Pension Options for Expats in France
Will you be better off with a UK pension, or should you transfer?
There are many things you should consider when deciding what to do with your pension as an expat, and lots of different options available. There is no one right answer, and it all depends on your individual circumstances. However, we have provided the following information to try and help you get a better understanding before seeking quality advice.
Overseas Tax Charge
The latest changes to the Finance Act 2004 were announced and became immediately effective on 8th March 2017. As of that date a 25% Overseas Transfer Charge (OTC) is levied on pensions transfers as they leave the UK unless one of the five following conditions is met:
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IMPORTANT FACTS FOR ALL READERS
The following points are based on the fact that you have been registered for tax purposes for 5 full years outside the UK.
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The rules only apply to pension funds and do not include public and private final salary (defined benefit) schemes, which do not qualify. Only a UK regulated G60/AF3 qualified adviser can advise these people, and so please contact us for advice.
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Throughout this we will refer to the Double Tax Treaty (DTT) – this is the treaty on tax that the country you are resident in has with the UK and also, if applicable, with the country that your QROPS is held in. All DTT are available via ourselves for all countries and they form the basis of many critically important decisions.
| What factor applies to you? | What should you consider? |
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| 5 FULL tax years rule – Often ignored by overseas advisers but actually critical for all decision making. The key here is that both the original pension holder, and the beneficiaries of that pension if the original pension holder dies, must have been registered as non-resident in the UK for 5 full tax years to be able to enjoy the optional “benefits” of QROPS. Just leaving the UK is insufficient, as one needs to be able to prove they were resident in another country, or their beneficiaries need to. This cannot be avoided as all QROPS trustees have a legal obligation to report everything back to the UK up to 10 years after any transfer. HMRC in the UK has been known to take non-compliance seriously and it can result in 55% tax penalty. | What happens if you cannot prove that you have been resident overseas for 5 full UK tax years – QROPS rules do not apply even if your pension is in a QROPS! A QROPS is merely a trust that follows UK pension rules, and reverts to the UK rules if any settlor or beneficiary resides in the UK. Without qualifying, you and your beneficiaries have to follow UK pension rules, although a QROPS can be continued to be held but not touched, until the person would have been outside the UK for 5 full tax years; QROPS rules will then apply as long as the beneficiary of the fund is not in the UK and also has been outside the UK for 5 full tax years. If you are considering a QROPS, make sure you don’t get caught out! |
| INCOME INCREASE – If you are seeking a tax-efficient high income as against large lump sum then this is possible. Under UK rules you have two different methods of obtaining this income and you need to select the most tax efficient for your circumstances. Generic QROPS have to follow UK rules on distributions. | With unlimited income options available once you are aged 55 or over, then a SIPP will be a cheaper way of receiving ongoing income but it will either be taxable in the UK or under the DTT with the country you are resident in. For some low tax countries without a UK DTT, or much lower taxation, then a QROPS should be considered, especially if double taxation is likely. Some QROPS jurisdictions offer limited DTT and very low taxation to reduce double taxation applied. For France residents, you should also consider French products that can be very tax efficient, such as assurance vie. |
| IS THERE A 45% or 55% DEATH TAX in the UK under 75? – As of 6th April 2015, the answer is “NO”. Upon death your investment-based pension funds are passed on with no charge in the UK, irrespective of whether you have taken any benefits. If when you die you are UNDER 75, the beneficiaries can choose to take the entire fund as a lump sum tax-free in the UK. | For a SIPP, all death taxes have been removed under 75. If aged over 74 see RULE BELOW. Although QROPS are similar, the main issue is that distributions from QROPS may not be recognised as tax-free in the country of your beneficiaries! SIPP Pension Rules |
