The unprecedented circumstances this year have given all of us plenty of time for reflection. For those fortunate to be safe and healthy during lockdown in France, this has offered a chance to take on positive distractions, such as home improvements and learning new skills.
While the current situation is clearly still challenging, you may be looking for other productive ways to spend this time. Financial planning may not be top of your to-do list, but with the Brexit clock still ticking, expatriates in France can benefit from reviewing their pension options, including where they stand in relation to the UK lifetime allowance (LTA).
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How much are your pensions worth?
The answer is not always clear. If you have had various employers and accumulated several pensions over your working life, it can be hard to keep track. Many even get forgotten – an estimated £20billion is sitting in “lost” UK pensions, with an average fund value of £13,000.
The value of “defined contribution” (money purchase) pension schemes is variable, as it depends on how it is invested and what the market is doing at that time. As with any other investment recently, the value of such funds may have suffered declines from global market volatility and may take some time to recover.
“Defined benefit” (final salary) pensions, on the other hand, pay a fixed proportion of your salary in retirement. What you will receive is known in advance and guaranteed for life. However, when it comes to calculating your lifetime allowance (LTA), the value of defined benefit pensions is not so straightforward.
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Will you breach the UK lifetime allowance?
The LTA is the maximum you can hold in combined UK pension benefits before you face 25% or 55% tax penalties. While the current limit of £1,073,100 may seem high, it counts all pension benefits (excluding the state pension), including decades of pension contributions, compound interest, investment growth and tax relief. For defined benefit pension schemes, the usual measure of value is 20x the annual income due.
Generally, this means those with defined benefit pensions worth £53,655+ a year may go over the LTA today. Once you breach the allowance, penalties are payable whenever you access funds or pass them on to heirs (a “benefit crystallisation event”). Rates are 55% for lump sums and 25% for income and transfers – on top of any other tax payable. Being French-resident offers no protection.
Usually, under the UK-France tax agreement, only UK government service pensions are liable for UK taxation, but for anyone over the LTA, the charge is applied in the UK first and cannot be claimed back. Without effective planning, this can have costly tax implications.
Calculating how much of your allowance you have used is not always straightforward, especially for defined benefit pensions, so check your position with your provider or pension adviser. HM Revenue & Customs (HMRC) will automatically test where you sit within the allowance when you turn 75, whenever you take money out, and finally on death.
How can you protect your pensions?
It is possible to secure a higher limit by applying for LTA “protection” from HMRC, but take care, as strict conditions can apply. French residents can transfer one or more UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS). Besides limiting exposure to LTA penalties, a suitable QROPS can provide tax efficiency, income and currency flexibility, and estate planning advantages.
If you transfer UK pensions into a QROPS and your total benefits are under £1,073,100, you will not trigger LTA penalties. However, make sure the QROPS is within the EU/European Economic Area (EEA) or you would instead lose 25% through the UK’s “overseas transfer charge”.
With no UK-approved French QROPS, take specialist advice to navigate suitable options. The 25% LTA tax is only charged on funds over the limit, whereas the 25% overseas transfer charge would be against the entire amount. After the Brexit transition period, the UK has scope to extend the overseas transfer charge to include all EU/EEA transfers. As such, there may be limited time to transfer without losing a quarter to UK taxation. An alternative to QROPS is taking your UK pension as cash and reinvesting into a tax-efficient French-compliant arrangement, such as a suitable assurance-vie.
If you take this as one lump sum and meet certain conditions, you could pay just 7.5% in French taxes with an uncapped 10% allowance. Otherwise, you would be subject to French scale income tax rates between 11% and 45%, plus 9.1% social charges. Once in a QROPS or assurance-vie, funds are out of range of LTA penalties.
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What if you are already over the limit?
Although excess funds in a QROPS transfer would trigger an immediate 25% LTA tax bill, you could subsequently access your money – however you wished and in your preferred currency – without further UK taxation. Your funds would also be free to grow without incurring higher penalties, and you could unlock more flexibility and tax efficiency when passing pensions on to chosen heirs.
If you transferred to a UK scheme instead, such as a Self-Invested Personal Pension (SIPP), you could do so tax-free but would remain liable to LTA penalties whenever you take benefits or pass them to heirs.
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Reviewing your options
Even if your benefits are within the allowance or you are not ready to access them, it is sensible to review your situation in the context of your wider tax, wealth and estate planning goals. As pension transfers can take several months – and Brexit could change the rules – explore your options sooner rather than later, especially if you are close to the limit.
While your pension funds are free to grow, the lifetime allowance is only set to increase with inflation each year so you could potentially avoid unnecessary taxation by taking steps now. It is vital to take personalised, regulated advice to establish what is suitable for your situation, goals and risk profile. Ensure your adviser has expertise in UK and French taxation to outline your full range of options and help you take advantage of tax-efficient opportunities in France.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change.
Tax information has been summarised; an individual is advised to seek personalised advice.
This column is by Bill Blevins of Blevins Franks financial advice group. He has decades of experience advising expatriates in France and co-authored the Blevins Franks Guide to Living in France.