Fonds en euros in assurances vie policies.
There has been concern for some time, about how plummeting bond yields may affect the extremely popular ‘fonds en euros’ (by far the most popular choice for French investors in assurances vie policies). The question is how life insurers are going to be able to continue paying an acceptable annual return to their policyholders, while sovereign bonds offer increasingly low (or even negative) returns?
To explain, these ‘fonds en euros’ have to guarantee capital whilst paying a bonus every year. The only way that a fund manager can be sure of meeting this obligation is to put the vast majority of investors’ money into French government bonds. By doing so, they fund government debt to the tune of trillions of euros.
As recently as 2007, they were paying an attractive 5% per annum net. This has now fallen to about 2.5% and are set to fall further, almost certainly to under 2% for 2016. With bond rates at historically low levels, they should now only be paying about 1%, but companies have been dipping into their reserves as they fear that such a low rate would lead to a mass exodus from these policies. This has inevitably caused concerns about the financial stability of the insurance companies.
There have been several recent developments:
1) The state has imposed new reporting requirements on life insurers from 1 January 2016 under which they are obliged to provide details of policies with a value of more than €7,500. This is to assist the fight against money laundering but it could also be used to test the solvency of insurance companies.
2) For the past few years, the French Ministry of Finance and the Governor of the Bank of France have been consistently urging life insurers to lower returns on their ‘fonds en euros’. This has not been sufficiently acted upon and the government has now passed an amendment to Article 21a of the law “Sapin 2”.
Voted in secret on June 23 (with the French population concentrating on their imminent summer holidays and the euphoria of the European Cup!), the new legislation passed virtually unnoticed by the mainstream media.
There were very few immediate reactions, even though some members of parliament were taken aback by this amendment when it was presented to them to vote on by the MP proposing the bill.
The government, as has often happened in the past, conveniently happened to be going on their own summer holiday immediately afterwards. This avoided their having to answer any awkward questions, had this matter happened to come to the attention of the media!
Whether this legislation ever needs to be acted upon depends on government bond and bank interest rates. However, the future certainly looks bleak for investors in ‘fonds en euros’ (probably 90% of all French assurance vie policyholders).
What does this new law actually say and how will it affect you?
It gives the ‘Financial Stability Board’ (‘HCSF’) the power to ‘suspend, delay or limit temporarily, for all or part of the portfolio, withdrawals or the option to switch funds’.
The implications of this are clear: overnight, at the request of Governor of the Bank of France, the HCSF may prohibit you carrying out all normal policy operations, including withdrawals and fund ‘switches’.
In short, some or all of your assets could be frozen for “a period of 6 months, renewable” (i.e. for whatever time is required for the crisis threatening an insurance company to pass). It is not inconceivable that your investment could be reduced in value in order to avoid an insurance company becoming insolvent. Article L.612-33 of the Monetary and Financial Code provides the means for this reduction to be imposed. It is not known how this would affect the official guarantee of €70,000 for every assurance vie policy.
People are becoming increasingly disturbed, and rightly so, that this draconian law will now allow the authorities, in total disregard of contract law, to deprive you of access to your money!
However, on closer inspection, the powers given by this new legislation were already granted to the ACPR (Prudential Control Authority and Resolution) by Article L. 612-33 of the Monetary and Financial Code, as follows:
“If the solvency or liquidity of a person or institution subject to supervision by the Authority or when the interests of its customers, policyholders, members or beneficiaries, are compromised, the Prudential Control Authority shall take the necessary precautionary measures […] it can, as such: […] 7. instruct a person or institution […] to suspend or limit payment of cash values, the option of switching investments, or the granting of policy loans.”
One should remember that similar provisions exist in the banking sector. The directive on the recovery and resolution of banking crises (BRRD) authorizes freezing of clients’ assets and potential loss of money in bank accounts, in case of any difficulty that might lead to insolvability..
The new version of the text is intended to prevent and reverse the effects of a contagion that could affect assurance vie investors in the event of a severe financial crisis, It is designed “to preserve the stability of the financial system or prevent risks seriously threatening insurance companies or a significant number of them.”
Clearly, these measures are intended to protect insurers, especially if investor panic sets in and there were mass surrenders of assurance vie contracts, an event which insurers would be hard pressed to cope with. They are holding bonds with maturity dates of ten or even thirty years from now. To try and offload trillions of euros of bonds would just not be possible.
How to react?
One suspects that this situation is worrying insurers because they are struggling to meet the expectations of their investors. This is eating into their reserves and, regardless of the prospect of an eventual increase in bond yields, some of them could find themselves in a precarious situation in the months and years to come.
The threat is therefore not just a short term one.
Of course, it would be reassuring to think that worried investors would not panic and withdraw their money from these policies, knowing that this would only exacerbate the situation.
