More and more people are seeking an alternative to regulated pension arrangements for their retirement savings. They are happy to forego the tax-relief on pension contributions during the savings phase, in return for more flexibility, as well as a more tax-efficient income during retirement.
In France, the most popular vehicle used for medium to long-term savings is the Contrat d’Assurance Vie. Investors have the possibility to make regular premium savings and/or ad-hoc lump sum investments.
What is an Assurance Vie?
An Assurance Vie is an insurance based investment and it can be as simple or as complicated as you wish to make it.
The advantages of Assurance Vie for French residents can be summarised as follows:
- Generally, there is no tax on any income or growth; whilst the funds remain within the Assurance Vie (i.e. the tax is deferred). However, for amounts invested in the Fonds en Euros, social contributions are now deducted on an annual basis (instead of at the time that the funds are withdrawn), in the same way as applies to French bank deposits.
- Part of any withdrawal that you make from the Assurance Vie is considered to be a withdrawal of capital and this part is therefore free from any tax.
- An Assurance Vie becomes more tax-efficient over time and after eight years the gain can be offset against a tax-free allowance of (currently) €9,200 per annum when you are subject to joint French taxation or €4,600 for a single person.
- You have full access to your capital at all times and you can receive regular income payments from the Assurance Vie although, depending upon the contract that you choose, withdrawals in the early years of the policy may result in penalties being applied.
- It is possible to switch the funds in which you are invested, as your circumstances and/or
attitude to investment risk evolves.
- Assurance Vie is highly tax-efficient for inheritance purposes.
Millions of French people use the Assurance Vie as their standard form of saving and investment and many billions of Euros are invested this way via French banks and insurance companies, which offer their own branded products.
In addition, there is a much smaller group of companies that are not French, but have designed French compliant Assurance Vie products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. Before choosing such a company, however, it is important to establish that the company is able to offer a product that is fully French compliant, so as to ensure that you will receive the same tax and inheritance advantages as the French equivalent product. Some of the advantages of the international Assurance Vie policy compared to the French policy are:
- It is possible to invest in currencies other than Euro, including Sterling, US Dollars and Swiss Francs.
- There is a larger range of investment possibilities available, providing access to leading investment management companies, as well as capital guaranteed products and funds.
- Documentation is in English, thus helping you to better understand the terms and conditions of the Assurance Vie policy.
- The Assurance Vie policy is usually portable, which is of particular benefit if moving around the EU (or many other countries in the world). In the case of EU countries, the policy can often be endorsed for tax-efficiency in these jurisdictions.
How does Assurance Vie work?
Your single lump sum investment or regular premiums are paid to an insurance company, which then places the money with the investment managers of your choice. These are usually unit-linked types of investments, for example in equity or bond funds, but can also be in deposits or special products on offer from various financial institutions. You can invest in any number of different funds or products and these are all collated together by the insurance company to form a collective bond, which is your Assurance Vie policy.
If you have chosen your investments wisely (with the help of your financial adviser), over the longterm the value of the units that you hold in the managed funds are likely to increase. The value of your Assurance Vie policy would therefore increase accordingly. However, you have to be fully aware and comfortable with the amount of risk that you are taking. As with any type of unit-linked investment, your fund value can go down as well as up, as a reflection of what is happening in investment markets. Over the long-term, however, the effect of short-term market volatility will usually be reduced.
Can capital be guaranteed through an Assurance Vie?
A common feature of the French Assurance Vie is the possibility of investing in a ‘Fonds en Euros’ (although this is also available, in limited circumstances, from insurance companies outside of France). This is a special type of fund designed to form a very cautious base to your total investment, since your capital, as well as any interest and year-end bonus added to it, is guaranteed. International companies providing this type of fund usually also offer Sterling and USD equivalents.
The fund invests mostly in government and corporate bonds, although there can be a little exposure to equities and property (real estate), with the aim of enhancing the return. During the year, your capital will earn interest. By law, the insurance company must allocate the majority of your share of the return of the fund to your account, in the form of a year-end bonus. The balance of the return of the fund is kept in the insurance company’s reserves, in order to ‘smooth out’ future investment returns, for example, in times of poor market investment performance.
Due to the nature of the guarantees with the ‘Fond en Euros’, however, the rate of return is typically low, but is usually better than the interest that you might earn from a bank deposit with immediate access. However, this type of fund is regarded by the tax authorities as being so secure that, unfortunately, social charges are levied annually on the gain, which can reduce the rate of return over the long-term. This is a disadvantage compared to unit-linked investment funds, which are only taxed when you make a withdrawal.
Additionally, through some international Assurance Vie policies, there is the possibility to invest in structured bank deposit offerings, whereby the investment return will be linked to the stock market, but your capital invested will be guaranteed.
