This is our second real-life case study highlighting the importance for British expatriates to receive pensions advice tailor-made for their circumstances in France.
In last month’s article, Inheriting pensions in France, we looked at problems a lady encountered after she had made the wrong decision about what to do with her late husband’s pension. Although that case was eventually resolved favourably, it highlighted how dangerous it can be to assume that things are taxed in France the same way as they are in the UK. Here, we look at how the tax treatment of UK pensions can vary greatly according to the actions you decide to take.
People generally understand that investments such as ISAs and Premium Bonds are taxed differently outside the UK, but pensions are quite often overlooked. People assume that because pensions exist here in France, the same rules apply. Whilst income from pensions is, broadly speaking, taxed much the same as in the UK, in that it is added to your other income and taxed at your scale rates, there are some big differences. The most important is the treatment of death benefits.
In the UK, taxation of payments to a beneficiary from a pension fund depends upon the age at which the pension holder died. If it was before 75, then either the income or the whole fund may be taken tax-free within two years of the death. If it was after 75, then any UK tax paid on income can be reclaimed through the France/UK tax agreement. Lump sums, however, would be liable to a tax charge at the beneficiary’s marginal rate of tax. For non-residents, this would be at the emergency tax rate up to 45%. Importantly, this is not reclaimable and applies regardless of who the beneficiary is, including the spouse.
In France, the treatment is simple; income would be taxed as income and the lump sum would be taxed under succession tax. This is not an issue if being left to the spouse, but if left to someone else, then it would be taxed at the normal succession tax rates – between 20% and 60%.
A recent conversation with a client highlighted some of these issues. Mrs D is in her late 60s and her husband has just turned 70. She had a pension fund of £300,000 which she had been taking income from. They have no children and plan to leave everything to nephews and nieces. This raised the prospect that if Mrs D died and the lump sum was paid to her husband, it would not be taxed, but when he subsequently died, the relatives would lose 55% of the fund. Equally, if she left the fund to the relatives on her death, the same tax would be due. These were serious concerns for her.
After taking advice, she decided to take the whole pension fund as a lump sum immediately. In France, she was only liable to pay tax at 7.5% on this amount as she was covered by an S1 from the UK. The money was then invested in her assurance-vie. This meant that she was still able to take the income she needed – in fact, she paid less tax on the income as a result. As she was aged under 70 when she invested, on her death, the nephews and nieces will receive the whole fund free of succession tax – a saving equivalent to £165,000.
This is just one example. Each case is different and this course of action may not be suitable for everyone. However, it highlights the importance of fully investigating all your pension options to ensure that your planning is as tax-efficient as possible.
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.