Why expats should be wary of new pension rules
By Spectrum IFA
This article is published on: 16th April 2014
There are tax implications for Britons overseas who choose to cash in their pension money under new rules announced in the Budget.
British expatriates with UK pension pots who believe they can cash them in tax free from next April are in for a disappointment, according to pension experts.
Rob Hesketh from The Spectrum IFA Group comments in a case study within this Telegraph Newspaper article, please click here to read more
How can I find out more about the financial services that are available to me in France?
By Amanda Johnson
This article is published on: 15th April 2014
For the past few years in addition to running financial surgeries, where people can pop in & ask me questions they may have, The Spectrum IFA Group have also held tremendously successful “Tour de Finance” roadshows in the area in conjunction with Currencies Direct.
This year we will be at the beautiful Chateau de Saint Loup, in Saint Loup sur Thouet on Tuesday 17th June & our aim is to provide you with the opportunity to listen to various market leaders & complimentary service providers you may not have access to directly and informally, over a buffet lunch after, ask any questions you may have regarding your personal situation.
In addition to Currencies Direct and The Spectrum IFA Group we will be joined by a number of financial institutions including Prudential International, SEB & Standard Bank, as well as Chartered Accountants & international tax experts, PetersonSimms and experts in the French health system, Exclusive.
Starting with registration over coffee at 09.30 followed by a series of brief presentations and then a buffet lunch after, we plan to finish at around 14.30. Once the event is over you will be able to enjoy walking in the grounds of this lovely chateau.
Whether you want to register for our Tour de Finance road show, receive our regular newsletter or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
For more information on Le Tour de Finance please click here
Do I have to pay French Social Charges on my Assurance Vie?
By Amanda Johnson
This article is published on: 14th April 2014
Under the most recently approved & ratified legislation the French Government announced that certain Assurance Vie’s should be subject to annual social charges of 15.5% for gains on the investment and this charge is to be deducted at source.
This is not the case for every Assurance Vie in circulation however, so it is worth reviewing any Assurance Vie you hold to understand whether yours will incur this additional taxation.
This amendment here in France, coupled with recent UK budget changes around private pensions may make now an ideal time to have a free financial review. I am happy to sit down with you, at a convenient time and consider your current situation in France. We will cover:
- changes in legislation
- inheritance tax planning
- current investment returns
- achieving maximum tax efficiency
- pension planning & options
At The Spectrum IFA Group, we believe that regular face to face reviews are important to ensure that your financial situation is aligned to your current needs and plans, so if you have not considered your position recently, the month of May could be a good time to remedy this.
Whether you want to register for our newsletter, attend our June road show in San Loup sur Thouet, or speak to me directly, please call or email me on the contacts below & I will be glad to help you. We do not charge for reviews, reports or recommendations we provide.
Delaying Savings
By Peter Brooke
This article is published on: 12th April 2014
No one wakes up in the morning and thinks, “I must start my pension planning today.”a “I must start my pension planning today.” I’ve not even done that, and it’s my job! Perhaps if someone had pointed out to me 15 years ago what the impact this thought process may have had on my own financial future, I may have listened and (may have) done something about it.
Let’s consider the rather simple examples of two people who joined the yachting industry at the same time, with similar careers, but different saving scenarios.
Scenario 1: James took his first job as a deckhand at the age of 23, earning €2,000 per month. His income went up by a healthy five percent each year, every year until he left yachting at 45 with a final salary of €7,300 per month.
From the very start of his career, James invested 25 percent of his salary every year. This means that by the end of his yachting career, he had earned a total income of €1.25 million and had put aside €310,000. He had managed to achieve an average annual growth rate of five percent on his invested money, which meant his savings pot was now worth €495,000. If he leaves this to grow for another 15 years before using it as a pension scheme, he will retire at 60 with a fund of just over €1 million — a very healthy fund.
Scenario 2: John had a very similar career, but only started saving 25 percent of his salary after being in the industry for 10 years. Even though he still had earned €1.25 million over his career, he only had put away €225,000, which, with the same growth as James, was now worth €290,000 due to the lesser amount of time to compound the growth. Leaving this amount to grow for another 15 years would give John a pension fund of €600,000 — quite a bit shy of James’s healthy fund.
In the real world, yachting salaries rarely grow in a straight line, but this simple example shows how delaying the start of a long-term savings program has a massive effect on your long term wealth and control. In order to retire with the same fund as James, John would have to save approximately €1,500 per month, every month from when he leaves yachting. If he is now working on shore, this could be difficult to achieve as costs normally not associated while aboard will now be added, such as rent, food and every day expenses.
