Build for the future
Changes are in the pipeline for the pension system in France. Steven Grover talks through the implications
Millions took to the streets in the final months of 2010 to protest against the French government’s proposed overhaul of the state pension system, and the progressive raising of the retirement age from 60 to 62 and the full pensionable age from 65 to 67 between now and 2018, which was fully written into French law at the end of 2010.
Under the previous rules, men and women in France could retire at 60, provided they had paid social security contributions, but they were not entitled to a full pension until the age of 65. Now, the retirement age will rise to 62 by 2018, and the pension age to 67. The government says this will save €70 billion.
So how does the state pension system work? The amount of pension received will not change, and even if the changes to the retirement age and required years of contributions are adopted, it will still be one of the most attractive state pension schemes in Europe.
Retraite de base
Currently for a salaried person (and auto-entrepreneurs) to receive a full basic pension, they must have paid contributions for at least 164 trimestres (quarters) i.e. 41 years. This is slightly dependent on age but is the case for those born after 1952. The retraite de base is managed by the Caisse Nationale d’Assurance Vieillesse (CNAV).
A full pension is calculated as follows:
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• Take the average of the 25 highest-paid years in your career (linked to inflation).
• Your pension is then 50% of this amount though it is capped by using the social security annual ceiling (€34,620 in 2010). So the maximum pension would be 50% of this, i.e. €17,310 per annum.
• If you don’t qualify for a full pension then you have the option either to purchase additional trimestres, which can be expensive, or you can take a reduced pension that is proportional to the number of trimestres you have contributed to, i.e. if you had 123 trimestres under your belt, your pension would be 75% of what your full pension entitlement would have been.
The biggest drawback with the retraite de base is that it is based on the principle that people currently working are funding the pensions for those who are already retired. This is being compounded by the number of pensioners rising due to the post-war baby boom and unemployment levels continuing to increase month on month.
As a consequence, the number of people funding pensions is decreasing so it has become harder to maintain this model. According to government sources, France’s pensioner population is forecast to rise to 18 million by 2020 and 23 million in 2050. Therefore, if nothing is done, the existing pension deficit of €32 billion could rise to some €50 billion a year by 2020 and to €100 billion by 2050.
All employees also benefit from a retraite compl�mentaire for which contributions are compulsory. ARRCO (Association pour le R�gime de Retraite Compl�mentaire des Salari�s) covers all employees in the private sector. Meanwhile, management staff (cadres) must also contribute to the AGIRC (Association G�n�rale des Institutions de Retraite des Cadres) supplementary pension.
In return for the contributions paid, employees obtain pension points on a monthly basis. These points give the right to a supplementary pension income at the legal retirement age. The pension will be financed by the contributions of those who are still working, and payment of the pension is guaranteed because the contribution by those working is compulsory.
The amount of points received is calculated like this:
• Divide the value of contributions by the purchase price of a point (€14.4047 per point for ARRCO, and €5.0249 per point for AGIRC for 2010).
At retirement, the accumulated points are converted into euros by multiplying them by the value of each point. (€1.1884 per point for ARRCO, and €0.4216 per point for AGIRC in 2010). This calculates the annual pension entitlement.
For profession lib�rales, it is a lot more complicated as in this case, the retraite de base is managed by the CNAVPL (Caisse Nationale d’Assurance Vieillesse des Professions Lib�rales) and is based on a points system like the ARRCO/AGRIC instead of taking an average salary.
Artisans and commer�ants still come under the same retraite de base as employees, but this is overseen by the R�gime Social des Ind�pendants (RSI).
It is again complicated for the retraite compl�mentaire, as 11 different organisations manage the retraite compl�mentaire for this sector, based on profession. Most people will probably be attached to the Caisse Interprofessionnelle de Pr�voyance et d’Assurance Vieillesse (CIPAV). This includes auto-entrepreneurs and works on a points system like the ARRCO/AGRIC.
Here is a look at what private schemes are available.
Plan d’epargne retraite populaire
The main private, personal pension is the Plan d’Epargne Retraite Populaire (PERP), which was only introduced in 2003. Anyone can save from as little as €50 per month into a PERP. The investor then receives an income tax credit for payments made into it, up to 10% of their revenues from professional activity the year before (after deducting 10% for professional fees). This is limited to eight times the annual amount of the s�curit� sociale ceiling, so a maximum deduction of €27,696 for 2010, and the minimum deduction is 10% of this ceiling – i.e. €3,462.
With most contracts one can stop making payments for a time, or increase or reduce payments. The payments made into the PERP are locked until retirement when the investment pot’ is used to buy a type of annuity that, as per the terms of the contract, can be fully passed on to the surviving spouse on death.
The only circumstances under which money can be taken out of the PERP before retirement is if the investor’s business activity is ceased due to a liquidation judgement or if they contract an illness or suffer a disability that makes it impossible to undertake their profession. In some cases it is possible to recover some or all of the PERP in the case of divorce, or the death or incapacity of a spouse.
An assurance vie contract may be more appropriate for saving on a monthly basis, as the withdrawals from this contract are not required to buy an annuity and do not have to be held until retirement age. The premiums invested do not receive income tax credit or rebate but withdrawals are taxed at low rates, especially after the contract has been in place more than eight years.
In addition, and especially if portability of pension income is a concern, many offshore assurance vie providers offer tax-compliant investment and savings products in other European jurisdictions. So for example if the policyholder were to move back to the UK from France, then the French assurance vie policy could be converted to a locally tax-compliant UK version with no cost and still offer favourable taxation on withdrawals.
More than 22 million individuals or couples have invested lump sums or save regularly into assurance vie contracts, and neither French capital gains tax nor income tax apply while the funds remain inside the policy. Even when an amount is withdrawn, only the growth element is taxable. Any gains are liable to social charges of 12.1% when they are drawn down, plus taxation on a sliding scale depending on how long the policy has been in force:
• 35% for a policy less than four years old
• 15% for policies between four and eight years old
• 7.5% for all policies over eight years old.
After eight years there is an annual tax-free allowance of €4,600 (single person) or €9,200 (married couple) of gains.
For those French-resident British expatriates who intend to retire permanently in France and who have pension funds left in the UK, it is a very good idea to investigate whether transferring and consolidating their UK pension funds using Qualifying Recognised Overseas Pension Schemes (QROPS) or Qualifying Non-UK Pension Schemes (QNUPS) would help their situation in France and offer more control over taking non-French pension benefits.
The information provided in this article was obtained from public sources including the AGRIC, ARRCO and CNAV websites, and is only a guide based on our understanding of current legislation. If you need assistance in this area you are advised to seek the help of a specialist in this field as each individual case is different.
Steven Grover is a partner with the Spectrum IFA Group in Paris