Assurance Vie: a common product for tax savings

Assurance vie and other savings options

Contrary to what may be assumed from the name, assurance vie – life assurance – in France is seen as more an investment than a way of benefiting loved ones after one passes away - though it can be the latter as well.

In fact it is one of the most popular forms of long-term investment, and is especially favoured by those with larger sums to invest, as it often has better returns than alternatives such as savings accounts and has no investment ceilings unlike regulated accounts such as the livret A.

The latter, along with similar accounts such as a livret Jeune (for young people), LDDS, or livret d’épargne populaire (limited to people on fairly low incomes), may also be of interest if you have a few thousand euros that you do not want to leave in your current account.

Regulated accounts

‘Regulated’ accounts are offered by all high street banks, and they are subject to official rules governing who may have them and how they operate, and have tax advantages. The most common kinds opened by Americans in France include the following.

Livret A: Anyone can open a livret A and you can only have one. You cannot deposit more than €22,950 into it. Once the amount in the account reaches this (or increases beyond it due to interest) you cannot deposit more unless you take some money out. The interest rate, which recently dropped to 1.50% (but historically has varied from 0.5% to 8%), is reviewed twice a year and usually rises or falls based on a formula linked to inflation (however the government can intervene to modify the effects). No income tax or social charges.

Livret de développement durable et solidaire (LDDS):  very similar but with maximum deposit level of €12,000. The name reflects the way funds invested via these are managed behind the scenes – they are invested in eco-friendly projects. Many people have this as a back-up to put money in if their livret A is full.

Plan d’épargne en actions (PEA): a regulated account for holding shares in European companies with a deposit ceiling of €150,000. There are some income tax advantages, but social charges are levied.

Plan épargne logement (PEL): a regulated French savings product designed to help savers build up funds in particular with a view to buying a home and, after a minimum savings period (usually about 4 years), to give access to a preferential-rate loan.

Other accounts

Livret bancaire: banks offer various non-regulated savings accounts with different interest rates; profits are fully taxable and liable to social charges.

Compte titres: an ordinary, unregulated account for holding shares.

Certain forms of private pension also exist, into which money may be placed (and locked) for an income and/or capital in older age, notably the Plan d’épargne retraite (PER) which has certain benefits including some of the money placed on it giving rise to deductions from taxable income. The money in it is not taxable while it is building up.

Assurance vie (AV)

An assurance vie policy is is not simply life insurance in the Anglo-Saxon sense, but a flexible investment ‘wrapper’ that can be used for saving, investing, retirement planning and inheritance planning. They are available from providers such as banks and insurance firms and via regulated financial advisors.

Many French residents rely on it for tax-efficient investing, and usage tends to increase at times when the livret A rates are low (as now).

When you open an AV, you pay money into a contract (known as primes). There is no overall cap on how much you can invest, although contributions should usually remain proportionate to your overall wealth.

You can fund the contract in different ways:

• regular scheduled payments,

• ad-hoc top-ups when you wish, or

• a single lump-sum investment.

There are tax advantages but they improve the longer the contract has been in place.

The insurer invests your money on your behalf, and you choose how cautious or adventurous you want to be.

Many AV contracts are multi-support, meaning your savings can be split between different types of investment.

• Euro funds (fonds en euros). These are low-risk, euro-denominated funds with capital protection. Returns are usually modest, but the value of the capital is guaranteed by the insurer.

• Unit-linked investments (unités de compte). These can include shares, bonds, property funds etc. They offer higher growth potential but also carry market risk.

You can manage the investments yourself or opt for gestion pilotée, where the insurer adjusts the investments based on a ‘prudent’, ‘balanced’ or ‘dynamic’ risk profile.

The returns accrued in an AV vary depending on how well it is managed and fluctuations in the markets. The level of fees levied by the provider at the time of taking out the contract, and while managing it, will also have an impact on how much is left to you. 

As a ballpark figure, fonds en euros may make around 2-3% (so, better than a livret A), and unités de compte around 3-5%.

Accessing your money from an AV

Although assurance vie is designed for long-term saving, your money is not locked away until a specific date or age.

You can make:

• partial withdrawals, leaving the contract open, or

• a full withdrawal, which closes it.

Only the gain element of a withdrawal is taxed – not the capital you originally paid in.

Some contracts also allow advances, which are effectively loans secured on the value of the contract. These are not normally taxable, provided they are repaid.

Note however, that AV is not designed for frequent withdrawals, and taking money out is more admin-heavy than, for example, taking money out of a livret A or LDDS, the latter accounts being easily accessible via online banking, with transfers being quick and simple between these and a current account with the same branch.

How AV is taxed in France

Tax treatment depends on how long the contract has been held and when the money was invested.

For contracts held more than eight years, annual withdrawals benefit from an income-tax allowance on gains (€4,600 for a single person or €9,200 for a couple). 

Above this, gains are generally taxed at a favourable rate of 7.5%, plus social charges (currently 17.2%), although higher flat-tax rules apply to amounts over €150,000 (for the part above this).

For shorter holding periods, the alternative is usually the 30% PFU flat tax, which includes social charges.

During the life of the contract, gains are not subject to French income tax unless you make a withdrawal (however social charges do apply).

Inheritance advantages

An AV can also be an inheritance-planning tool as you may name beneficiaries who will receive the contents of the plan if you were to die.

Amounts invested before age 70 can normally be passed on outside the estate, with up to €152,500 per beneficiary free of French inheritance tax – regardless of family relationship. 

This can be especially helpful for stepchildren or non-relatives who face high inheritance tax on ordinary bequests.

Special clauses can be added in for example, a ‘quasi-usufruit’ allowing a surviving spouse to use the money but with a requirement (placed as a debt on his/her estate) to pass on an equivalent capital sum to other heirs afterwards.

However, excessively large or late-life contributions do risk being challenged and brought back into the estate.

For US citizens, it should also be noted that AV contracts can trigger additional US tax reporting obligations.

You may wish to take specialist advice before opening an AV, to ensure the contract is structured and reported correctly for both France and the US.