Information for British citizens resident in France on how to manage and make the most of the various pensions schemes available: private pensions, UK pension funds, QROPS…
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.
If a retiree is entitled to a state pension from the UK only, the pension will be paid by the Department for Work and Pension (DWP).
Entitlement to a UK State pension depends on the number of years of National Insurance contributions made. An individual needs only 30 years of contributions for a full basic State pension. A retiree with contribution gaps in the most recent ten years can make additional contributions to top up the entitlement.
Women’s state pension age was being gradually brought in line with men’s, so that by 2020 men and women would have the same state pension age of 65. The new UK government has proposed that women’s state pension age will increase to 65 more quickly than previously planned, by adjusting the timetable from April 2016 so that women’s state pension age will reach 65 by November 2018.
From November 2018 the UK state pension age of both men and women will be gradually increased, to reach age 66 from 2020.
The basic state pension currently stands at around £5,000 gross per annum although an increase to around £7,000 gross per annum from 2015 has been mentioned (referred to as the “citizen’s pension”). Full details are not yet available; it is unlikely that this will affect anyone who is already in receipt of their state pension. It is not known how this will tie in with any state second pension.
Qualifying for State pension
Generally, the DWP 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
Open: Monday to Friday 08:00-20:00 (GMT)
European Union/European Economic Area rules on “harmonisation” of social security systems (introduced in May 2010) will affect how a retiree who is also entitled to state pensions from other EEA countries should claim their various EU state pensions.
A claim for any EEA state pensions, including the UK State Pension, should be made via the state pension service of the last country of employment, where social security contributions were paid.
Where a retiree is entitled to state pensions from more than one EEA country, the combined pension entitlements will be calculated according to national and EU community rules; they will be entitled to receive the higher of the two calculations.
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 €36,600, so if a person has £10,000 pension income, only £9,000 will be taxed.
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.
The alternative to a Final Salary pension is a Money Purchase arrangement which includes many 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 is 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, recent changes to French legislation now mean that this lump sum is taxable.
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:
- 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.
- Drawdown: 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.
Drawdown 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. Recent changes to UK legislation have meant that drawdown can now continue indefinitely.
April 2011 saw the introduction of “flexible drawdown”. With drawdown, the maximum allowable income per year is normally around the same as an annuity, but if secure pension income (from state pension, company pensions or annuities) of £20,000 or more can be demonstrated, there is no limit to the level of income that can be drawn from a drawdown contract.
The structure of a Self Invested Personal Pension (SIPP) can be beneficial to people in situations where a drawdown 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 the transfer took place within the last ten years. If any payments are made which are not allowed in the UK (a lump sum greater than 25%, payments resulting in income greater than that allowed in the UK, or benefits accessed earlier than age 55) then there may be a tax charge applied of up to 55% if the individual has been a UK resident in either the current or any of the previous five tax years.
The majority of overseas transfers have focused on a transfer of a UK pension fund to a QROPS in an offshore location, such as Isle of Man or Guernsey, but tightening up of the QROPS rules earlier this year has reduced the availability of such jurisdictions. This has acted as a reminder that with any QROPS transfer there is additional risk that HMRC may subsequently amend legislation or remove QROPS status of any schemes without warning.
There are a number of French schemes have registered to be QROPS, but at the moment only annuity purchase is available through a French private pension scheme.
The advantages of QROPS
Transferring a pension fund abroad has several advantages: it enables 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 free from UK taxes.
The disadvantages of QROPS
The main potential disadvantage of a QROPS is that the scheme could be de-registered as a QROPS, which could mean that any individuals who transferred to the scheme may be liable for up to 55 % tax.
Note: Many QROPS advisers are unregulated (and therefore there may be no recourse if the advice is incorrect), and unfamiliar with UK pensions legislation.
One key area that is often omitted by advisers is that a QROPS is similar to an Income Drawdown plan in the UK, in that income is not secure, and based on the investment performance of the fund. Unlike in the UK though, where an income drawdown contract can be converted to an annuity should a guaranteed income be required, through a QROPS it is difficult to purchase an annuity.
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 an individual returns to the UK.
There are a number of options available, both in the UK and overseas. However, be aware that, particularly where an existing pension is from a final salary scheme (and therefore guaranteed and inflation linked), the guaranteed benefits would be lost by moving to QROPS.
There are options available within the UK that may be able to meet an individual’s requirements for security and flexibility of income but with regulatory protection and a cheaper costing structure. The amount of income required, acceptable level of risk, and requirements to preserve a pension for a spouse should be taken in to account.
If you have any questions on anything discussed in this post please do not hesitate to contact us.