So you have moved to France, settled in nicely for your retirement, and your pension is due to commence. What are your options?
Can I transfer my pension fund to France?
Well, you could transfer your pension benefits into a French personal pension scheme (PERP). However, under present French legislation, any income you receive from a French PERP must be elected in the form of an annuity, which is only payable at state retirement age (currently 65) and are less flexible than UK annuities.
Therefore transferring pensions to French schemes is not, for the time being at least, suitable for the majority of people.
So what can I do with my pensions?
Some people will be fortunate to be members of Final Salary schemes, where employers pay a pension based on your salary and years of service. Due to falls in the stockmarket and extended longevity, the last few years has seen these types of schemes become scarce.
The pensions provided by these types of schemes are usually much better value for money than the alternative (which is where the scheme offers a lump sum to transfer into an alternative pension), so in the vast majority of cases we would recommend that benefits are kept within the scheme. However, we always check as this also provides a useful guide as to the benefits the scheme will provide.
The alternative to Final Salary pensions is Money Purchase. This covers a multitude of different pensions such as Money Purchase Occupational Schemes, Personal Pensions, Executive Pensions and Stakeholder pensions. This is where regular contributions (yours and/or your employers) are invested in funds, which fluctuate as the markets rise and fall.
At retirement, these funds will provide an income. This will be based on the fund value at retirement and also annuity rates at the time.
There are two main methods of providing income: annuity purchase and drawdown (now known as unsecured income).
In short, annuity purchase is where the fund is exchanged for a guaranteed income, payable for life, no matter how long you live. This is done through an insurance company. You can add certain conditions, such as a pension to your spouse in the event of your death, a requirement for the pension to increase in payment, a minimum payment period (to ensure some return of the fund in the event of death in the early years) but all of these conditions reduce the starting income as the insurance company is taking on more ‘risk’.
The alternative, drawdown, is the complete opposite. Income is taken directly from the fund, which continues to be invested. There is a set maximum that can be taken, but apart from that, any withdrawals can be tailored to your circumstances. The maximum is expressed as a percentage of the fund, so if the fund decreases in value, there is a possibility that the income may also decrease.
This is only a brief synopsis, and you should obtain specialist advice before retiring as – due to the complexities and risk – income drawdown is only suitable for certain types of people.
Of course, as your income will be denominated in Sterling, this does give rise to a very real possibility that you will be exposed to currency fluctuations.
There are some products now available that will permit this exposure to be reduced somewhat, via a Self Invested Personal Pension; but as with all financial products independent advice should be sought before retiring.
It is possible to transfer your pension fund to a QROPS, which will be similar in structure to a drawdown plan, and may provide additional benefits. However these are more complex than UK arrangements and therefore are not suitable for everyone.
If you are a year or two from retirement, you may consider it worthwhile reviewing your pension arrangements. Firstly, perhaps review what funds your plans are invested in. If there were a collapse in the stockmarket, your plans do not have the ‘long term’ in which to recover, so by switching to less risky funds you can at least reduce the risk of your plan suffering a downturn a few days before retirement. Some older plans may contain guarantees, so you should check with the providers to find out if you have any of these written into your plans.
In addition to this, as annuity rates have fallen recently, the projections the insurance company may have provided for you a few years ago may be widely inaccurate – as may any projection given by your company pension scheme.
You should also consider obtaining a basic state pension forecast. This can be done either in writing, or over the internet via the Government Gateway at www.gov.uk or directly to the specific page at www.gov.uk/state-pension-statement. If you are not entitled to a full UK state pension (and for this typically you must have paid National Insurance contributions for 90% of your working life) you can make voluntary additional contributions.
The UK government is proposing to change the rules for people reaching state retirement age after 2010, when it is intended that only 30 years contributions will be required to receive the full basic state pension. If you are due to retire after then, it may be worthwhile delaying any voluntary contributions until 2010 to see if legislation changes.
Pensions and tax
As a resident of the EU, you will still be entitled to increases in payment on the UK state pension. Expatriates living in some countries, typically Australia, Canada, and New Zealand, do not enjoy any increases on their UK state pension.
Many people are under the assumption that as their pension income is sourced in the UK, you can still have a UK nil rate tax band, and pay tax in the UK.
Firstly, as French residents you must pay tax in France. You cannot DECIDE where to pay income tax. Some UK pensions (typically civil service and other government schemes) will remain subject to UK tax, but you must still declare these to your French tax inspector who will take into account the UK tax paid when assessing your liability to French Income tax.
To enable your pension to be paid gross from the UK the relevant forms are available on the Inland Revenue’s website (www.hmrc.gov.uk) and should be submitted to your French tax inspector.
What happens if I am retiring early?
If you are retiring before state pension age, you will need to consider the tax implications. In general, once either you or your spouse are in receipt of an EU state pension then you will not be liable for social taxes or health contributions on your taxable income. But if you are retiring early, then you may be liable until your state pension commences.
Another ‘quirk’ of the French taxation system is the favourable treatment of pensioners. In short, any pension income (up to a maximum of €34,460) receives a 10% abatement, so only 90% of your income is taxable. Combined with the fact that in France you are taxed as a household, this means that in general, most people pay less income tax in France than they would in the UK.
In short, in the run up to retirement, you should obtain estimates of ALL your pensions to give you a guide to the amount of income you could receive, and review the details of any plans to ensure they are still suitable for your needs (i.e. what funds are they invested in? do they contain any guarantees?).
Ideally, you should speak to an independent financial adviser who can advise you on your retirement planning, and with the inheritance tax complications of France as well, it is much easier to put things in place correctly at the start, rather than having to potentially unwind arrangements that are not suitable for France.