THE RETIRING TYPE
Understanding your pension options and the implications of receiving pension income in France is an important part of a move across the Channel, as Rob Kay explains
The implications of receiving UK pension income in France
For many British expats, their pension is the key to a secure and comfortable retirement. If you are already living in or planning to move to France in retirement, it is important to understand all your pension options as well as the tax implications of receiving pension income in France. You need to make sure you meet all your obligations under UK and French tax law – without paying more than you need to. The actions you take now could mean the difference between paying as little as 7.5% or as much as 45% tax on your pension income.
WHO WILL YOU PAY?
You cannot choose which country you pay tax in. If you meet certain conditions, the French tax authorities will consider you a resident for tax purposes, whether it suits you or not. If you are considered a French resident, you will need to pay French tax on all of your income, including your UK pension. All UK state, occupational and private pensions are taxable in France. UK government service pensions are an exception – they remain taxable only in the UK. These include pensions from a local authority, the army, police and some NHS departments – you can find a full list at HM Revenue & Customs ( gov.uk).
Thanks to a tax arrangement between the UK and France, you will not have to pay tax twice on the same income. This means that any UK personal and occupational pension income for French residents can be paid gross in the UK and then taxed only in France (the state pension is always paid gross).
With government service pensions that are not subject to French tax, you must still include them as taxable income on your French tax return. You then receive a credit equal to the French income tax and social charges that you would have paid, which is taken off your final tax liability. Although you will not pay French tax on a government service pension, it will be counted as part of your annual income when calculating your French tax rate.
HOW MUCH WILL YOU PAY?
For French residents, UK pensions are taxed at the normal French income scale rates, which range from 0% for income under €9,700 to 45% for income over €152,108. Instead of taxing the whole amount, the French tax authorities offer a 10% allowance on your gross pension income, up to €3,711 per household. They will also work out your tax rate according to the ‘parts’ system, which divides your household income by the number of members. For couples where one spouse receives a much higher income than the other, this results in a lower overall tax bill than if they were assessed individually.
TAX ON CASH LUMP SUMS
One of the UK’s new pension freedoms allows you to take out all of a ‘defined contribution’ pension fund as cash. British residents can withdraw up to a quarter without paying tax in the UK. If you take out more than this as a UK resident, you will get a quarter of it tax-free every time you withdraw cash.
However, if you are a French resident, as soon as you take a cash lump sum it becomes liable to French tax, even if it remains in the UK. The only exceptions to this are if your withdrawal is due to circumstances known as an ‘accident of life’, such as invalidity, unemployment or death of a spouse.
It is possible to limit French tax on your UK lump sum to a fixed rate of 7.5% with an uncapped 10% allowance. This will only be an option if you can meet two conditions. First, the pension contributions must have been deducted from your or your employer’s taxable income. Second, you generally have to take the whole pension fund at once. It is unlikely you will be eligible if you have already taken anything from your pension fund.
If you do not meet the conditions for the lower fixed rate, any lump sums will be taxed at the normal French scale rates of income tax up to 45%.
OTHER TAXES ON YOUR PENSION
As well as French income tax, your UK pension can also be liable for social charges of 7.4%, but only if you are affiliated to the French healthcare system. This will be the case if you are still employed or self-employed in France and paying cotisations sociales, or if you are paying protection universelle maladie (PUMA) contributions. Provided you never worked in France, if you hold Form S1 – available once you start receiving your UK state pension – you do not need to pay any social charges on your pension income.
It is your responsibility to establish what taxes you are liable for on your worldwide income and assets, and declare and pay the right tax to the right place. If you fail to do this, however inadvertently, you could face a tax investigation, back taxes, interest and penalties. New international law means your local tax office will soon automatically receive information on your assets and income outside France, so you need to make sure you declare everything correctly.
FINDING THE BEST OPTION FOR YOU
Even if it is possible to take your entire pension in cash and pay just 7.5% in French tax, this may not necessarily be the best option for you. For some people there may be advantages in doing this and reinvesting, for example, in a tax-efficient assurance vie, but it is by no means a one-size-fits-all solution. There are also differences between providers and jurisdictions that could affect the tax benefits. It is important to take personalised advice and explore all of the options available.
Another option for non-UK residents is to transfer your pension into a Qualifying Recognised Overseas Pension Scheme (QROPS). Again, you should seek professional advice before you decide if this is suitable for you. Also be wary that pension transfers are a common focus for scammers looking to defraud people out of their pension savings.
The Financial Conduct Authority in the UK recommends that you speak to a regulated financial adviser before you make any decision about your pension. A regulated expert will carry out a high level of due diligence and outline your full range of options to establish the best solution for your particular circumstances. They can also prevent you falling victim to pension scams or unregulated investments that risk losing some or even all of your pension savings.
Since your pension provides financial security and income for the rest of your life, it is important not to rush into any decisions. You need to make sure you take the right route for your circumstances and objectives while taking the French and UK tax implications into account.
Pensions are a highly specialist and complex area, as is French taxation, so professional guidance is essential to ensure you are in a position to make the most of your retirement in France.
Rob Kay is senior partner at Blevins Franks blevinsfranks.com
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
It is your responsibility to establish what taxes you are liable for