Guide to pension tax for expats
PUBLISHED: 10:00 15 January 2015
Rob Kay, of Blevins Franks, explains how your UK pension will be taxed in France if you decide to make a permanent move across the Channel
Pensions are an important part of your retirement planning. This is a complex area for British expatriates, with rules frequently changing. If you are, or become resident in France, you also need to understand the tax rules of both the UK and France, and how the two regimes interact. Great care should be taken to assess the options available, including the tax implications, before you transfer your fund or start to draw your pension.
The UK pension reforms are good news for UK retirees, and under the French tax regime, provide opportunities for those who are resident in France.
How UK pensions are taxed in France:
UK state retirement pensions, and income from pensions derived from professional activities and generally from private pensions, are taxed the same way as salaries. You therefore pay tax at the income tax scale rates, currently up to 45%. The Parts system, which benefits households where one spouse receives a much higher pension income than the other, applies as with other income, and private pensions receive a 10% deduction (maximum €3,689).
Most UK government service pensions remain taxable in the UK, unless there has been a transfer out before the pension commences (and usually before the age of 59). They are not taxed in France, but the income is taken into account when determining your income tax rate in France, and so can increase your tax bill.
Genuine annuities receive discounts of between 30% and 70%, depending on your age.
Lump sums from UK pension funds are taxable in France at a flat rate of 7.5%.
All pension income is additionally subject to 7.4% social charges, but if you hold EU Form S1 your pension income is exempt. You are entitled to Form S1 once you start receiving your UK state pension, and it is issued by the Department for Work and Pensions.
State retirement pensions are always paid gross in the UK. To receive occupational pension income without tax deducted in the UK, you should obtain Form FRA/Individual (FD5) from HM Revenue and Customs (HMRC) or its website and submit the completed form to your local French tax office, usually with your first French tax return. This form comes in two identical parts (in French and English). It will be stamped to confirm you are French tax resident and the income is taxable in France. The English part will then be sent to HMRC and your pension provider notified to pay the income gross. Any tax deducted at source in the UK since you became French tax resident will be reimbursed.
Your pension options
The options for British expatriates include remaining in your current scheme; income drawdown; Self-Invested Personal Pensions (SIPPs); Qualifying Recognised Overseas Pension Schemes (QROPS); and buying an annuity. You should establish how each will work for you, the pros and cons, tax implications in France and UK, whether you can pass the balance on to your chosen beneficiaries, etc. The selection of the correct option is a minefield for the unwary, so this is an area where specialist advice is more than invaluable.
Under the current system, with income drawdown you can opt for either capped or flexible drawdown.
With flexible drawdown there is no limit to the amount you can withdraw at one time, and it is available to those who can the meet the £12,000 minimum income requirement (MIR) of secure pension income.
The opportunity to take 100% of your fund out at once can be a particularly interesting option. It would enable you to take the funds and reinvest them inside other arrangements that are more advantageous for you in France.
The new ‘Freedom and Choice in Pensions’ regime comes into effect on 6 April 2015. Both capped drawdown and flexible drawdown will be replaced by a new ‘flexi-access drawdown’.
This new form of income drawdown has no upper limit on how much members can take. It works in a similar way to flexible drawdown, but with no minimum income requirement.
For UK residents, the withdrawal (after the 25% tax-free lump sum) would be taxed at the individual’s marginal rate of UK income tax (instead of the current prohibitive 55% charge).
The good news is that the France/UK double tax treaty gives tax rights solely to France, so if you choose to take your pension as a lump sum when you are resident in France, it is likely to be treated as a lump sum, and so taxed at just 7.5%, representing a very significant tax saving indeed.
Even if you do not hold Form S1 and have to pay social charges of 7.4% on the fund, the combined French tax and social charges will be less than one third of what you would pay in the UK. While the UK will almost always deduct the tax at source, this will be repayable to you.
Many would highlight 7.5%, considering it as a relatively low amount for the benefits you may be able to achieve elsewhere.
You do, however, need to consider other tax implications in France, such as succession tax. Funds withdrawn from your pension fund would become exposed to this tax (as well as UK inheritance tax should you return to the UK), but taking advice on your circumstances and investing tax-efficiently for France could allow you to avoid exposure to succession tax, or at least minimise the impact.
One option is to consider transferring the funds from the lump sum received from your UK pension scheme, after tax, into an assurance vie. These policies offer significant tax benefits in France, especially the longer you hold them. A wide range of investments can be held within an assurance vie, giving you flexibility and choice. They are not all the same, however, so it is important to ensure the one you choose provides the most advantages and suits your aims, needs and circumstances.
Specialist, professional advice is essential to make sure you understand all the implications of the various available options and make the best decision for you. For peace of mind, your adviser should be authorised by the UK Financial Conduct Authority (FCA), even if you yourself are 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.