Once you reach retirement age you need to carefully consider all your options for receiving pension income, and how they affect the transfer of any balance to your spouse and heirs. If you live in France or are planning to move there you need to consider all the French tax implications as well as the UK ones.
With pensions and tax legislation changing frequently, this is quite a complex area and you need to assess all your options and ensure you have all the latest rules to hand.
Tax in France
Under French domestic law, a pension deriving from a professional activity is taxed in the same way as salaries. Income from state retirement pensions, occupational pension schemes and often also private pensions receives a 10% deduction (minimum €377, maximum €3,689 per household per year) and the balance is included as part of your household’s taxable income and taxed under the Parts system at the usual income tax scale rates of up to 45% for 2013 income. This benefits households where one spouse receives a much higher pension income than the other.
Social charges are also, separately, payable on pension income at a rate of 7.1%. However, if you have a Form S1 all your UK pension income is exempt from social charges.
Government service pensions remain taxable only in the UK even though you are tax resident in France (unless you have transferred out before the pension commences and usually before age 59). While the income is not taxed directly in France, it is taken into account for determining the effective rate of tax payable on your other income, and so can increase the tax you pay on your other income.
The new UK/France double tax treaty covers social charges as well and government service pensions are not subject to social charges even if you do not hold form S1. (For non-government service pensions you do have to hold form S1 in order to get the social charge exemption.)
Private pensions are a grey area as there is nothing similar under French tax law. Your income could be taxed as a pension as described above, or as an annuity. However, it is very unlikely that the French authorities will allow any type of UK pension to be treated as an annuity, other than a true purchased annuity from an insurance company or recognised annuity provider.
If you receive an annuity, then a portion of the income is tax free based on your age when the annuity started. The tax free amount ranges from 30% up to 70%. On the downside its capitalised value will be subject to wealth tax. There are specific tables for calculating the capitalised value of the annuity, depending on age, gender and level of annuity. The trade-off being to determine whether the saving on income tax is greater than the exposure to wealth tax?
Pension commencement lump sums are commonly referred to as “tax free lump sums” in the UK, but they are now taxable in France. A lump sum from a UK pension fund will be taxed at a flat rate of 7.5%.
Most UK private pension funds can be transferred into a Qualifying Recognised Overseas Pension Scheme (QROPS). Funds in a QROPS can grow free of any French income tax and will only be taxed when you take benefits.
If you have been non-UK resident for five complete and consecutive UK tax years when you die, QROPS escape the 55% charges on lump sum death payments which apply to UK pension funds if you were in drawdown or aged over 75 when you die.
UK pension options
The various options for your UK pensions are:
- Leave your pension funds as they are
- Consolidate multiple schemes into an existing one
- Buy an annuity
- Transfer to a new UK pension scheme, this could be an Income Drawdown or Flexible Drawdown plan
- A cost effective Self Invested Personal Pension (SIPP)
- A suitable QROPS (for non-UK residents).
You can start to draw an income from your pension fund after the age of 55, known as Drawdown Pension.
A 55% tax charge will be deducted from any lump sum paid to your beneficiaries when you die if you have started drawing benefits or are aged 75 or over.
“Capped Drawdown” is the standard drawdown arrangement for most people. Within HM Revenue & Customs limits, you choose the frequency and amount of income you draw during the year. You should take potential investment performance, inflation, longevity and medical/long-term care costs into consideration.
You may take a pension commencement lump sum of up to 25% of the fund value.
Under “Flexible Drawdown” there is no limit to the amount of income you can draw each year. You can only opt for flexible drawdown if you have a secure pension income – “minimum income requirement” (MIR) – of at least £20,000 in payment that year. Not all pension income counts. There are other conditions, so you need to carefully weigh the pros and cons.
Then there are tax considerations. UK tax residents receive the 25% lump sum tax free, but the rest of the income is fully taxed. In France the whole amount would be taxable. If you return to the UK within five years of leaving you will have to pay UK income tax on the total amount of withdrawals made while in France, at your highest marginal rate, with no credit for tax paid in France.
Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in 2006 and quickly become popular in France and elsewhere, but the landscape changed significantly in April 2012 when HMRC introduced changes to make the QROPS regime operate in line with policy intention.
There is now less choice in the QROPS market, and more complexity than people realise. They can be advantageous for some people, but are not necessarily the best option for everyone. You need to look at how QROPS work, what the alternatives are, and your personal circumstances and objectives, before establishing what would be the most effective individual solution for you.
Should a QROPS prove to be the best option for you, you need to consider which one. Look at the jurisdiction, its legislation, restrictions etc; how the product is structured and the provider. Consider the tax implications in the jurisdiction, the UK and France. All QROPS are not the same, and the rules can vary considerably between jurisdictions.
To establish what all your pension options are, the tax implications and how they affect you personally, you should seek specialised advice. You need an adviser who is au fait with all the UK pension rules as well as taxation in France.