How do I choose what to invest in inside my Assurance Vie?
You may have strong views on this yourself, or you may have no ideas at all. Either way, it helps if you have a good financial adviser at hand. His or her job is to help you understand the whole
concept of investment and to help you establish your attitude to investment risk.
Sadly, there is no realistic chance of a meaningful return on your savings without accepting some degree of risk. We have seen in recent years that even leaving your savings in a bank can be risky. Either you do not earn a real rate of return (i.e. one that more than keeps up with inflation) or because the bank fails due to poor management decisions.
Your adviser will show you different types of investment options; explain how they work, what their track record is and how much risk is involved. You make the final decision, but his or her help can be invaluable.
When the investments have been made, there should be follow-up meetings to review the performance of your investments. Your adviser may well recommend some changes. This could be because your own circumstances have changed or he/she may have some interesting new funds to introduce to you. Alternatively, some funds may not be performing as well as had been anticipated and you may prefer to replace these with better performing funds.
How is Assurance Vie taxed?
Only the gain element of any amount that you withdraw is liable to tax and you have a choice of tax treatment. You can either be taxed at the fixed prélèvement rate or declare the amount of the gain through your annual income tax return. The method of taxation that you choose will simply be down to the amount of other taxable income that you have to declare in that tax year.
The ‘prélèvement’ scale works as follows:
- Gains on withdrawals made during the first four years are taxed at 35%
- Gains on withdrawals made between years four and eight are taxed at 15%
- Gains on withdrawals made after eight years are taxed at 7.5%
In addition to this, social charges, currently at the rate of 15.5%, are levied on the gain element of the amount withdrawn.
The reason that anyone would elect for the ‘prélèvement’ rate of tax is, of course, if this is less than their ‘marginal’ rate of income tax. Currently, the top rate of income tax in France is 45%; hence, even if 35% appears to be high, it is still the better option for the higher-rate taxpayer.
After four years, we all need to re-assess which method to choose. For example, if your marginal rate of income tax is at least 30%, choosing a ‘prélèvement’ rate of 15% is the better option. On the other hand, if your marginal rate is only 5.5%, then you would choose to declare the gain element through your annual income tax return.
To offset these taxes and to encourage people to save for the long term, there is an additional income tax benefit after eight years. A single taxpayer receives an income tax allowance of €4,600 against the gain element of any withdrawals during the tax year. For a couple who are subject to joint taxation, this is increased to €9,200. Providing that the gain element of total withdrawals made during the year does not exceed the allowance, then there is no income tax to pay. This might not sound a lot, but it is a very useful allowance, as can be seen in the following simplified example.
Peter and Pam have an Assurance Vie policy, which they started 9 years ago with an investment of €100,000. They have never taken any withdrawals and it is now worth €160,000. They decide to buy a new car and need €15,000 to help pay for it, so they withdraw this amount from their Assurance Vie.
When they make the withdrawal, they receive a tax certificate from the insurance company advising them of how much gain is included in the amount withdrawn. In this case the Assurance Vie has grown by 60%, but the taxable gain element is only 37.5% (or €5,625). Since they are subject to joint taxation, they have a tax free allowance of €9,200, resulting in there being no income tax to pay.
Does an Assurance Vie have other advantages?
Without doubt, the Assurance Vie is also highly effective for inheritance planning – both as concerns the mitigation of French inheritance taxes and providing you with control over who receives your financial assets after death.
Due to a quirk of historical reasoning, this type of investment is considered to be outside of your estate for inheritance purposes. You are free to name whoever you wish to receive the benefit payable on death. You can also name as many beneficiaries as you wish and vary the proportions that each is to receive.
When this type of investment is set up before your 70th birthday, each beneficiary is entitled to a taxfree allowance of €152,500 in respect of monies invested before age 70, with taxation limited to 20% on anything more (although a higher tax rate of 31.25% applies for amounts exceeding €700,000 per beneficiary).
For amounts invested after age 70, the inheritance advantages are reduced. In this case, there is a tax-free allowance of €30,500 (plus the investment growth on the total amount invested), which is shared by all beneficiaries. Any part of the premium exceeding €30,500 would be subject to the standard French inheritance allowances, which would depend upon the relationship of the beneficiaries to the policyholder.
Social contributions at the current rate of 15.5% are now chargeable on any gain in the policy paid out as a death benefit. Despite this charge, this can still be a viable tool for inheritance planning, as well as providing a source of tax-efficient income for the policyholder during his/her lifetime.
Please note that this report is based on The Spectrum IFA Group’s understanding of current legislation and may be subject to change. No liability can be accepted for any change of interpretation or practice relating to any tax or legislative measure or the introduction of any new measures that may affect this document. The value of your investments can go down as well as up and past performance is no guarantee of future performance.