Taxing times in deciding pension options

If you have retired to France, you may wonder what to do about your UK pension. Leaving it there may not be the most tax-efficient plan, but there is no one-size-fits-all solution.

Expatriates in France have options, but what works best for you depends on several factors.

One new consideration is the introduction of a 25% UK tax on overseas pension transfers. For some expatriates moving pensions offshore, this could cost 25% of transferred funds in UK tax.

The overseas transfer charge

Previously, you could move UK pension funds into a Qualifying Recognised Overseas Pension Scheme (QROPS) without paying UK tax.

This applied regardless of residency or where your QROPS was based, unless your total fund was over the pension lifetime allowance (LTA – currently £1million).

Since March 9, however, the UK treasury can in certain circumstances claim 25% of funds being transferred – of any value.

This will not affect most expatriates in France moving their pensions overseas. You will not be liable for the tax if one of the following applies:

  • Both you and your QROPS are in the European Economic Area (EEA)
  • You and your QROPS are based in the same country outside the EEA
  • The QROPS is run or sponsored by your employer

Currently, the EEA includes France and all other 27 EU member states (including Gibraltar for this purpose) as well as Iceland, Norway and Liechtenstein. So, generally only those moving UK pensions to excluded jurisdictions in which they are not resident – such as Switzerland, Guernsey, Monaco or other perceived tax havens – will be liable for 25% taxation.

No eligible French QROPS

Last December, the UK government removed all French pension schemes from its public list of approved QROPS so expatriates in France wishing to transfer to a QROPS must select an eligible scheme in a third country, increasing the risk of UK taxation. The 25% tax can be avoided, however, just by transferring to a QROPS within another EEA jurisdiction.

QROPS based in Malta or Gibraltar, for example, still make the HMRC list while providing tax-efficient benefits.

For expatriates tax resident in a non-EEA area like Monaco, liability can be avoided so long as they transfer to a QROPS in the same location.

The five-year liability trap

Transferred UK pension funds remain taxable by HMRC for five full tax years. So if your circumstances change to bring you in line for the transfer tax, you could face a 25% tax bill on the initial transferred value – eg if you move from France to become tax resident in a non-EEA area within five full UK tax years of transferring.

It could also apply if you move funds from a QROPS to another scheme (an ‘onward transfer’) that does not meet the criteria for tax-free transfers. For example, a pension scheme could invite tax penalties for allowing members to access their funds under the UK age limit of 55.

Note that the five-year clock starts ticking from April 5 following the transfer date – so the period can be closer to six years, especially for transfers made on or just after April 6 in a given year.

If you decide to relocate or move your QROPS it is therefore essential to explore options to minimise tax liabilities.

Why consider transferring?

Despite this new threat of taxation, expatriates transferring to a QROPS can still enjoy significant tax advantages and flexibility over UK pensions. Once in a QROPS, funds are sheltered from UK taxation on income and gains. Also, your savings will no longer count towards your pension lifetime allowance (LTA), enabling unlimited growth without attracting the 55% or 25% LTA tax penalties for withdrawals.

Another advantage concerns estate planning. While many UK pensions are payable only to your spouse on death, QROPS gives flexibility to include other heirs and roll across generations.

QROPS may also provide greater investment choice and diversification compared to UK pension schemes, more freedom to vary your income, and the flexibility to hold and withdraw your pension savings in multiple currencies.

However, transferring a UK pension is not suitable for everyone and differences between QROPS providers and jurisdictions could affect the tax benefits. There are also alternative options available that may offer the same, if not better, benefits to a QROPS.

What are your other options?

You could leave your UK pension there and take the income in France, where it is taxable at the income tax scale rates up to 45%. If you withdraw a cash lump sum, a quarter will be tax-free in the UK but it is usually liable for French income tax.

Under certain conditions, however, it is possible to limit tax to just 7.5% on a lump sum with an uncapped 10% allowance.

Any UK pension withdrawals will also attract social charges of 7.4%, unless you hold EU Form S1 or do not have access to the French healthcare system.

Once the pension fund has been taken, French residents can reinvest in an assurance-vie, where the underlying investments attract no tax in France. Tax is only paid on the growth element of the funds when withdrawn. After eight years, income tax liability is removed on gains from withdrawals under €4,600 for single people or €9,200 for married couples.

Having similar estate planning, currency and investment flexibility advantages over UK pensions to a QROPS, an assurance-vie may actually be a more tax-efficient way for French residents to hold retirement income.

Whatever you decide, you must first examine the options for you and your family to avoid scams and unsuitable investments. Brexit may bring more rule changes so you need to look at how to future-proof your retirement in France.

This article is by Bill Blevins of Blevins Franks financial advice group who also writes for the Sunday Times on overseas finance. He is co-author of the Blevins Franks guide to Living 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.