Pension lump sums and pension income paid as one-off sums

There is an article of French tax law which states that all pension income is assessable to tax (Article 79 of the Code général des impôts; CGI). Some years ago, the French authorities added wording stating that “the same applies to retirement benefits provided in the form of capital” (prestations de retraite servies sous forme de capital). 

In doing so, lawmakers helped clarify issues surrounding, among others, QROPS payments and small private pensions that are too small to provide a regular income and are therefore paid as one-off sums.

Another example is UK state pension lump sums, which a UK pensioner might receive if they reached state pension age before April 6, 2016, but chose to defer receiving their pension until a later date. This scheme no longer exists for people reaching pension age after this date.

These various one-off sums may, if you choose, be declared and taxed in a specific way involving a 7.5% rate. Alternatively, they can be taxed as ordinary pension income under the income tax bands or by using the 'quotient system' for large one-off sums (see the last section of chapter 7).

The specific method involves a fixed income tax rate of 7.5% after the 10% allowance, plus the two main social charges on top: CSG (see the previous section in this chapter for rates) and CRDS at 0.5%, where applicable. However, as this is foreign pension income, S1 holders who are not a burden on the French health system are exempt from the social charge part.

The CGI tax code states (Article 163 bis) that for the 7.5% rate to apply, the contributions made into the pension must have been tax-deductible or tax-exempt at the time, which is the case for payments into UK pensions. It also states that the capital sum must be taken in one go, not in several payments.

In France, the 7.5% rate may be used, for example, for sums taken from pension schemes called Plan d’épargne retraite populaire (Perp). The introduction of these plans was seen as one reason for the creation of the 7.5% rate.

Current rules for a Perp include an option for taking 80% of the fund as an annuity and 20% as a capital lump sum, taking the entire amount as an annuity, or taking it all as capital (the latter only where the equivalent annuity would pay no more than €110 per month). With either the 20% or 100% capital options, the 7.5% rate may be used (see tinyurl.com/perp-taxa).

The taxation of one-off pension sums is complex. When the 7.5% option was introduced, a financial adviser working with the British community in France expressed the view that capital withdrawn from private pension schemes and paid into a UK account was simply ‘personal capital’, and that “a pensioner can then do what they wish with this without attracting fiscal consequences in France, since the movement of capital is not a taxable event”. He considered that such sums were not directly comparable to anything in France.

The Connexion was not, however, able to obtain confirmation from the central French tax authorities regarding any potential exemption for British pension lump sums received by French residents.

The authorities referred instead to notes indicating that the 7.5% system could apply to amounts from some common British private pension types.

One firm of tax advisers working with the English-speaking community has in the past given the view that UK ‘pension commencement lump sums’ from private pensions should be treated in the same way as funds saved into a Perp and then decided to take a percentage of the fund as a lump sum.

Note that in the UK, it is often possible to take up to 25% of a pension pot as a tax-free lump sum. This relates only to UK tax rules, so you may wish, if relevant, to consider making use of this before a move to France.

We note that some foreign financial firms advise on their websites that the ‘entire pension pot’ should be taken in one payment to benefit from France’s 7.5% rate. 

This does not necessarily follow from CGI Article 163 bis, which details the 7.5% system and which states that it applies where le versement n’est pas fractionné (the payout is not split up). Nor is this the case where 20% is taken out of a French Perp, which allows for use of the 7.5%.

If in doubt, and if you are considering cashing in all or part of a UK pension, we suggest seeking independent financial advice or making a query to your tax office to check the right way to declare these amounts in your situation, before doing so.

Amounts to which you want the 7.5% system applied should be declared on the main declaration (form 2042 if filing on paper), section 1, in boxes 1AT and 1BT.

Those to which the quotient should apply should be declared only in the specific box for this (0XX).

The foreign income form 2047 also includes a section for comparable ‘pensions in capital taxable at 7.5%’ which it asks to also be added to 1AT and 1BT.

The French authorities have also created a newer type of private pension called the

Plan d’épargne retraite (but not ‘populaire’), which was designed to replace the old Loi Madelin pensions used by the self-employed and the Perps. These plans allow for deductions of the premiums from taxable income, within certain limits (see the final section of this chapter, 'Private pensions with tax breaks').

These pensions also have an option for taking a lump sum, which is, however, subject to different tax rules again and must be declared in a specific box (2TZ). These are subject either to the flat tax or to the income tax bands, if that option is taken up for investment incomes.

So far, the foreign income form does not indicate that foreign pension lump sums are comparable to these new pension lump sums.