| IS THERE A 45% DEATH TAX CHARGE in the UK from age 75 onwards? – The answer is “NO” if advice is taken. If you are 75 or over when you die, there is a 100% transfer of a DC fund, free of any UK tax, to any other qualifying pension of another individual, irrespective of whether you have taken any benefits. We are finding people are being misled about this option! The beneficiaries can choose to take the entire fund as a lump sum. From 6th April 2016, the 45% tax charge was removed and the recipient/beneficiaries are charged at their own rate of income tax. This does not include public and private final salary (defined benefit) schemes. | This rule makes UK pensions ideal for succession planning (passing down money to beneficiaries) and very flexible. For QROPS it is far more difficult to answer as their rules vary region by region and there is no longer a one-size-fits-all answer (contrary to much advertising by other overseas websites.) In some territories, QROPS offer the same flexibility and options, and can also allow a full transfer out without applying any 45% tax charge. However, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries, e.g. the UK, France and the USA being key ones! Careful advice needs to be sought, especially in the event that any of the beneficiaries are in the UK, or plan to return there in the future. QROPS Pension Checklist |
| QROPS vs SIPPs at point of death – This question was easy to answer until April 2014; QROPS was usually the better option for someone who had lived overseas for more than 5 full tax years (and their beneficiary had lived overseas for 5 full tax years), but this was not necessarily the case if the country of residence was France or the USA, among others. The best option for you depends on various factors, and the 5 full qualifying tax years rule still applies. QROPS may provide the same full access to 100% of the pension fund if the jurisdiction where the QROPS is registered has pension legislation in line with that of the UK. | If you, the settlor, or your beneficiaries have been out of the UK less than 5 years, then a UK pension (SIPP) remains the best option. Additionally, up to the age of 75 upon death, there are no longer any advantages for a QROPS over a SIPP/UK pension (other than tax considerations, which vary according to the country that you live in AND the country that your beneficiaries live in). If death occurs at age 75 or older then QROPS rules are more flexible and better in some jurisdictions, but not all. In fact, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries and become taxed at a higher rate than if they had been left in the UK. BEWARE! Foreign Pension Comparison |
| INCOME TAX EFFICIENCY (UK Rules) – The 55% capital charge on “excess” pension entitlements has been removed from April 2015 other than where tax abuse is found (typical abuse is taking of benefits before age 55, or transferring overseas to take 100% tax-free benefits within 5 years). Individuals have the right to choose which form of pension they want, and different rules apply to the options selected. By combining your personal income allowance of over £10,000 (still available if you are an expat) with 25% tax free cash, consideration should be given to taking funds annually, utilising maximum UK zero-tax income level and segments of 25% tax free cash. | There are two UK options available: You can choose between applying to take “segments” of 25% tax-free cash with further income taxed at your marginal rate each year, or taking the full fund with an income tax charge on 75% of the fund at highest assessed marginal UK rates. Both tier options would currently include any annual 0% personal allowance, even for expats, making it a very competitive form of taking income for most people. Taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and, in the case of extreme income or lump sums being taken, then it could be as high as 45%. Accessing your pension |
| INCOME TAX EFFICIENCY (QROPS vs SIPPs) – This will come down to making a decision based on the country you will be resident in at retirement and the type of DTT with either the UK, or the country the QROPS is held in. However, any saving on tax must be offset by the increased costs and charges of transferring to a QROPS which might rule out any tax advantages. It will come down to the speed at which people want to access their funds and the total value of their funds; ultimately only people with substantial funds who need to have immediate access to the whole fund will probably benefit from a transfer to a QROPS. | Taking into account offshore QROPS trustee and investment charges, many people will be better off with a SIPP from the UK with equivalent flexibility, matching that of QROPS up to age 75. With funds of less than £150,000, then careful tax planning will be much more effective than transferring to a QROPS and accessing income, other than in exceptional circumstances. Contact us to see how this benefits you and for a personal calculation. |
| PENSION FUND ACCESS & FLEXIBILITY – Since 6th April 2015, if you are aged 55 or more, you can have 100% access to your investment-based pension (income taxes will apply in the country you are resident in). This does not apply to Defined Benefit schemes. | The choice of SIPP or QROPS will come purely down to the country you intend to retire in and the tax rules. In most cases a SIPP will be the choice, but there are a few where QROPS should be considered. Foreign Pension Comparison |
