It is well known that people in the UK have the right to cash in private pensions, known as ‘crystallising’, but not that many are seriously considering it. The fact that we are usually talking about significant sums, means high taxation is a foregone conclusion.
An interesting fact, however, is that France is one of the world’s most tax friendly countries in which to cash in your pension, subject to some very strict criteria.
This is an emotive subject, and rightly so, as we are talking about one’s life savings. Moreover, the UK has seen a trail of very poor pension advice, leading to significant fines and tighter regulation. So, not a decision to be taken lightly.
In France, capital taken from a pension may be taxed at 7.5% after a 10% allowance (so 6.75%, as the allowance has no ceiling). Compared to the UK’s 45% top rate this looks very generous.
What about those very strict criteria?
Well, they are strict, but essentially there are just two rules:
‒ The pension must have been tax deductible in your home country
‒ The payment must not be split or fractioned.
That first rule is hardly an issue where qualifying pensions are concerned, as, unless a scheme is specifically non-qualifying it is acceptable.
The second rule may be a challenge as UK residents can usually take 25% of their pension completely tax free (tax free not an option once living in France). However, taking a quarter means it is fractioned, so taking the rest at the 7.5% rate, once living in France, is not possible.
Doing the maths on what is the best option is, therefore, vital. Usually, taking the full amount works out better, but I implore anyone considering it to make no assumptions.
A very good question would be, if there is a cost to it, then why do it at all?
‒ The ability to take total control of your money
‒ The ability to hold the money in other currencies; ideally, the one in which you live
‒ The ability to plan local taxation better
This sounds like I am sold on the idea, so this should be for everyone.
The answer is categorically no.
In offering advice, we make sure it is as balanced as possible. Where, in general, we might give a firm conclusion, we also list the rules, offer projections and the pros and cons and allow people to make an informed decision.
Some people in the 30% or even 40% tax band still want the income as a pension, which seems illogical when 6.75% is on offer; others like having an income for life; others still have been wealth tax payers who understood cashing in their pension would mean a significantly higher or extra tax bill, yet still wanted to do it.
Their decisions were well-informed ones; the consequences well understood and appreciated.
What about QROPS / ROPS?
Despite a plethora of options, I have never endorsed them as they have two issues: There is a risk they may not be viewed as a pension, and they are nearly always in a trust.
A few years ago, with another company, we worked with French fisc tax officials to design a suitable product for French residents.
In the end we gave up as the fisc felt that if it, in any way, fell outside of the rules applying to French PERP savings plans, they would view it as tax evasion.
While I questioned this logic and still do, it put the option under “questionable”. As my mantra is always ‘deal with certainty as far as possible’, it would need to be the only option to endorse it.
If it is not seen as a pension it means it is just a pot of money in trust, which could be bad news in France where residents can then face tax at 60%.
To sum up, you need full understanding of the best options for your pension, you need to set your priorities and you then need to take professional advice. It is not a decision to be rushed.
This column was written by Robert Kent of Kentingtons financial advisers.
See www.kentingtons.com