It’s interesting to note that James still actually spent more than €930,000 over his 23 years in yachting, which is an average of €3,400 per month for that period. Are there many yacht crew who actually spend this much on living costs, and if not, could he have saved even more for his long-term future? The answer is obvious.
Expat tax break threatened, spelling bad news for pensioners
By Spectrum IFA
This article is published on: 11th April 2014
The UK government’s assault on the finances of British expats continues as it threatens to review their personal tax allowances.
Many of the five million Britons living and working overseas may have missed the announcement in the Budget mid March, that personal allowances for non-residents are set to be reviewed.
Daphne Foulkes comments in an article for the Daily Telegraph Expats personal finance section, read more here
Should I use a Financial Adviser?
By Peter Brooke
This article is published on: 10th April 2014
Creating a financial plan is not complicated; it’s an audit of where you are today, financially, and where you want to be at different life stages. This requires creating a list of what you have, earn, own and owe and deciding to put something aside to cover different goals for the future.
I have met yacht crew who have worked for 20 years without implementing a financial plan, and when they want to leave yachting, they have no pensions and minimal savings or investments, leaving them with a simple choice: live on very little or keep on working.
We can agree that having a financial plan, however simple, is important, but why have (and pay) someone to help you bring this together?
The process: Although creating a plan is quite simple, a financial adviser will ensure that all areas are discussed and re-examined so nothing is left out. All of the horrible “what if” questions should be covered.
Implementation: A good adviser will have access to thousands of products for different clients with different needs. The more choice available, the more assistance you will need in choosing the best ones, but also, the more independent the advice will be. A small advisory firm is likely to have only a few products to choose from and will display less independence.
Professionalism: If we are ill, we go to a doctor — financial advisers have qualifications to diagnose our financial problems and help put together a plan to make us better. And as with a doctor, a financial adviser should have qualifications in his or her trade, even specializing in certain areas.
Regulation: A financial adviser will be regulated by a government body and will have to display a certain competency and have insurance in order to practice.
Knowledge: Qualifications don’t guarantee knowledge; good advisers should continually improve their knowledge and should be able to prove this through their ability to explain complex issues.
Humanity and perspective: Most importantly, you need to trust your adviser. This person or firm should be your trusted adviser for most of your life; they need to be able to empathize with the different situations in which you’ll find yourself over the years. They should be able to draw on experience from other clients to help solve issues you face; they should be able to offer perspective on the decisions you make.
This last point is the hardest to prove and is probably best achieved through a combination of your own gut instinct and referrals from friends and colleagues. Do your own research on all of the above factors, ask around, and keep asking around until you have a short list of advisers to meet. Then follow your own feelings about whether you can trust them; the relationship should be a long-term one, and you will end up telling them a lot of very personal information over time.
Pension changes – who benefits?
By Spectrum IFA
This article is published on: 8th April 2014
Since my last article we’ve enjoyed absorbing the somewhat spectacular aftermath of the UK budget. Spectacular that is if you’re into pensions and all that stuff. I am, and I’m absolutely fascinated by what is going on at the moment in the world of pensions. Daphne is the technical expert on all of this of course , with many qualifications and huge experience in the field, and she gave us all the technical low down in her last article. I’d just like to add my thoughts on why this might be happening.
I do find it somewhat odd that George Osborne seems to have sent a clear message to HMR&C to prepare full a full blown retreat and reversal of the policies that they have pursued avidly over the past eight years. In case you are not aware, April 2006 was ‘A’ Day, when the whole pension industry was overhauled, and QROPS, already born, was really launched on the UK expatriate market. Saving for your retirement was of paramount importance, and woe betide any financial adviser who dared to try to help a client access their pension funds contrary to the terms approved by HMR&C.
I need to say here that I am completely anti pension busting. My strong view is that the UK State Pension is pitifully ill equipped to provide us with anything like a comfortable retirement. Those of you who are lucky enough, or who have been diligent enough to create a decent pension fund are to be congratulated and encouraged to continue in a similar vein. Pension busting advisers are not acting in the clients’ best interests. They are in fact acting completely in their own interest; looking to create income and commission where it is not due.
