To move, or not to move, one’s pension pot? Should I cash in my UK pension? This is the question that many expat retirees find themselves asking. Well, as I try to answer this question, the first thing that I can tell you is that approximately half of our clients do, and the other half don’t! Hence we can safely conclude that, as so often in finance, it really does depend on your particular situation.
A pension may be an individual’s most valuable asset. We tend to rely on our pension pot, in order to continue living life to the full. After all, living off just the UK full state pension of £179.60 per week would likely be challenging. Of course, we should all have a retirement plan, but that is a story for another day! Today we are looking into the question of potentially cashing in our most valuable asset, thus not a question to treat lightly.
Reasons why you might want to cash in your UK pension
There are several reasons why we might consider cashing in a UK-based pension; for example, and in no particular order:
- Pension income for French residents is taxed for income tax on 90% of its value.
- Subject to certain conditions, there is a very attractive tax rate in France for cashing in foreign pensions in full; the rate, after allowances, equates to 6.75%.
- Since Brexit, UK pension providers have lost automatic European passporting rights. This means certain providers may no longer be allowed to offer advice to clients living outside the UK.
- You may simply feel more comfortable with your pension funds denominated in euros, being this is the currency that you spend in.
However, clearly, this is not a simple “one size fits all” question. For instance, if you are drawing down a relatively moderate pension from the UK, there may not be very much French income tax to pay and so you may decide just to leave the pension where it is, drawing down income according to your needs. If, however, you are a 40% taxpayer and are doomed to pay this rate on income received, 6.75% seems attractive, saving over 33% in tax straight away and greater tax efficiency on future returns.
There are, of course, other considerations.
What factors must you consider when deciding to cash in a UK pension?
I thought it would therefore be helpful to point out some of the factors that may influence one’s decision to cash in a UK pension or not. These include:
- Are you already past state retirement age, or are you an early retiree? This will affect the way you are taxed in France.
- Do you hold other assets, or is the majority of your accessible wealth held in your UK pension(s) and under either scenario, how much, if anything, do you intend to draw down from pensions annually?
- In point two, I write “pension(s).” If you have multiple pensions, it is perfectly possible, and at times may be very interesting, to cash in part of your holdings. Take somebody, or a couple, with three separate pensions. He/she/they may decide to cash in one pension, investing the funds in France, whilst leaving the other two pensions in the UK.
- Whether or not you think that you may eventually return to the UK, or whether you expect to see out your days in France?
- Implications for inheritance will likely be another important factor.
- Should you choose to cash in your pension (unless you are planning to stash it under the mattress or blow the lot!), you will need to consider what to do with the proceeds. A UK pension is a UK tax-efficient, long-term savings wrapper. Naturally, tax-efficient savings wrappers exist in France too. We will not go into any details on that front today; lest to say, interesting choices abound.
So, should I cash in my UK pension or not?
If you went to an ophthalmologist to see if you required glasses, then before coming to any conclusions, you would expect them to run a series of tests in order to consider your overall needs fully. Similarly, for French residents, cashing in a UK pension is not one size fits all. With multiple criteria, as outlined above, any such decision evidentially needs careful assessment of your family’s specific overall financial situation as French tax residents.
This article was first published in the Connexion March 2023