Those looking to retire in France and spend their time sipping fine wine need to be au fait with the impact of the changes to pension funds made in 2017.
Chartered Financial Planner Russell Hammond, APFS MSCI, touches on some of the issues affecting expatriates in France when transferring UK pensions, especially regarding changes to the pension rules in UK HMRC QROPS legislation which were made in April 2017 and affect French pension schemes.
The QROPS changes, principally, stem from two new tests that were brought in by HMRC to assess whether a scheme qualifies: an age test and a regulatory test. The first test that French pensions often fail is the age test, due to the fact that French pensions will allow access to pension funds before the age of 55 as a consequence of unemployment.
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The ‘regulatory’ test requires that the provider of the scheme be regulated by a body in the country in which the scheme was established under the EE area. In France, providers of schemes are regulated; however, the satisfaction does nothing to counter the failure of the first test, hence the removal of all French pension schemes from the HMRC list of international schemes said to meet the conditions for accepting UK retirement pots.
Therefore, unless France changes pension laws to be in line with the UK’s (which is unlikely to happen) there will be a permanent block on France qualifying for QROPS.
2015 pension changes and freedom legislation
New pension rules and freedoms introduced in 2015 in the UK enabled pensioners to have the option to forgo the purchase of an annuity, capped or flexible drawdown and take their pension as a single or sequential lump sums. However, for overseas schemes, the 70/30 rule, which required 70 percent of the fund to be used to secure an income, remained in place until legislative changes meant that flexible access was extended to EU schemes. Non-EU schemes were required to maintain the 70/30 arrangement.
However, the removal of the 70/30 rule in April 2017 means that any scheme that does not satisfy both the age and the regulatory test will no longer be considered as a Recognised Overseas Pension Scheme and will, therefore, be subject to an unauthorised 55 percent tax charge on transfer.
Consider alternative jurisdictions to transfer UK pensions
In line with the new rule established in 2017, those wishing to retire to France and transfer their pension to a QROPS scheme administered in France can no longer do so. This means that the pension scheme either needs to be left behind in the UK or transferred to a QROPS in another jurisdiction such as Malta, which would enable you to avoid your pension being subject to UK taxes when living in France.
Malta, as the QROPS destination of choice (for most) passes these new tests and therefore does not represent an issue for someone living in France and wishing to consolidate their pensions within a QROPS arrangement. QROPS in Gibraltar also continue to work, with some amendments made to local legislation (e.g. providing regulation on the schemes themselves). Importantly, France and Malta have a DTA in place, which states that Maltese pensions will only be taxed in France.
Amended Finance Act 2011
The Loi de Finances Rectificative 2011 (Amended Finance Act 2011), new trust rules enacted in France in 2011, didn’t completely clarify that personal pension trusts would escape these new provisions, that relate to trust structures. Panic and confusion swept the pension industry at the time, as it was thought that these new rules would require UK (and offshore) pensions schemes to report to the French authorities on French residents holding personal pension trusts. This meant that tax advisors were required to reveal the market value of assets or income from 2013. There was much confusion among tax experts as to how this applied to UK pensions, as it appeared to relate to civil law and appeared to exempt personal or employer-sponsored pensions.
There is now a general consensus that QROPS do not fall under this new legislation, and most QROPS providers have not been reporting to the French authorities nor advising their clients to do so. Again, this is a complex area of advice; you should speak with your own tax adviser to make sure that you are fulfilling your own personal taxation liabilities.
Returning to the UK
For expats who move back to the UK, the UK government brought foreign pension taxation rules in line with the rules applied to UK pension holders. Most notably, the 10 percent discount of foreign pension income was jettisoned, meaning QROPS pension holders who return to the UK now pay the same UK levels of tax on their QROPS pensions as UK pension holders.
As it currently stands, if you are a QROPS holder and you decide to return to the UK to live, the pension will be classed as a foreign pension and only 90 percent of the amount will be taxable. Since April 2017, 100 percent of pension income from foreign pensions, including QROPS, is taxable.
However, the advantage of a transfer to QROPS being a final pension crystallisation event (BCE8) is still in place. What this means is that when you transfer to a QROPS, though your fund will be assessed against the current annual lifetime allowance—with a 25 percent tax charge on anything above the current LTA—it will never be assessed against the LTA again, allowing you to enjoy tax-free growth beyond the current LTA.
A pension switch or transfer is complex. You should always seek professional help to ensure that you set up the most appropriate arrangement. It is important when considering your future that you understand the differences in pension and taxation regulations in France as compared to the UK, now and in the future. Regardless of your circumstances, you must make sure that you are well informed if you plan to transfer your pension scheme to a QROPS.
In uncertain times with Brexit looming on the horizon, further changes are bound to affect your pension; it’s important to ensure that you make the most of your wealth and that you seek a high-quality, independent financial adviser to provide the best possible advice on your current and future circumstances prior moving to France.
After working as a stock broker in London, Russell Hammond started advising expatriates and internationals on financial planning, investments, and pension transfers 13 years ago. As a Chartered Fellow of the Chartered Insurance Institute and Chartered Member of the Chartered Institute for Securities and Investment, Russell provides high quality, fee-based, advice to his diverse international clientele.Contact us for further questions