We are (mostly) living longer, and will need to fund longer periods of retirement. Accelerating the pace at which we spend our retirement savings is going to end in tears. It’s a bit like telling a child who is allowed to buy one bag of sweets a week that he or she can eat them all on day one. And now we have a new pension buster on the block, Mr George Osborne himself. The proposals outlined in the budget remind me very much of the government’s war on drugs and drug related crime. A drug ‘Tzar’ was appointed a few years ago who after a couple of years of beating his head against a brick wall decided that the best thing to do would be to legalise all class A drugs and make them freely available. I’m not sure if he suggested an suitable tax rate at the same time, but it wouldn’t have surprised me if he did. Fortunately public outcry defeated that move, but I’m not sure that the same will happen this time round. This is all about money in your pockets, and that is a powerful lobby.
What worries me most about these proposals is the reason behind them Please don’t think for one minute that kind Mr Osborne is looking to make life easier for us by removing restrictions on when and how we access our pensions. What he is actually looking to do is raise his tax yield. 55 years old? A couple of hundred grand in a pension pot? Why don’t you take it all out and splash it about a bit? Treat yourself to that holiday; that car; that boat. Help your children progress up the housing ladder, or help your grandchildren get on the ladder. Tax?, sure, you’ll have to pay high rate tax when you take it, but doesn’t nearly everyone pay high rate tax these days?
Surely there’s a problem here? Why would the government want to stoke up problems for themselves in the future? Surely they don’t want droves of hard up pensioners clamouring for state aid in their final decades because they’ve spent all their money. I’m afraid the answer might be that the government doesn’t really care. One thing we’ve missed in all of this is the other pension proposals that have been going through. A raise in the general level of state pension yes, but the complete erosion of many other benefits that have always come to the aid of pensioners who can’t cope. The message now is ‘Here is your £7,000 a year. Don’t come back asking for more, because there isn’t any.’
So if the benefits system is largely to be dismantled, surely it makes sense to the government to try to get its hands on as much of the pension savings that currently exist as they can? They wouldn’t do that, would they? I think the bottom line here is that we are seeing just how interested the government is becoming in our pension savings. QROPS allows you to move your pension fund out of UK jurisdiction; have more control, and eradicate all sorts of risks. I think we should be looking very carefully at protecting our futures.
Yes, you can retire before your 40th birthday
By Victoria Lewis
This article is published on: 7th April 2014
What if you didn’t have to wait until you were in your mid-sixties to retire? What about 50, or even just as you hit your 40th birthday? Don’t laugh — with enough dedication, you could say goodbye to your full-time job years sooner than you think.
“We all dream of retiring early with a fantastic pension and no money worries,” said Victoria Lewis, a financial adviser with the Spectrum IFA Group in Paris, France. You just have to put the right plan in place.
Proposed UK Pension Changes
By Spectrum IFA
This article is published on: 30th March 2014
The UK Budget for 2014 took the financial services industry by surprise. As details of the proposals were unveiled, it became obvious that we were hearing some of the best kept secrets (for a long time) of a government’s plans. Banking secrecy may be dead, but the UK government had managed to build a wall of secrecy around itself before the budget was made public.
So after “A-Day Pensions Simplification” in 2006, now we have another major reform proposed for “Freedom and Choice in Pensions”. I have seen a few reforms during my working life and as I get closer to pension age myself, I am thinking that this might be the last time that I have to get to grips with yet another. But who am I fooling except myself. Pensions is a political football that the politicians will kick around and of course, keep moving the goalposts.
To understand the reform, you need to understand the two main different types of pensions. The first is the defined benefit pension (DBP), where your employer basically promises to pay you a certain amount of pension, which is calculated by reference to your service and your earnings. DBPs are a rare breed now, as employers have found this type of arrangement too costly to maintain. This is because the liability for financing the scheme falls upon the employer (after anything that the individual is required to contribute) and if there is any shortfall in assets to meet the liabilities – perhaps because of poor investment returns – the employer must put more money into the scheme.
The second type of pension is what is known as a money purchase plan (MPP). You put money into an MPP, perhaps your employer does/did also, as well as the government in the form of tax rebates and in the past, national insurance contribution rebates. Maybe your ‘MPP’ was not through an employer at all and you just set up something directly yourself with an insurance company. They are several different types of MPP arrangements, but they all result in the same basic outcome, i.e. the amount of the pension that you get depends on the value of your ‘pension pot’ at retirement and so the investment risk rests with you. There is no promise from anyone and therefore, no certainty of what you might receive.
