A new 25% tax on pension transfers to QROPS could affect retired expatriates in France planning to bring their UK pensions overseas.
If you have chosen to retire in France, you may be wondering what to do about your UK pension. While leaving it there may not be the most tax-efficient approach, there is no one-size-fits-all solution. With numerous options for expatriates in France, what will work 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 their pension offshore, this could divert a quarter of their transferred funds to the UK taxman.
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 your residency or where your QROPS was based, unless your total funds exceeded the lifetime pension allowance (currently £1 million). Since 9th March, however, under certain circumstances the UK treasury can automatically claim 25% of funds being transferred – of any value.
The good news is that 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:
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. That means 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 such as Monaco, liability can be avoided so long as they transfer to a QROPS located in the same place.
The QROPS options offered by Blevins Franks are based within EEA jurisdictions so are not themselves affected by this new tax charge. That means we can continue to provide tax-efficient structures to protect and grow the pension savings of expatriates living in the EU. Contact us to request a pension review
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 still face a 25% tax bill on the initial transferred value. This could happen, for example, 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 5th April following the transfer date. This means that the period for HMRC liability can actually be closer to six years, especially for transfers made on or just after 6th April in any 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 lifetime pension allowance (LTA), enabling unlimited growth without attracting the 55% or 25% LTA tax penalties.
Another advantage concerns estate planning. While many UK pensions are payable only to your spouse on death, QROPS offers 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, so take specialist advice.
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 the money 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, it is important to take regulated, personalised advice to protect your life savings from pension scams and unsuitable investments. Take time to carefully explore your options and establish what will work for you and your family. Amidst so much Brexit uncertainty, consider acting now – before any more rules change – to future-proof 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.