| FULL LIFETIME PENSION FUND ACCESS – Since 6th April 2015, people over 55 have full access to their DC and private pension fund, although it will be part taxed, as detailed above in the previous points about Income Tax Efficiency. | Income tax on any funds taken in excess of the tax-free limit will apply in the country that you are resident in. If deemed UK resident, then taking of funds can lead to you being put into a higher marginal tax rate, so some or all of your funds could be taxed at 20%, 40% and in the case of extreme income or lump sums being taken then it could be as high as 45%. Accessing your pension |
| PENSION TRANSFERS – Funded Private and Public final salary (defined benefit) schemes can continue to be transferred to take advantage of the new rules, but unfunded schemes cannot be transferred. | Any transfer of one of these pension schemes can only be done if it is advised and signed off by a G60/AF3 qualified individual who is also currently regulated by the UK Financial Conduct Authority, alongside your adviser in France. Fill in the contact form at the bottom of the page if this applies to you, as AISA has advisers in the UK, France and elsewhere. Learn more |
| AVOID BONDS (investment or insurance bonds) with high commissions to ensure that your funds do not decrease due to high cost levels. High-charging investment bonds with extra charges and surrender or access penalties in the early years eat into the investment though charges that are not declared by salesmen, leading to a decrease in investment returns and usually value as well! | There is no reason why a SIPP should ever be placed into an investment or insurance bond. Excuses are provided about them being “more” tax efficient or “protected”, both of which are untrue when compared with the SIPP held in the UK which is fully tax efficient and protected already. We do not recommend anyone take out a QROPS and put it into an investment or insurance bond either. |
| AVOID UK IHT (Inheritance Tax) – 55% death taxes were removed from 6th April 2015 from UK pensions, and funds can be handed down to beneficiary pension funds without any tax applied in the best cases. For beneficiaries under the age of 55 they can access the fund totally, subject to legislative change. | It is important to check that jurisdictions who have QROPS have legislation that matches the UK rules for QROPS to qualify in each particular country where the Trustees are based. Accessing your pension |
| RETAIN FUNDS IN PENSIONS – Wherever possible it will remain advice to retain funds within the tax-efficient environment of a pension rather than access it to invest elsewhere. Certain countries (like the US) will continue to recognise UK SIPPs, although it is questionable if they will recognise non-contractual QROPS as the pension funds will have crossed international boundaries and may not be recognised as pension funds. | Since the UK reformed pension legislation to make UK pensions more flexible, there has been a reduced need in many cases for expats to transfer. If you are currently considering your options, we would advise you not to rush to a decision without seeking quality advice, and not mere guidance. |
Contrary to what some overseas marketing websites suggest, in many cases a QROPS may not actually be the best solution for expats anymore. There is still a place for QROPS, and we do mention some points that demonstrate this above, but we still think it’s a good idea to seek advice before opting for a QROPS. Furthermore, if you are currently resident in France it is also worth noting that there are currently no eligible QROPS in France, and so a QROPS would have to be held in an appropriate third party country in the EEA, such as Malta or Gibraltar. If you intend to remain in France it is well worth considering taking advantage of the range of French products on offer, which can be very tax effective.
Our main concern is that there are many people who have taken advice from the “largest international IFAs in the world” that now have serious issues, including penalties on “bonds” held within their pensions, or reducing income at the 3-year assessment. There is no reason why this should continue. Do not be fooled into thinking “big”, “large” or “extensive worldwide coverage” means quality, or protection from bad advice. In our opinion all future advice should come from a combination of a UK based adviser who works in the current system and fully understands current pension rules, and an offshore adviser who understands the DTT with the country that you are currently in, and more importantly, the country you intend to retire in.
2017
INTERNATIONAL INVESTMENT INTERNATIONAL FUND & PRODUCT AWARDS
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OVERALL WINNER: BEST BEST-PRACTICE IN OFFSHORE
2016
INTERNATIONAL ADVISER BEST PRACTICE AWARDS
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WINNER: BEST ADVISER FIRM EUROPE
