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Should I transfer my UK Pensions if I’m living in France?

By Philip Oxley - Topics: France, International SIPP, Moving to France, QROPS, UK Pensions
This article is published on: 12th October 2020

12.10.20

I live in France but have pensions in the UK. Should I transfer them to a QROPS, an International SIPP or just leave them where they are?

For British Nationals living in France, perhaps the primary decision to be made in relation to long term financial planning is whether or not to take any action with regards to any pension scheme/s they have in the UK.
To deal at the outset with one question I have seen asked, and increasingly so since the Brexit decision, it is important to state that it is not necessary to move your pension if you move to France. Even after Brexit, you will still have access to your pension funds. Concern that you will lose access to your pension fund is not a good reason to move it!

However, there can be good reasons to consider moving your pension once you have relocated to France. This decision should be made only on the basis of a proper analysis having been conducted on your existing schemes.

As a French resident, the primary options in relation to your pension scheme/s are as follows:
i) Leave them where they are
ii) Move them into a QROPS
iii) Move them into an International SIPP
iv) A combination of the above

Click on the sections below to find out more:

Following a professional review, sometimes our recommendation is to leave your pensions schemes in their existing arrangement in the UK. Reasons for doing this include the following:

  • you plan to move back to the UK at some point in the near future
  • your pension scheme/s are relatively small in value (e.g. less than £100,000)
  • you have a cautious stance in relation to investments, your pension scheme is a Defined Benefit scheme (sometimes known as a Final Salary scheme) and this is your only or primary source of income once you retire

One key drawback to this approach is that you will forever receive your pension in GBP, therefore always be subject to exchange rate risk and currency exchange costs. You only have to speak to someone who already receives their pension in GBP (or even read some of the posts on Facebook on this issue) to see that British Nationals have really felt exchange rate pain in recent years, only receiving €1.10 currently for each £ when once it was closer to €1.40. In addition, there is the time spent researching and using currency exchanges to try to obtain the best rate.

For example, drawing a pension of £10,000 per year and converting to Euro would have yielded approximately the following amounts over the past 15 years:

  • €15,000 in January 2007
  • €10,500 in December 2008
  • €14,250 in July 2015 and
  • €11,000 currently

These fluctuations are not helpful in your later years when you need to plan your financial affairs and seek a degree of certainty in relation to your income.

A QROPS has been the go-to product for many expats over the years. To be classified as a QROPS the scheme must meet certain requirements, as defined by Her Majesty’s Revenue & Customs (HMRC). Amongst the key benefits are the following:

  • The option to consolidate multiple pensions into one administratively simple but diversified portfolio. Consolidating pension pots into a single structure is a more convenient way of tracking your pension growth and provides a far simpler structure when you start to draw your pension
  • The currency of the pension can be chosen, not just at outset, but a change in currency can be made whilst holding the pension. Therefore, if you move your pension into a QROPS in GBP initially, if a point arises in the future when the pound significantly increases in value, part of the fund or the entire fund can be moved into Euro
  • A QROPS is a pension which is held outside of the UK; therefore, it provides some protection against future legislative changes that might take place impacting pensions based in the UK. Chancellors of the Exchequer have for many years now seen pensions as an easy target for raising tax revenue
  • Moving pensions funds into a QROPS is an action that is known as a Benefit Crystallisation Event (BCE) and your pension will be tested against the UK Lifetime Allowance (LTA) at the time of transfer. Should your pension subsequently grow in value in a QROPS beyond the LTA (currently £1,073,000) there will be no further test or tax to pay. Currently, pensions in excess of the LTA can be taxed at up to 55% in the UK, depending on the type of withdrawal (lump sum or drawdown). Although in some cases, you may be able to enhance the LTA limit with different forms of pension protection
  • Tax planning opportunities for your nominated beneficiaries on the event of your death. Currently, if you are over 75 when you die (most of us hope this will be the case) then a tax liability exists for your beneficiaries in relation to UK based pensions. This liability could be greatly reduced and often no tax is payable if certain conditions are met

One disadvantage of some QROPS is the level of fees. Because of the structure of a QROPS requiring an offshore investment platform, EU based trustee (typically Malta-based) and sometimes a Discretionary Fund Manager (DFM), costs can in some cases become prohibitive. However, regardless of pension value, there is scope to control both initial and ongoing charges. With proper planning, cost should not be an obstacle to establishing a QROPS.

