When you retire to France your pension is possibly the main source of regular income you will receive. Having worked all your life and contributed to your pension pot, you will wish to receive the benefit of your pension contributions in the most efficient way and with the minimum deductions as possible. But how will your UK pension be taxed in France?
Once you arrive in France with the intention of living there indefinitely, you become a tax resident in France. It is up to you to make yourself known to the French tax authority and declare your income.
Government service pensions remain taxable in the UK but other pension income will be taxed in France if you are tax resident there. In order to receive this pension income gross and avoid double taxation you need to file a form FD5 FRA/INDIVIDUAL with your local French tax authority. The UK will not pay pension income gross until it is verified that you are paying French income tax.
You should submit the completed form FD5 to your local French tax office, when making your first French tax return. The form will be stamped to confirm that you are tax resident in France and that the income is taxable in France. Not only does this form ensure that UK tax is not levied on the income, but it also allows for reimbursement of the tax deducted in the UK in the interim. Form FD5 can be downloaded from www.hmrc.gov.uk or obtained from HM Revenue & Customs International – Centre for Non-Residents, Fitz Roy House, PO Box 46, Nottingham NG2 1BD or by phoning 0115 974 2041.
Under French law, retirement pensions are taxed in a similar manner to salaries, at the French progressive scale rates for 2007 as follows:
|
Net Income
Subject to Tax
|
Band |
Tax Rate |
Tax on Band |
Cumulative Tax |
|
Up to €5,614 (£3,687) |
€5,614 (£3,687) |
Nil |
|
|
|
€5,615 (£3,688) to €11,198 (£7,355) |
€5,583 (£3,667) |
5.5% |
€307 (£201) |
€307 (£201) |
|
€11,199 (£7,356) to €24,872 (£16,337)) |
€13,673 (£8,981) |
14% |
€1,914 (£1,257) |
€2,221 (£1,458) |
|
€24,873 (£16,338) to €66,679 (£43,798) |
€41,806 (£27,460) |
30% |
€12,542 (£8,238) |
€14,763 (£9,697) |
|
Over €66,680 (£43,799) |
|
40% |
|
|
Private pensions and annuities
A previously beneficial approach that could be taken in France with ‘pension annuity’ income (from personal pension plans, for example), is no longer generally available. This type of pension is alien to the French system as they do not have pension annuities. They do, however, have purchased annuities as a form of investment, and confusion between the two often allowed the annuity approach to be taken for this type of pension income.
In the case of whole of life purchased annuities, only a percentage of the pension is subject to French tax depending on your age when you start to take the pension. If you were under 60 years old when the annuity started, the tax free amount (fixed for ever) is 50 per cent rising to 70 per cent at age 70 years or over when the annuity starts.
Tax-free lump sum
Tax-free lump sums are no longer taxed in France, which is good news. There is no equivalent to this in the French pension system, and the French rules were vague. France has no legal authority to tax such lump sums and they are no longer potentially liable to tax in France. Previously they were liable to French tax and were taxed at the French progressive income tax rates.
Pension contributions
If you are thinking of moving to France before you had completed contributions to a pension scheme, there may be the possibility of deducting ongoing contributions to a foreign pension scheme while living in France, although this issue remains unclear. The European Commission started infringement proceedings against France and other EU counties on 5 February 2003 to prevent discriminatory treatment against foreign pension schemes in these countries. The aim of the commission is to ensure that contributions to foreign pension funds are treated in the same way as those made to domestic pension funds. In other words, France should not deny or restrict the deduction of pension contributions from the net taxable income on the grounds that these contributions were made to a pension fund based outside France. The outcome is still awaited.
UK state pension and UK national insurance contributions
If you are considering moving to France before your pensionable age, it may be worthwhile for you to pay Class 3 NI contributions in the UK when you are in France, depending upon how long it is before you reach state retirement age. This will not give cover for health care abroad, but Class 3 NI contributions protect entitlement to retirement pension and widows benefit. The contribution rate is £7.55 per week (around £393 per annum) in 2006/2007, increasing to £7.80 per week (around £406 per annum) in 2007/2008.
Full entitlement to state retirement pension only requires sufficient contributions in approximately 90 per cent of the maximum working years (eg in 44 out of the 49 working years for a man, or a woman born after 5 April 1955; 39 years for women born before 6 April 1950). So, it may be that you will already have sufficient qualifying years for a full pension and you may not need to make further contributions. A ‘pension forecast’ can be obtained from the DWP which will tell you if you have already made the required contributions for a full state pension and help you to decide whether or not you should consider paying Class 3 voluntary contributions. Beware though – in the projection, ‘auto-credits’ from age 60 to retirement age will often be assumed, but these are not granted to non-residents.
The tax rules relating to UK pensions taken in France can be quite complex. Before leaving the UK you may wish to seek the advice of a professional pensions and tax expert who has full knowledge of the French and UK tax systems in order to organise your pension in the most tax efficient way once you have moved to France.
Bill Blevins is Managing Director of Blevins Franks International, one of the largest independent financial advisers, which specialises in advising retired expatriates in southern Europe