I am usually given a topic by the Connexion to cover, but this month they were keen for me to pick a topic from my frequently asked questions, unrelated to Brexit or the pandemic. This was super easy, since what to do with UK pensions currently dominates our enquiries and I will focus solely on the most popular solution.
It seems that more and more people have become aware of the ability to take a UK pension, as a French resident, and pay just 7.5% tax, after an unlimited 10% allowance, thus a very reasonable 6.75%. Indeed, we have written about it, in this very space, however, we have come across people not fully understanding it and making some expensive mistakes.
At first glance, it all seems incredibly simple. Article 163 bis of the French tax essentially makes two main points that need to be fulfilled to qualify for this very interesting tax treatment:
1) Contributions made were deductible from taxable income or related to exempt income
2) The payment must not be split (n’est pas fractionné)
Clearly a UK qualifying pension fulfils the first point, so employer and personal pensions, SIPPs etc.
The second point is often where one of the issues arises. This is because many people decide to take their “tax free cash”, that usually being 25% of the pot first and then take the rest later. Clearly, this is splitting the pension pot and so is a deal breaker for the special tax treatment, yet we have seen many do it, considering that they lose the tax free advantage if they do not.
There is no reason to take it separately because if you give a single instruction to the pension provider i.e. to take it all in one go, they will automatically pay 25% of it without tax. Moreover, the tax they do apply to the other 75% is of no relevance since, if you live in France, the HMRC may not keep it, since France is where you pay your taxes and not the UK. This means that you claim back any tax taken, so the tax free 25% cash is of no relevance.
There are other points to consider for new movers to France. The HMRC tells us that they require two forms in order to make any claim (they do like to change these requirements from time to time, so it is important to keep up):
1) The HMRC R43
2) The HMRC France Individual
The first one is not an issue and may be completed any time, and we still sometimes see people get their full refund before they have sent the France Individual. For those that have yet to complete their first tax declaration, this can cause a problem. This is because the France Individual needs to be stamped by your local tax office, which they will only do once you have submitted a tax declaration, which is always a year in arrears.
This means that someone moving in January will not complete their first declaration until May the following year. What follows can be a long wait up to 17 months (or longer if there is a delay) to get your tax refund from the HMRC. The obvious solution is to choose your timing carefully as to when you cash in your pensions.
Some may recommend a QROPS, to get the money out and then cash it in; however, there are potential complications with this and also a cost (commission based advisers having a more self-serving reason for the suggestion).
There are other layers of complication for those with no state pension, thus access to an S1 (which we understand will continue for UK nationals after Brexit). Those people may have to pay the social charge of 9.1%. Interestingly, we have never actually seen this applied, however, there is no clear legislation supporting its exemption. For new movers, who may not join the health system on their arrival (the first three months) there is a potential loophole for avoiding this charge, however, this makes timing even more critical.
Another question we often get is from those who have already taken their 25% cash and want access to their pensions. There is no magic bullet proof solution here. We, however, have seen people who have moved their UK pension into an entirely new pension, transferring it into a new contract; one that has not been split. If we take the law literally, the money comes from a pension that has not been split, however, it could be deemed to not be within the spirit of the law (so arguably a grey area), thus there is potentially a risk to it, and it is important that those doing it realise this risk.
Of course, once you have successfully extracted the money from the pension, most people then need to use it to provide an income. Clearly it is important to ensure that this is done in a way that works well for French tax payers, avoiding unnecessary income tax and inheritance issues for your family.
As you can see, what started out as two simple bullet points, has the capacity to trip people up; indeed I have not covered all the potential pitfalls, so it needs some very careful planning, taking into account your own circumstances.
This article was first published in the Connexion March 2021