A SIPP has some of the advantages of a QROPS in relation to currency flexibility and consolidation, but because it remains a pension structure domiciled in the UK, the tax advantages in relation to the LTA and Death Benefits for heirs do not apply. Also, it remains exposed to any legislative changes made by the UK Government in future budgets.

However, if you plan to move back to the UK or prefer to keep your pension based in the UK, then this is an option that may be suitable.

What I mean by this, is that if you have a good, well-funded Defined Benefit (final salary) scheme and also one or more Defined Contribution (money purchase) pensions schemes, you have the option to move one or more into another structure (e.g. QROPS or International SIPP) and leave some of the schemes in place. For example, you may want to keep the security of a guaranteed pension that a Defined Benefit scheme provides but move your other DC pension schemes into a QROPS or SIPP and secure the benefits that ensue from these structures.

Other considerations

In deciding whether to go ahead and transfer your existing pensions into a different structure, typically the bar should be set at a higher level for a Defined Benefit (final salary) scheme. This type of pension provides a guaranteed income for life, offers some protection from inflation and the risk of funding your retirement does not rest with you (i.e. you are protected from the ups and downs of the stock market).

However, these schemes do lack flexibility and by exchanging the guaranteed annual income from retirement age, you receive instead a cash lump sum (and transfer values have seldom been higher than now) which you can invest and spend how you like with access from age 55 and the ability to pass the full amount onto your beneficiaries (tax-free if you die under the age of 75 and also the potential to be tax-free over the age of 75 if your pension is a QROPS).

Most Defined Benefit schemes only pay half of your pre-commutated pension to your spouse should you die, and usually a minimal amount or nothing to your children if you no longer have a spouse at the time of your death or your spouse who was a beneficiary of your pension subsequently dies. A QROPS for example allows much greater flexibility in relation to the selection of a beneficiary, allowing the funds to pass to any named beneficiary. Also Defined Benefit schemes are not entirely risk free – many are underfunded and some may be unable to meet their obligations (although the Pension Protection Fund exists to provide 90% of the guaranteed income if the scheme becomes insolvent before you reach retirement age, although there are maximum limits of compensation, i.e. £37,315 at age 65. The full amount would be paid if the scheme became insolvent if you were over the scheme retirement age).

There are two primary types of
employment pension schemes in the UK

a) Defined Benefit (or Final Salary)

• Provides guaranteed pension as a proportion of final salary based on i) salary ii) years of service iii) accrual rate (e.g. 1/60th of final salary for each full year of service)
• Payable from Age 65 (if taken earlier penalties apply for each year taken before 65)
• The pension is reduced when taking a lump sum

b) Defined Contribution (or Money Purchase)

• Pension benefits depend on the size of the fund
• Significant flexibility in relation to when to take the pension (currently from Age 55), how much to take and structure used to take the pension (annuity, capped and flexi-access drawdown, UFPLS, Scheme etc.)
• The pension fund size will depend on how and where it has been invested and the performance of those funds

Summary

This is a complex area and it is difficult to cover all relevant details within the parameters of this article. There are other considerations I have not addressed here, and this piece should be considered a high-level overview of some of the factors to consider. Perhaps the best advice I can give is the following:

  • Do not just do nothing and leave the pensions where they are because it’s the easiest thing to do
  • Do not assume the best option is to move your pension/s offshore into a QROPS just because you live in France and the UK has left the EU
  • Act now to have your pension schemes carefully reviewed. Engage with a properly regulated financial adviser and have an analysis conducted as to your options. Only then can you make a well-informed decision about what is best for you and your long-term financial security

A final point to consider is that there is currently a 25% tax applied to pension transfers into a QROPS for British Nationals living outside the EEA. After 31 December 2020, it is possible that this tax will also apply to those living in the EEA (as the UK will no longer be an EU country and the transition period will have expired). This has not yet been confirmed by the UK government but the opportunity to consider a QROPS as a financial planning option may not exist beyond the end of this year. If this is an option you want to explore, I recommend you do this without delay.

