As a financial and tax advisor in France, I often find myself pondering the pivotal question that plagues many expat retirees: “To move, or not to move, one’s pension pot? Should you cash in your UK pension?” The answer, my friends, lies within the intricate web of your unique financial circumstances.
Your pension holds immense value, representing a lifetime of hard work and dedication. It serves as a cornerstone for maintaining a fulfilling retirement. Let’s face it, relying solely on the UK full state pension of £179.60 per week would present its fair share of challenges. However, today we embark on a journey to explore the possibilities of unlocking the true potential of your most prized possession—the question of whether to cash it in or not.
Reasons why you might want to cash in your UK pension
When contemplating whether to cash in your UK pension, numerous factors come into play. Let us delve into some compelling reasons why this option might pique your interest, presented in no particular order:
- Favourable Tax Rate in France: Under certain conditions, cashing in foreign pensions in their entirety can lead to a highly attractive tax rate in France. After considering allowances, this rate equates to a mere 6.75%. Such a compelling rate holds immense appeal for those seeking to maximize their pension’s potential.
- Post-Brexit Changes: Since Brexit, UK pension providers no longer possess automatic European passporting rights. Consequently, certain providers may no longer offer advisory services to clients residing outside the UK. This shift may influence your decision, prompting you to explore alternatives that align with your new circumstances.
- Currency Comfort: For those who prefer to have their pension funds denominated in euros, cashing in your UK pension can provide a sense of financial ease. Having your funds in the currency you spend can enhance peace of mind and simplify your financial management.
However, it is crucial to recognize that this is far from a “one size fits all” scenario. Consider, for instance, if you are currently receiving a relatively moderate pension from the UK. In such a case, the French income tax implications may not be substantial, leading you to contemplate leaving your pension where it is and drawing down income according to your needs.
On the other hand, if you find yourself in the 40% tax bracket, the allure of a 6.75% tax rate becomes evident. Opting for such a course of action can result in immediate tax savings of over 33%, accompanied by enhanced tax efficiency on future returns.
What factors must you consider when deciding to cash in a UK pension?
As you would expect, there are many additional factors and considerations to explore, so let’s explore some important factors that may influence your decision, and help shed some light on the path ahead.
- Retirement Age and Taxation: Are you already beyond the state retirement age or an early retiree? This distinction significantly impacts how you are taxed in France, making it an important factor to assess.
- Taxation Benefit of keeping a pension: As a resident of France, you may find it intriguing that, within certain limits, only 90% of your pension income is subject to income tax. This favourable tax treatment offers an opportunity to optimize your financial situation.
- Portfolio Diversity: Do you possess other assets aside from your UK pension, or does the majority of your accessible wealth reside within it? Evaluating your overall financial landscape and determining the amount you intend to withdraw annually from your pensions will shape your decision-making process.
- Multiple Pensions, Multiple Possibilities: If you possess multiple pensions, an intriguing option emerges. It may be feasible to cash in a portion of your holdings. For instance, consider someone, or a couple, with three separate pensions. They might choose to cash in one pension and invest the funds in France while leaving the other two pensions intact in the UK.
- Long-Term Plans: Contemplating whether you anticipate returning to the UK in the future or envision spending your golden years in France plays a significant role. Your decision should align with your long-term aspirations and lifestyle preferences.
- Inheritance Implications: Understanding the implications for inheritance is crucial. Factoring in how cashing in your pension may impact your loved ones’ financial future will help you make a well-informed decision.
Should you opt to cash in your pension (unless you plan to hoard the funds under your mattress or indulge in an extravagant lifestyle and blow the lot), you will need to consider what to do with the proceeds. A UK pension serves as a tax-efficient, long-term savings vehicle. However, rest assured that France also offers its own array of tax-efficient savings options. While we won’t delve into the specifics here today, it’s worth noting that intriguing choices are abound.
So, should I cash in my UK pension or not?
The question of whether to cash in your UK pension is akin to seeking the expertise of an ophthalmologist to determine if you need glasses. Just as the ophthalmologist conducts a series of tests to comprehensively understand your visual needs, the decision to cash in a UK pension for French residents is far from a one-size-fits-all scenario. It demands a meticulous evaluation, considering the multitude of criteria outlined above. Your family’s unique financial circumstances as French tax residents play a pivotal role in this intricate assessment.
At Kentingtons, we meticulously analyse your specific financial situation so we can get a comprehensive understanding of your goals and requirements. By taking into consideration a variety of important information, we can guide you towards a decision that aligns harmoniously with your long-term financial goals.
Remember, there is no singular answer that universally applies to everyone. Your financial well-being and the intricacies of your family’s circumstances are paramount in making this decision.