Policyholders are all too well aware that if they rush en masse to cash in their contracts, they could actually cause the assets in these policies to be frozen. But is that going to stop them trying to be ‘first in the queue’ and avoid the suspension of withdrawals?
The ideal scenario would be for investors to stay calm and avoid possible future difficulties by gradually switching out of ‘fonds en euros’ to other assets (unit linked multi-asset funds, property funds, etc). We will see if this is what happens!!!
In spite of all this, assurance vie remains an attractive investment, especially in view of its advantageous tax benefits. Investors therefore have to weigh up the advantages compared to what is obviously an increased element of risk.
Fortunately, there are companies who offer alternative funds to ‘fonds en euros’. There are also policies domiciled outside of France (in Dublin, for example) who should be completely immune to this French legislation.
Concerns over effect of BREXIT on expat pensions
The decision by UK voters to leave the European Union could have far-reaching consequences for pensioners living abroad.
This is especially the case for those receiving UK state pensions, but who are living in another EU member state.
The main uncertainty is whether state pensions will continue to benefit from annual increases.
As at September 2014 there were 1.24 million people receiving British state pensions but living outside the UK.
Approximately 560,000 expat pensioners live in countries such as Australia, New Zealand, Canada and South Africa, where their state pension is frozen at the amount it was when they left the UK.
Is it going to be the case that British expats living in EU countries such as France or Spain will find themselves in a similar position?
Since 1955, pensions have been paid worldwide, but there was never any mention of annual increases.
However, in the period to 1973, reciprocal arrangements were made between the UK and 30 other countries, which allowed for annual increases to be paid in certain countries. This was seen as making it easier for people to move freely between countries during their working life without suffering penalties in retirement for doing so.
Very few new agreements have been signed since, possibly because the EU rules meant that there was no need for them between EU countries.
Pensioners living in the EU, Norway, Iceland and Liechtenstein do get increases, but there is no guarantee that this will continue following Brexit.
Inevitably, the UK government will be tempted to save money by ending the increases to pensioners living in the EU.
It is already estimated that the Treasury saves around half a billion pounds a year from pensioners excluded from the increases. This could easily double if pensioners in the EU were to be treated similarly.
The number of overseas voters still on the UK electoral register is negligible, so the government might decide that upsetting these people would have a very modest negative effect. One result could be that more expats would get themselves back on to the UK electoral register (if it were possible for them to do so).
There is also the question of people who are planning to retire to a EU country in the future. They might show their dissatisfaction at the ballot box.
Another reason for the government might not stop the increases is the possibility of large numbers of pensioners living in the EU finding that they have no choice but to return to the UK
If access to free healthcare in the host country was also abolished, the UK government could easily find that significant numbers of pensioners return to the UK, which is a situation it would want to avoid.
For this reason, it is to be hoped that state pension increases will be paid, and there will almost certainly be considerable pressure on the government to find a way to preserve the existing system.
Impending changes to French inheritance laws
In England, we are used to being able to decide who should inherit our assets when we die. However, once you are considered a French resident, the ‘Code Civil’ stipulates that a set proportion should go to your ‘protected heirs’ (i.e. your children).
For example, if you have two children, they are entitled to 2/3 of the value of your estate. It is only the remaining proportion that you have some control over. If you are not married, and there is no will, the entire estate will pass to the children.
Whatever your will might say (e.g. leaving 100% to your spouse or a friend), these ‘protected heirs’ can insist on receiving their percentage. It is possible to insert a clause in a will whereby your spouse has lifetime ‘use’ of the matrimonial home. They can also continue to receive income from any investments for life, but they cannot sell any assets, (or spend any money), destined to go to the children (e.g. money in a bank account).
Unmarried couples face a tax bill of 60% of any inheritance, after an allowance of the first 1,594 euros. The same applies to anyone you are not directly related to.
‘PACS’d couples have the same rights as husbands and wives and are not liable to pay inheritance tax.
Recent changes in legislation have improved the rights of the spouse to a certain extent, but the situation is still far from ideal.
The good news is that France has signed up to a recent EU law under which citizens of other countries will be allowed to opt for the inheritance laws of their country of birth. This is due to take effect from 17th August 2015.
Providing you have written a will stipulating that your estate should be disposed of under English law, you are at liberty to leave your assets to anyone you want (and in any proportion). This will take precedence over the Code Civil and completely eliminate the question of ‘protected heirs’.
It is worth mentioning that Scottish inheritance law has some similarities with the French ‘Code Civil’. Anyone born in Scotland would still have some restrictions on whom they could leave their estate to (although the limits are far more generous for spouses and it would almost certainly be preferable to take advantage of the new laws).
For reasons best known to themselves, the UK and Irish governments have not signed up to this EU legislation. Nevertheless, this in no way prevents UK citizens living in France taking advantage of the new rules.
