With so many options for pensions today, establishing the best path to a comfortable retirement is not easy. A good start is getting answers to some key questions.
What are your options?
You can take as much cash as you like from a ‘defined contribution’ (‘money purchase’) UK pension from age 55. Each time you make a withdrawal, a quarter can be taken without paying UK tax. Alternatively, you could take a regular income through drawdown or buy an income for life in the form of an annuity.
If you have a defined benefit (‘final salary’) scheme, you cannot withdraw cash but you can transfer it to a defined contribution scheme or a Qualifying Recognised Overseas Pension Scheme (QROPS). Today, with pension providers struggling to keep defined benefit schemes afloat, some members are being offered very generous sums (‘transfer values’) to leave. However, a one-off pay-out may not outweigh the benefits of drawing a guaranteed pension for life, so before transferring it is crucial to fully understand the consequences.
How will you be taxed?
While you can take a quarter of a defined contribution pension tax-free in the UK, for French residents the lump sum becomes liable to French taxation, even if it never leaves Britain. An exception is if the withdrawal is prompted by an ‘accident of life’, such as invalidity, unemployment or death of a spouse.
It is possible to limit French tax on a UK lump sum to a fixed rate of 7.5% with an uncapped 10% allowance – but only if you meet two conditions. First, pension contributions must have been deducted from your or your employer’s taxable income. Second, you generally have to take the whole fund at once (you may be ineligible if you have already made withdrawals).
If you cannot get the 7.5% rate, any lump sums will be taxed at the normal French scale rates, like other pension income. This ranges from 0% for income under €9,700 to 45% for income over €152,108, with a 10% deduction of up to €3,715 per household.
All pension income also attracts annual social charges of 7.4%. However, this is waived if you do not have access to the French healthcare system or hold EU Form S1.
Is transferring a good idea?
Expatriates may benefit from reinvesting UK pension funds into more tax-efficient arrangements for France – like an assurance-vie – or transferring to a Qualifying Recognised Overseas Pension Scheme (QROPS).
As well as tax efficiency, assurance-vie and QROPS unlock estate planning advantages. While many UK pensions are payable only to your spouse on death, other structures offer flexibility to include other heirs. They can also offer currency flexibility – by holding savings in multiple currencies, you can benefit from switching between pounds and euros when rates are favourable.
However, transferring is not suitable for everyone and there are differences between providers and jurisdictions that could affect the tax benefits. Also, on 9th March 2017 the UK government introduced a 25% tax on overseas transfers to QROPS under certain circumstances. This charge will not affect you if both you and your QROPS are in the European Economic Area (EEA) or are both based in the same country outside the EEA.
It is important to take personalised, professional advice to explore your options and establish what will work for you. Use a regulated adviser to avoid pension scams and unregulated investments that risk losing your pension savings.
With speculation that the UK government may make withdrawals more difficult or start taxing pension transfers for non-residents post-Brexit, now is the time to review your options. Pensions are a highly specialist and complex area, as is French taxation, so take tailored, cross-border advice to ensure you are in the best possible position to enjoy your retirement 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.