Inheritance Planning & French Residency

By Occitanie - Topics: France, Inheritance Tax, Moving to France, Succession Planning, Tax, Wills
This article is published on: 9th June 2020

09.06.20

Welcome to ‘Spectrum in Occitanie, Finance in Focus’.

The Covid-19 pandemic still dominates the news and will inevitably remain at the forefront of our thoughts for some time. Last month we focused on the financial consequences of this virus and we may well return to this subject in future editions. However, in this issue we are going to focus on the very important, and often neglected, subject of Wills and Inheritance Planning. Succession laws in France differ significantly from those in the UK and careful planning is required to mitigate French inheritance tax.

As a reminder, we are Sue Regan, Rob Hesketh, Derek Winsland and Philip Oxley. Together we form Spectrum’s team in the Occitanie.

As touched on in last month’s Newsletter, now is probably a good time to revisit the subject of inheritance planning – an integral part of any financial planning review.

Despite the importance of making sure one’s affairs are in order for the inevitability of our demise, very few people actively seek advice in this area and, as a result, are unaware of the potential difficulties ahead for their families and heirs, not to mention potential tax bills which can be quite substantial for certain classes of beneficiary. With some sensible planning you could save your intended beneficiaries a great deal of stress and dramatically reduce their inheritance tax bill.

The basic rule is, if you are resident in France, you are considered also to be domiciled in France for inheritance purposes and your worldwide estate becomes taxable in France, where the tax rates depend upon the relationship to your beneficiaries.

Fortunately, there is no inheritance tax between spouses and the allowance between a parent and a child is reasonably generous, currently €100,000 per child, per parent. For anything left to other beneficiaries, the allowances are considerably less. In particular, for step-children and other non-related beneficiaries, the allowance is only €1,594 and the tax rate on anything above that is an eye-watering 60%!

There are strict rules on succession and children are considered to be ‘protected heirs’ and so are entitled to inherit a proportion of each of their parent’s estates. For example, if you have one child, the proportion is 50% of the deceased parent’s estate; two children, one-third each; and if you have three or more children, then three-quarters of your estate must be divided equally between them.

You are free to pass on the rest of your estate (the disposable part) to whoever you wish through a French will and, in the absence of making a will, if you have a surviving spouse, he/she would be entitled to 25% of your estate.

You may also be considered domiciled in your ‘home country’ and if so, this could cause some confusion, since your home country may also have the right to charge succession taxes on your death. However, France has a number of Double Taxation Treaties (DTT) with other countries covering inheritance. In such a case, the DTT will set out the rules that apply (basically, ‘which’ country has the right to tax ‘what’ assets).

For example, the 1963 DTT between France and the UK specifies that the deceased’s total estate will be devolved and taxed in accordance with the person’s place of residence at the time of death, with the exception of any property assets that are sited in the other country.

moving-to-france

Therefore, for a UK national who is resident in France, who has retained a property in the UK (and does not own any other property outside of France), the situation would be that:

  • any French property, plus his/her total financial assets, would be taxed in accordance with French law; and
  • the UK property would be taxed in accordance with UK law, although in theory, the French notaire can take this asset into account when considering the fair distribution of all other assets to any ‘protected heirs’ ie. children

If a DTT covering inheritance does not exist between France and the other country, with which the French resident person has an interest, this could result in double taxation, if the ‘home’ country also has the right to tax the person’s estate. Hence, when people become French resident, there are usually two issues:

  • how to protect the survivor; and
  • how to mitigate the potential French inheritance taxes for other beneficiaries

Protecting the survivor
There are various ways in which you can protect your spouse:

European Succession Regulation No. 650/2012
Many of you will no doubt have heard about the EU Succession Regulations that came into effect in 2015 whereby the default situation is that it is the law of your place of habitual residence that applies to your estate. However, you can elect for the inheritance law of your country of nationality to apply to your estate by specifying this in a French will. This is effectively one way of getting around the issue of ‘protected heirs’ for some expats living in France.

Adopting a ‘community pot’ marriage regime or family pact
There are other tried and tested French structures available to fully protect the rights of a spouse, that don’t rely on the notaire having an understanding of the succession laws of other countries.

You could choose to have the marriage regime of ‘communauté universelle avec une clause d’attribution intégrale au conjoint survivant’. Under this marriage regime, all assets are owned within a ‘community pot’ and on the death of the first person, those community assets are transferred to the survivor without any attribution of half of the assets to the deceased’s estate.