If you have any assets (e.g. a bank account) in the UK, it is usually advisable for you to have both English and French wills. Whilst not compulsory, it does make the winding up of the estate far simpler (and cheaper!).
Wills do not need to be complicated and it is quite likely that a standard version for both English and French wills would suit your purposes. Anyone who would like to discuss this with me can contact me on email@example.com.
There are other factors to bear in mind before deciding whether it is in your interests to take advantage of the new legislation. If you have a ‘classic’ French will and are on good terms with your children, they can simply sign away their rights to the inheritance. Mentioning the new law may confuse the notaire in charge of winding up the estate.
Also, you could lose the valuable tax-free limits that your children would otherwise be able to take advantage of.
Personally, I believe the people most likely to benefit from the change in legislation are those who have children from previous relationships, those who want to leave money to their beneficiaries in unequal shares and those who want to leave money to people other than their direct descendants.
You should bear in mind that this new ability to leave your money to anyone you wish in no way affects the inheritance tax rates. As previously mentioned, there is no inheritance tax between spouses. However, after an allowance of €100,000, children will pay a sliding scale of tax (usually with the majority of the excess being taxed at 20%). If you leave your money to third parties, or charities, they can expect to pay 60%.
Assurances Vie policies are frequently used to avoid inheritance tax. Providing these are set up before age 70, each named beneficiary can inherit up to 152,500 euros, totally tax-free, and it is not considered part of the estate. Any sum in excess of this is taxed at a flat rate of 20%. This is particularly beneficial if you were leaving money to an unmarried partner, a charity, nieces and nephews, etc where they would avoid paying the 60% tax!
This is one of the reasons that these policies account for the majority of the investments in France (as well as being the nearest thing the French have to a UK ‘tax-free ISA’).
This report is intended simply as a summary of some aspects of French succession law and inheritance tax. It is based on my understanding of current legislation, which may be subject to change. No liability can be accepted for any change of interpretation or practice relating to any tax or legislative measure that may affect the accuracy of the content.
Are you sure your bank accounts covered by the €100,000 government guarantee?
Graham Keysell of the Spectrum IFA Group is increasingly concerned about the safety of some expats’ investments.
Keysell says “I am extremely alarmed at the number of people I’m meeting who have been persuaded to invest in ‘Comptes Titres’. These accounts are designed for those who want to actively trade in shares, funds, bonds, etc. in a tax efficient manner. For whatever reason, people think that they are ‘high interest deposit accounts’ which they are definitely not.”
“Even worse, these people have unwittingly left it to their banks to decide on where the money is invested. This is invariably in bonds in the banks concerned and occasionally in shares in these banks”. He continues, “With the prevailing uncertainty in financial institutions, would any of these people have knowingly lent money to a bank or bought bank shares? You only have to look to what’s happening to bondholders in the Co-op bank to appreciate the danger. ”
With the meagre interest rates on offer for ‘classic’ bank accounts, it is no surprise that investors are attracted by quoted returns which can exceed 5% per annum. This is what a bank bond may pay out over 5 or 7 years.. The attraction is obvious, but he has yet to meet anyone who understands the risks they are taking.
“I have met elderly widows who have been persuaded to invest their life’s savings in these ‘Comptes Titres’. Nobody has explained to them that these are not covered by the €100,000 French government guarantee. If you read the small print, it is absolutely clear that investors in bank bonds will be the last to be paid out if the bank becomes insolvent. It is obvious that shareholders are also risk losing some or all of their money. I have no doubt that some people could be financially ruined if they have the majority of their savings in these accounts”
He continues “My own French step-son was advised to invest in such an account. I asked him to phone his ‘counsellor’ at the bank and she assured him that the government guarantee applied. It was only when I showed him the ‘small print’ in the Terms & Conditions that he changed his mind.”
For those people who have invested in these accounts and are worried about their exposure to risk, the solution is not obvious. The price they paid for the bonds is frequently higher than the price they can now be sold for. Keysell’s advice is to check the current value online before taking any decision about whether they want to sell some or all of their holdings in these accounts.
TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009 Paris « Société de Courtage d’assurances » R.C.S. Paris B 447 609 108 (2003B04384) Numéro d’immatriculation ORIAS 07 025 332 – www.orias.fr « Conseiller en investissements financiers, référencé sous le numéro E002440 par ANACOFI-CIF, association agréée par l’Autorité des Marchés Financiers»
French U-turn on tax grab spells good news for expats
Expats in France can breathe a sigh of relief after the French government backed down on its tax grab on second homes.
From September 1, those owning a second home in the country for more than 22 years will have complete exemption from capital gains tax (CGT).
Graham Keysell comments in The Daily Telegraph personal finance section. Read more here