The proposed reform is all about the MPP, although there is nothing to stop a person from transferring their private DBP to a MPP (at least for the time being), if they have left the service of the former employer. But why would someone do this and take over the investment risk of their pension from the former employer? Well there are some very limited situations, but I will not go into them here. The more normal position is that people would not voluntarily transfer their DBP to a MPP unless perhaps, there was a case of serious underfunding of the DBP.
Without getting into too much of the technical detail, the bottom line of the reform is that people will have more choice about how and when they can take their benefits from a MPP. For example, from April 2015, people over the age 55 will be able to take all of the MPP pension pot as a cash sum. Actually, this possibility has already been available for some time in certain situations and the reform basically relaxes some of the requirements that have to be met to do this. The minimum age will progressively change from age 55 to 57 by 2028 and then be linked to future State Pension Age increases.
For UK resident taxpayers, 25% of this pension pot would be paid tax-free and the balance would be subject to income tax at their marginal rate (the highest tax rate being 45%). As an illustration, assuming that the person had no other taxable income in the year and they took the 25% tax-free lump sum, on a fund of £50,000 the tax on the total fund would work out to be 11%, for a fund of £100,000 it would be 19.63%, for £150,000 it would be 24.75%, for £250,000 it would be 28.2% and for £500,000 it would be 30.98%.
The government suggests that by making available the option to take the full pension pot as a cash sum, this has taken away the need for someone to purchase annuity. This, of course, is referring to a ‘lifetime annuity’, whereby someone gives the insurance company a pot of money in return for a guarantee that the insurance company will pay an annuity to them for the rest of their life. In fact, the requirement to purchase a lifetime annuity had already been abolished in 2011 for Self-Invested Pension Plans (SIPPs), which is one of the types of MPP.
Over the last few years, life-time annuities have not been very popular because the low interest rate environment has had a negative effect on the amount of annuity that someone is able to buy with their pension pot. Therefore, the SIPP has proved to be a popular alternative choice, since the pension pot remains invested and the pension investor can draw an income from the fund. The amount that can be drawn from a SIPP is linked to UK long-term gilt yields, as are insurance company annuities, which implies that there is little difference between the two options.
In fact, the SIPP is more flexible and the amount that can be drawdown can be varied between minimum and maximum amount. In addition, on the person’s death, the remaining fund does not die with the person, unlike a lifetime annuity. So what would make someone chose a lifetime annuity over a SIPP?
Principally, it comes down to attitude to investment risk. If someone is very ‘cautious’ and cannot stand the idea of any volatility in their pension fund and also wants the certainty of a defined amount of income for life, then that person would chose a lifetime annuity, despite the new freedom and choice that they are being offered.
On the other hand, if someone is comfortable with some investment risk and is attracted by the idea of their pension pot passing down to their children, then they are more likely to go down the SIPP route. If they have left the UK, then they may consider transferring the MPP benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS). In effect, a QROPS operates just like a SIPP, but there is some extra flexibility and more potential to mitigate currency risk – very useful if you need your income in a currency other than Sterling – and the fund can pass to your dependants on your death without the UK 55% tax charge.
Generally, the UK pension reform is a welcome improvement, which will provide flexibility that will allow people to make their own choices regarding ‘when to take’ and ‘how to use’ their pension funds, according to their own individual circumstances. For those wishing to make the transition from full employment to full retirement over a number of years – which has become more important due to the increase in the State Pension Age – the reforms will be of enormous benefit. Indirectly, the reforms also have the potential to reduce youth unemployment in the UK, as younger people replace those who are able to retire earlier because it may now be financial viable for them to do so.
However, as in every case of financial planning, everyone’s situation is unique. Therefore, caution will be needed to ensure that people make the right choices, since the decision that they make at retirement will affect them for the rest of their lives. It would be disastrous if the reforms created a scenario that people might unwisely take “too much”, “too early”, out of their pension pots and every effort should be made by those involved in the advice process to avoid that risk.
It follows that it will be essential that people take professional advice, which not only considers the pension assets but also takes into account the person’s total wealth and objectives. Sadly, the government’s proposal that individuals should receive “free”, “face to face”, “impartial advice” as “pensions guidance” is unlikely to be sufficient for this purpose and creates the risk of misleading the person to believe that they do not need any other advice.
What does it mean for UK non-residents?