However, adopting a ‘community pot’ marriage regime would not be suitable for families with step-children. This sort of arrangement could be subject to a legal challenge by the survivor’s step-children as they could miss out on their inheritance due to the fact that there is no blood relationship with the step-parent.

In this situation, a family pact (pacte de famille) could be the solution, whereby families agree in advance who will inherit and when. Of course, this would only really work where there is an amicable relationship between parents and children, as the children are effectively waiving all or some of their right to inherit.

There are a number of other ways in which you can arrange your affairs to protect the survivor, depending on your individual circumstances, and we would always recommend that you discuss succession planning in detail with a notaire experienced in these matters.

Mitigation of inheritance tax
On whichever planning you decide, it is important to remember that the French inheritance tax rules will still apply. So, even though you have the freedom to decide who inherits your estate, this will not reduce the potential inheritance tax liability on your beneficiaries, which, as mentioned above, could potentially be very high for a step-child. Hence, there will still be a need to shelter financial assets from French inheritance taxes.

By far and away the most popular vehicle in France for sheltering your hard-earned savings from inheritance tax is the Assurance Vie. The assurance vie is considered to be outside of your estate for tax purposes and comes with its own inheritance allowances, in addition to the standard aIllowance for other assets. If you invest in an assurance vie before the age of 70 you can name as many beneficiaires as you like, regardless of whether they are family or not, and each beneficiary can inherit up to €152,500, tax-free. The rate of tax on the next €700,000 is limited to 20% – potentially making a huge saving for remoter relatives or step-children.

Let’s look at a simple example of the inheritance tax position of a married couple with two children, comparing the IHT position with and without investing in assurance vie:

CLICK ON THE IMAGE TO DOWNLOAD PDF

It is clear to see from this example that by wrapping their medium to long term savings in an assurance vie, this couple have saved each child €30,500 in IHT.

Of course, the more beneficiaries nominated, for example grandchildren, siblings, etc, the greater the IHT saving overall. Beneficiaries can be changed or added to the assurance vie at any time. Remember, also, that beneficiary nominations are not restricted to family members, so, whoever you nominate gets the same allowance.

The inheritance allowance on premiums paid to assurance vie after age 70 are less attractive at €30,500 of the premium (capital investment) plus the growth on the capital shared between all named beneficiaries, and the remaining capital invested is taxed in accordance with the standard IHT bands.

Nevertheless, an assurance vie is still a worthwhile investment after the age of 70 as, in addition to the inheritance tax benefits, assurance vie offers personal tax efficiencies to the investor such as gross roll-up of income and gains whilst funds remain in the policy and an annual income tax allowance of €4,600, or €9,200 for a couple, after 8 years.

So, in order to ensure that your inheritance wishes are carried out, some planning may be required and there are investment opportunities to mitigate the IHT for your chosen beneficiaries.

Please contact us if you would like to discuss your particular circumstances.

The Spectrum IFA Group – Occitainie
occitainie@spectrum-ifa.com

Moving to France – When should I take financial advice?

By Amanda Johnson - Topics: France, Moving to France
This article is published on: 20th February 2020

20.02.20

For the majority of those who move to a France, speaking to a qualified financial adviser, who is regulated where you plan to live, is something which happens after you have made the move. But, talking to one before you embark on the journey can help avoid some issues which expatriates can find themselves encountering:

Many UK based advisers are not fully regulated to offer advice for France and may not be aware of the most current regulations or tax efficient solutions for your needs.

A French regulated adviser can ensure you are financially prepared for your move, in terms of any investments, savings and taxes which can become due on both income and windfalls you may be expecting after your move.

Many people come to France with plans of using their new French property to run a business. A French regulated adviser can compare your anticipated return on investment to that from tax efficient, financial investments available.

For those planning on using the property as the main source of income, how you buy your property can have different benefits in terms of French tax rules.

A regulated adviser has no vested interest in which property you buy, yet has often a long history of experience of the path you are undertaking.

Investing an hour of two of your time before you make the move to France can provide peace of mind and financial comfort when planning a new adventure.

Whether you want to register for our newsletter, attend one of our road shows or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.