I finished last month’s article as follows: “Whereas up until now I would say a majority of our clients have tended to leave pensions in the UK, with this rule change, I envisage that the majority will now cash in UK pensions, moving the funds into more tax-efficient vehicles in France; but that is an article for another day!” So, let us dive into this important subject.
In the wake of the UK’s recent budget, announced at the end of October, many British nationals living in France or planning to move there are taking a closer look at their pension arrangements, and rightly so. With significant changes on the horizon, the implications for retirees and early retirees are profound.
Let us delve into the key aspects of these changes and explore how they might impact those who hold UK pensions while living in France.
What’s Changing? The New Inheritance Tax Rules for UK Pensions
One of the most striking aspects of the UK’s October 2024 budget was the introduction of inheritance tax on UK pensions. From April 2027, pensions will no longer be exempt from inheritance tax. This marks a dramatic departure from the current regime, where pensions are free from inheritance tax.
Furthermore, under the new rules, inherited pensions will face a double tax hit:
- Inheritance Tax (IHT): A flat 40% on the total pension value above the £325,000 tax-free threshold on a UK estate.
- Income Tax: If the pension holder dies at or after the age of 75, UK resident beneficiaries will also pay income tax at their personal marginal rate on pension drawdowns.
This means that a basic-rate taxpayer inheriting a pension could face a combined tax rate of up to 52%, while higher and additional-rate taxpayers could pay 62% or more.
Why British Nationals in France Should Rethink UK Pension Strategies
For British nationals living in France, the tax implications of UK pensions were already complex, but this new rule adds another reason to reconsider one’s arrangements.
As implied at the start of this article, keeping UK pensions in the UK has remained a popular choice due to their tax-free status on death and relatively flexible withdrawal options. However, this upcoming inheritance tax change and the existing French tax environment will likely push more people to move pension money out of the UK and into France.
One option, a qualified recognised overseas pension scheme, QROPS, has also been affected by the UK budget. QROPS is an overseas pension scheme that meets certain requirements set by HM Revenue and Customs (HMRC). As of 30th October 2024, and as things stand today, a French resident wishing to transfer their UK pension to a European QROPS would have to pay a 25% overseas transfer charge. Before the budget, this 25% charge would not have applied.
Therefore, the most straightforward and tax-efficient solution might be to fully cash in your UK pension(s) and transfer the proceeds into a French-compliant, low-cost, long-term investment option, which includes significant inheritance tax advantages. As a French resident, it is possible to cash in certain UK pensions for an effective tax rate of under 7%!
How to Reduce Your Tax Bill: Cashing Out UK Pensions as a French Resident
Beyond tax considerations, UK pension holders also face currency risks. Depending on longer-term exchange rates, leaving a pension denominated in sterling could lead to a decline in purchasing power when converted to euros. Transferring funds to a euro-denominated French-compliant long-term savings product, such as assurance vie, could help mitigate this risk. While initial transfer fees may apply, the long-term tax savings are likely to outweigh the costs.
The essential point I am making is that the recent UK budget represents a significant shift in the treatment of pensions, particularly for those concerned about inheritance tax. Thus, for British nationals living in France, it would be advisable to use this as an opportunity to reevaluate UK pensions and how you manage your money more generally.
Why Assurance Vie Could Be a Tax-Efficient Solution for Expats in France
While transferring pensions to France or cashing out entirely may seem daunting, the potential tax savings in inheritance and income tax are now more likely to outweigh the initial costs. French-compliant investment vehicles such as assurance vie offer significant advantages, including inheritance tax benefits and euro-denominated stability.
Ultimately, with France offering a comparatively favourable tax regime for retirees, many may find the recent UK changes to be the final push they need to fully integrate all their finances, including pensions, into French-compliant and tax-efficient investment vehicles. This shift not only simplifies the complex tax situation but also offers potential long-term benefits, even if people ultimately return to the UK later in life.
Key Takeaways for British Nationals
For those unsure of their next steps, consulting a French-qualified financial advisor with expertise in both the UK and French tax systems is highly recommended. With careful planning, you can protect your pension pot from the new UK rules while simplifying what has become truly complex and optimising your tax position in France.
In conclusion, the UK budget has introduced significant changes that impact pensions and inheritance tax, particularly for British nationals living in France. Whether you choose to transfer, cash out, or restructure your pension funds, expert advice will ensure you make the most tax-efficient and strategic decision possible.