The terms of any Double Taxation Treaty (DTT) between the UK and the person’s country of residence will define which country has the right to tax the pension payments of the type that we are discussing here. Usually, it will be the person’s country of residence and not the UK, when the payments are made. Therefore, providing that person has been granted relief from UK income tax – after making application under the terms of the DTT – in theory, they should be able to receive their MPP pension pot without the deduction of UK tax.
However, the practical difficulty will be how the administrator of the MPP will be able to pay the benefit without deducting tax. No doubt HMRC will put in place a prescribed set of rules for calculating and deducting the UK income tax from these ‘cash payments’, for application by pension scheme administrators, as is the case that already exists for these types of payments. If the administrator cannot make the payment gross, this means that you would need to claim the UK tax back from HMRC and HMRC might want evidence that you have declared the amount in your country of residence.
On a final point, there are already tax rules in place in the UK regarding non-residents and ‘flexible drawdown’. The proposed reform is, in effect, ‘flexible drawdown without the Minimum Income Requirement’ (at least from 2015) and so it is reasonable to assume that at least the same tax rules will apply. If so, this could have implications – either when taking the payment or when returning to the UK – if you have not had a sufficient period of UK non-residence. Again, it would be wise to seek advice before making an expensive mistake.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or the mitigation of taxes.
French Trust Law
By Spectrum IFA
This article is published on: 3rd March 2014
As a financial adviser to the expatriate community, I am contacted by lots of people who have either already moved to France from another country, or are planning to do so. Amongst many other things, people are seeking advice as to how best to structure their financial assets for tax-efficiency in France. Since most of the people I advise originate from Anglo-Saxon countries, it may be the case that they may have an interest in a trust, which creates difficulties for them, due to the French tax treatment of trusts.
In 2011, France introduced legislation, which defined the taxation rules and reporting requirements, concerning trusts with at least one of the following:
- French resident settlor;
- French resident beneficiary; or
- French situated assets – even if the settlor/beneficiaries are not living in France.
Basically, the law is aimed at the ‘family type of trust’ and generally excludes trusts falling outside of this area. A summary of the taxation treatment is shown below.
Income tax relating to trusts
Distributions received from a trust (whether capital or income) are treated as investment income, in the hands of the taxpayer. Therefore, 100% of the amount received is added to other taxable income of the household and taxed according to the progressive rates of income tax set out in the barème scale, for which the highest rate is 45%. Social contributions (current rate 15.5%) are also chargeable on the amount distributed.
Wealth tax (ISF) relating to trusts
The law aims for transparency, so that the real ‘owner’ of the assets placed in a trust can be identified. This will either be the original settlor or where that person has died, the beneficiary is subsequently deemed to be the settlor.
The trustees are required to report the annual value of the assets of the trust and to pay a levy, based on the highest percentage rate of ISF (currently 1.5%) of the underlying value of the trust’s assets. However, the levy is not payable if the French resident taxpayer has already declared the trust assets for ISF. Failure to report by 15th June each will result in a fine of 12.5% of the value of the total trust assets or if greater, €20,000. The settlor and/or the beneficiaries are jointly and severally liable for the payment of the levy and for any penalty as a result of non-reporting.
Gift & succession duty regimes relating to trusts
Lifetime gifts and inheritance transfers from a trust with a French resident settlor or ‘beneficiary deemed settlor’, as well as to beneficiaries who have been resident in France for at least six out of the last ten years, are liable to taxation; so too is the transfer of assets into a trust. For non-resident settlors, the transfer of French assets into or out of a trust (for example, property) is also caught by the rules.
Using the market value of the assets, as at the date of transmission, the tax liability is as follows:
- For trusts set up after 11th May 2011, or for trusts set up in a jurisdiction that has not concluded a Tax Information Exchange Agreement with France (referred to as a “non-cooperative territory”), the tax rate is 60% in all cases.
- For existing trusts, which are set up in a “cooperative territory”, the rate of tax is as follows:
- if the relationship between the settlor and the beneficiary can be identified, the tax rate and allowance will be according to the standard IHT barème scale;
- if the beneficiaries are, globally, the descendants of the settlor, the tax rate will be the top rate for descendants in direct line, i.e. 45%; and
- anything else will be subject to a tax rate of 60%, unless covered by specific exemptions in the French tax code.
Overall, trusts do not work well in France and an alternative structure is needed to achieve the same objectives. Therefore, seeking professional advice from someone who understands both the Anglo-Saxon systems and the French system is essential.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets.