Pensions and Retiring in France (UK Expatriates)

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Pensions and Retiring in France (UK Expatriates)

The vast majority of people retiring to France from the United Kingdom will have an entitlement to a UK State pension, along with various private and company pensions. This is information relevant to British citizens retiring to (or planning a retirement in) France: 

• The UK State Pension

• Private Pensions

• Using a UK Pension Fund 

• QROPS and Transferring a Pension Abroad

UK State Pensions

It is not possible to transfer an entitlement to a UK State pension to France - the only option is to retain it in the UK and draw it at retirement.

Generally, the UK Department for Work and Pension will contact an individual qualifying for pension approximately four months before they reach State pension age. A retiree should contact the Department if they do not receive written notice.

• UK Department for Work and Pensions
  International Pension Centre
  At: Tyneview Park, Newcastle Upon Tyne, NE98 1BA, United Kingdom
  Tel: +44 191 218 7777
  Fax: +44 191 218 7381
  Textphone (for those with speech or hearing difficulties): +44 191 218 7280
  Hours: Monday to Friday, 08:00-20:00 (GMT)

There have been several changes to the UK State pension age - currently it is age 60 for women, and 65 for men. From April 2010, the State pension age for women will increase gradually to age 65 by April 2020. In addition, the State pension age is due to increase from 65 to 68 between 2024 and 2046.

Entitlement to a UK State pension will depend on the number of years of National Insurance contributions made. As of September 2008, to be entitled to a full UK basic State pension, an individual needs to have made contributions for 90 percent of their working life (working life is: age 16 to 65 for a man, 16 to 60 for a woman). From 2010 an individual will need only 30 years of contributions for a full State pension.

A retiree with contribution gaps in the most recent ten years can make additional contributions to top up the entitlement.

Private Pensions

With the exception of Civil Service pensions (and some other government pensions) a UK pension is taxed in France. There is a ten percent abatement that applies to pension income up to €34,910, so if a person earns £10,000 pension income, only £9,000 will be taxed (figures valid 2008).

Final Salary schemes

In Final Salary schemes, employers pay a pension based on the member's salary and years of service. Because of recent stock market declines and peoples' increased lifespan, schemes such as this have become rarer. 

Pensions provided by the Final Salary schemes are usually better value for money than the alternative (in which the scheme offers a lump sum to be transferred into an alternative pension), so in the vast majority of situations it is recommended that benefits are kept within a Final Salary scheme.

Money purchase pension plans

The alternative to a Final Salary pension is a Money Purchase arrangements which includes a multitude of different pensions such as Money Purchase Occupational Schemes, personal pensions, executive pensions and stakeholder pensions. Regular contributions, employee's and employer's, are invested in funds, which fluctuate as the markets rise and fall.

At retirement the level of income will be determined by the value of the fund as well as interest rates at the time.

At retirement a member may be entitled to a lump sum from a pension fund. Although tax-free in the UK, French legislation does not allow for lump sum payments from pension funds, and therefore a French tax inspector could view any lump sum received as income and tax it accordingly. While in general, tax inspectors have not looked to tax these lump sums, this has not been confirmed in writing, and therefore it could be taxed.

At present, as UK pension arrangements do not have a surrender value (where an individual can have access to the whole fund), they are not liable for Wealth Tax.

Using a Private UK Pension Fund

A person approaching retirement and looking to draw income from UK Money Purchase plans has several options:

1. Buy an annuity: The pension fund is exchanged for an annuity - this is a guaranteed income - which is payable for life. A pension to a spouse, a guarantee period, or a yearly increase can be built in. Annuities are suitable for people who want a secure income, and do not require control over their pension fund.
2. Unsecured Pension: Income is taken directly from the pension fund which remains in place although contributions are no longer paid. This offers several advantages:
   • the pensioner retains control of their fund
   • there are more options for a spouse in the event of death
   • an annuity can be bought at any time if circumstances change and a secure income is required.

   An Unsecured Pension is not suitable for everyone as it provides an income which is not guaranteed and is subject to investment risk: if a plan goes down in value, so does the income.

3. Alternatively Secured Pension: Previously an annuity had to be purchased by age 75. Now the pension can be continued with a form of Unsecured Pension, the Alternatively Secured Pension, which offers many of the same benefits of an Unsecured Pension, but with one or two restrictions (an advisor can explain this further).

Note: None of these apply to a person holding a State pension plan.

SIPPs

The structure of a Self Invested Personal Pension (SIPP) might be of interest to people in situations where an Unsecured Pension is suitable.

A SIPP is a type of personal pension. With personal pensions, contributions or transfers are invested in selected funds. A SIPP is a "wrapper" in which there is a trustee bank account which acts as the control centre. It is from here that income is paid, and investments are bought and sold.

It is possible to have a trustee bank account which is euro denominated, but the majority of SIPP providers are not able to accommodate this. If the SIPP bank account can be euro denominated, a UK based pension fund can hold (and pay income in) euros, and if an appropriate euro-denominated investment is held, the entire plan is euro denominated, which removes any currency exchange rate risk from the income.

Transferring a Pension Abroad

Qualifying Recognised Overseas Pension Scheme (QROPS)

Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in 2006 to simplify the process of transferring pension funds abroad.

A transfer to an overseas scheme from a UK pension fund can only be done if the scheme has registered to be a Qualifying Recognised Pension Scheme (QROPS). For the scheme to qualify, various caveats must be satisfied, such as it must be recognised as a pension scheme in the country where it is based, and the benefits must be subject to taxation.

The scheme also reports any payments out of the scheme to the UK Inland Revenue. If any payments are made which are not allowed in the UK (a lump sum greater than 25 percent, payments resulting in income greater than that allowed in the UK, or benefits accessed earlier than age 50) then a tax charge of up to 55 percent will be levied by the UK Inland Revenue.

This requirement to report to the UK Inland Revenue is only applicable if a person has been a UK resident in either the current or any of the previous five tax years.

Transferring a pension

There are two possibilities for transferring a pension fund abroad: 

1. either transfer to an "offshore" scheme, or 
2. transfer to a French pension scheme that has registered to be a QROPS.

There are several schemes in France which have been accepted as QROPS. The majority of these are occupational pension schemes, but some are personal pensions (called PERPS).

At the moment, a pension fund in France must be used to purchase an annuity at state retirement date (age 65) and no lump sum is available. Annuity rates in France, like in the UK, are based on interest rates and projected lifespan and as interest rates are lower in mainland Europe than the UK, a comparable annuity will be lower in France.

The advantages of QROPS

• Transferring a pension fund abroad could have several advantages as it could enable a pension fund to be euro-denominated, and therefore provide income payments in euros reducing exposure to currency exchange fluctuations.
• An offshore scheme may offer greater control of the fund, and the potential to pass funds to children
• It may also offer the possibility of greater income than the UK

The disadvantages of QROPS

As of September 2008, it is still unclear how French tax authorities will treat these pensions as concerns: 

• if the funds can be accessed, whether they are subject to Wealth Tax
• whether they are still viewed as pension schemes, and therefore if any income is eligible for the 10 percent abatement

If the schemes offer access to the whole fund, or provide "tax-free" income, then they are technically not operating within the "spirit" of the rules, and the QROPS approval may be withdrawn, which could have taxation consequences. The UK Inland Revenue has recently shown an intention to pursue individuals who abuse the rules.

The limit on any withdrawals is dependant on the jurisdiction where the scheme is based: a resident of France is taxed on their worldwide income. This means that while the scheme may determine a payment as "tax-free", the French authorities may take a different view.

Historically, offshore pension funds have costly and complex charging structures, and as transferring pension funds abroad is not regulated by the FSA, a person may not be afforded the same protection if things go wrong. It may also not be possible to transfer the funds back if they return to the UK. There are options within a UK structure which retain the option of transferring offshore in the future once the treatment of these funds becomes clearer.

Summary

There are options available within the UK that should be able to meet an individual's requirements for security and flexibility of income. The amount of income required, acceptable level of risk, and requirements to preserve a pension for a spouse should be taken in to account.

Information provided by Robert Brealey, Pension Consultant, John Siddall Financial Services Ltd
Lothian House, 22 High Street, Fareham, Hampshire PO16 7AE 
Tel: 01329 288641 / Fax 01329 281157 / e-mail  / Website
Copyright © 2008 John Siddall Financial Services Ltd. All Rights Reserved