When it comes to money, most of us would like to have a bit more of it than we do. This may be motivated by the need for new car, a holiday, the security knowing it is there provides or, most importantly, the ability to support those we love.
Many of us will have value tied up in places that means they cannot use it, such as in pensions or property. So how can we release this potential wealth?
As you may have read, the UK government changed the law as from April this year, allowing those over the age of 55 to access their pension pots, pulling it all out as cash.
Pensions minister Steve Webb said he did not care if people went out and bought a Lamborghini, which is probably just to illustrate that you can do as you please with the money, not an instruction as the basis for sound financial planning.
What are the pros and cons of doing this apart from the potential purchase of Italian sports cars?
On the plus side you now have control over your money. For an expat, this means that you now have the option of holding your money in the currency in which you spend and in a way that is tax friendly in your host country.
In the UK, 25% of your withdrawal would be tax free but with the other 75% being taxed as earned income, so potentially up to 45%. This is why the new law is there, as a “tax grab” for the chancellor to get money in quickly (indeed I dare question the motives of politicians).
As a French resident, the tax treatment of cash from pensions is different.
Lump sums can be taxed at a fixed rate of 7.5% after a 10% deduction (163 bis II of the French tax code), so in effect the tax is 6.75%. The law says that to benefit from this special taxation, the payment must not be split and payments into the pension must have been tax deductible in the source country or sourced from exempt income.
Therefore, if drawing your UK pension, as one single payment, it appears that there is a significant advantage to living in France for those who would pay tax above 7% and very advantageous for high rate tax payers.
It is vital to understand that, though we can see no reason why this will not work, this is new untested legislation concerning, what may be considerably large sums of capital, and we cannot know the reaction of either the UK or French governments who may seek a way to close this legal loophole. In conclusion we have to say that there is a risk. Given that income tax of up to 45% could otherwise be applied, many people will be happy to take their chances.
An important consideration, however, is that official onshore pensions, such as UK Personal Pensions or French PERPS, are not assessable to wealth tax (anything offshore is not defined as a pension by the French fiscal authorities, including QROPS), so by withdrawing money from your pension, it is important to understand the value of the capital taken will have an impact on your wealth tax position. The answer is to do the maths and calculate the best course of action.
Property and Equity Release
Equity release, as we know it, does not exist in France and, up until a few years ago did not exist at all. Of course there is the ancient variant, which is disposing of an asset “en viager”. The person (a private individual) buying agrees to pay a fixed regular sum until the seller dies and, on death, stops paying and becomes the full owner. I once spoke to someone who was offered payment for their home in this manner and considered it until they learned that the buyer was an active part of the local mafia. They wisely declined the offer, not wishing to so drastically reduce their life expectancy!
We have seen private companies offering to purchase people’s homes, placing them inside investment funds, with the salesperson maintaining that they can remain there for life and release the capital. In the contract there is often a clause allowing them, as the owners, to throw them out in the event the situation is not maximising investment returns, so buyer (or indeed seller) beware!
Understanding the need for people to be able to realise the value in their homes, in March 2006 the French government released a pilot project for a regulated equity release scheme known as prêt viager hypothécaire. This was only available via the crédit foncier and had limitations. The biggest issue was the restricted access for foreigners, which was caused, the government argued, by the different mortality rates in different countries. These issues have been ironed out; however, getting access is still difficult, taking time and patience. Moreover, if you want to leave a legacy, then the expense may put you off with the percentage cost being up to around 10% per year (thus you are essentially giving up your property). The market has now been opened up, so you can ask your bank, but not many are offering this service.
Naturally before considering cashing in pensions or releasing equity on your property, it is vital to take advice from a suitably qualified professional before acting.
See you on the autostrada!
This article was originally written by Kentingtons for the Connexion and has been reproduced here with their kind permission.