QROPS and expats living in France
By Spectrum IFA
This article is published on: 12th June 2014
As part of the March 2014 budget substantial changes to UK pension legislation have been proposed by the UK government, and here our Financial Expert Steven Grover a Partner with the Spectrum IFA Group will guide you through these proposals and what consequences they could have for expats.
So what are the changes that have been proposed and which of these changes have already been adopted ? The majority of the proposed changes are already effective as of the 27 March 2014 which include the following:
New higher income drawdown limits – Drawdown investors have a yearly limit to the income they can draw which is from zero up to the maximum, The maximum amount has increased by 25% (from 120% to 150% of a broadly equivalent annuity) So for instance, an investor aged 65 with a £100,000 pension starting drawdown before these changes could draw a maximum income of £7,080 a year. However if they start from 27 March 2014 this will rise to £8,850.
Flexible drawdown made more accessible – Flexible drawdown allows investors to make uncapped, unlimited withdrawals from their pensions. There are, however, strict qualifying criteria. The main one is that you must already have a secure pension income of at least £12,000 (prior to £20,000 before).
However the £12k income must be “relevant income” so only the following will count:
State Pension, Scheme Pension (so a final salary pension which is fixed), Lifetime annuities, Overseas Pensions (but only overseas state pension or final salary), Pension income provided by the Financial Assistance scheme.
And the following income would not be included as they can change, capital can be spent, investments sold, drawdown income can finish – Rental income, Dividends, Interest, Drawdown pension income, QROPS income, Part time salary.
More flexibility for investors with pension small pots – Now investors aged 60 or over with total pension savings under £30,000 (formally £18,000) will be allowed to draw them as a lump sum. The first 25% will be tax free (in the UK but this may not be the case for French tax residents), and the remaining amount will then be taxed as income. This can only be done once. Investors with individual personal pension pots smaller than £10,000 (formally £2,000, twice) will be allowed to draw them as a lump sum from age 60, which will be taxed as above but can only be done three times.
The following changes have however not come into force and are still in consultation:
Pension Investors will be able to take the whole of their pension as a lump sum (Potentially effective from April 2015) – Currently most investors aged 55 or over can take up to 25% of their pension as tax-free cash (in the UK but this may not be the case for French tax residents), and a taxable income from the rest. There are, however, rules that determine the maximum income most people can draw each year. These restrictions will be removed in April 2015 so pension investors will be able to take the whole of their pension as a lump sum if they so wish, subject to consultation. The first 25% will be tax free (in the UK but this may not be the case for French tax residents), whilst the rest will be taxed as income. Should this come to fruition, it takes away one of the most cited objections to funding a pension.
Lump Sum Death Benefits – The 55% tax charge on certain lump sum death benefits will be reviewed. The Government believes that a flat rate of 55% will be too high, and will engage with stakeholders to review the rules to ensure that taxation of pensions on death is fair under the new system.
QUESTIONS & ANSWERS
What exactly is the government consulting on?
The government is consulting on “Freedom and choice in pensions”. The consultation relates to whether the proposed changes will happen and how. The main points which affect investors with private pensions are:
- Ability to take unlimited income from pensions (from age 55, rising to 57 in 2028). The first 25% remains tax free, whilst the rest is taxed as income.
- Review of the 55% tax charge on death in drawdown/post 75.
- Review of the tax rules that prevent individuals aged 75+ from claiming pension tax relief.
- Increase in minimum pension age from 55 to 57 from 2028 and further rises after that so it remains 10 years below state pension age.
- A consumer’s right to financial guidance at retirement. • Potential use of (yet to be developed) pension products for social care.
What is the timetable of the consultation?
The consultation will close on 11 June 2014 and the government aims to confirm any changes by 22 July 2014, these changes will potentially be effective from April 2015.
Can I take my pension as a lump sum?
Potentially, yes you could. However it will depend on your individual circumstances and the decision made after the consolation period has closed.
- From 27 March 2014 some investors aged 60 or over will be able to take their pension as a lump sum if:
▸ Their total pension savings are under £30,000 (only once), or
▸ They have individual personal pension pots smaller than £10,000(maximum three times)
- From 27 March 2014 some investors aged 55 or over will be able to take unlimited withdrawals from their pension (through flexible drawdown) if they can prove they have a secure pension income of at least £12,000 a year (including state pension), instead of 20,000 a year.
- From April 2015, if the changes above are confirmed after the consultation, everyone will be able to take their pensions as a lump sum.
What happens to investors already in drawdown?
Investors who started income drawdown before 27 March 2014 will remain on their current maximum income until their next annual review date. If the three yearly GAD calculation is due at that review, their maximum income will be recalculated based on the current fund value and that month’s GAD rate. They will then be eligible to take 150% of the new GAD limit. Clients not due a GAD calculation will simply move from 120% to 150% of their existing GAD rate at their next annual review. These same existing drawdown clients may potentially have their maximum income restrictions removed completely in April 2015 if the proposed changes are agreed following consultation.
What happens to investors who have already bought an annuity?
An annuity cannot usually be cancelled once set up, so you are unlikely to have any further options. However, you typically have 30 days to cancel (cancellation period). The start date of the cancellation period will depend on the terms set out by your annuity provider. Some providers are extending their cancellation period.
So with all of the above changes potentially changing drastically changing the UK pension in Industry, will a QROPS now be less relevant to Expats living in France?
First of all what is a QROPS?
QROPS (Qualifying Recognised Overseas Pension Scheme) was brought about following changes to UK pension legislation on April 5, 2006. This scheme has been specifically designed to enable non-UK resident individuals who have accrued pension benefits in the UK, to transfer these out once they have left the UK. Provided that the UK Registered Pension Scheme and the QROPS provider both have the appropriate transfer authority, individuals who leave the UK and establish a QROPS are able to request a transfer of their UK benefits as long as they can provide evidence they are no longer a UK resident.
Due to the fact that this scheme is an international contract, future benefit payments can potentially be received without deduction of UK tax, however individuals will be responsible for declaring the income in their own country of residence. So those who have moved to France to retire or are thinking about moving to France in the future, and have private or work pension benefits that would have normally been left behind in the UK can benefit from a QROPS Transfer.
What are the key benefits of a QROPS over leaving the pension in the UK?
Pension Commencement Lump Sum – With a QROPS approved scheme the amount of PCLS available at retirement can be up to 30 percent, compared to the 25 percent allowed with a UK pension however this does depend on which one of the approved jurisdictions is used.
Inheritance tax planning – Most people would like to think that, upon their death as much of their assets as possible would be passed on to their heirs. It is a complex issue, however, by transferring to a QROPS the taxation of pension benefits on death can be much less punitive. With the current UK pension rules a UK pension scheme could be a taxed up to 55 percent of the fund value before being passed on. By bringing the pension out of the UK and using a QROPS approved scheme, this tax liability can be greatly reduced or in some cases even wiped out completely.
Age benefits can be taken – Some QROPS jurisdictions will allow you to start taking benefits from your pension at the age of 50, as apposed to 55 years old in the UK.
Currency risk – This is a very important consideration for expats who have retired in France with UK pensions that will pay their pension benefit in sterling, because this means they not only run an exchange rate risk but also will incur charges for converting their pension benefit payments into Euros. By putting your pension into a QROPS you can receive your pension benefit payments in Euro’s and therefore eliminate any exchange rate risk, currency conversion charges and have peace of mind that the amount of income you receive each month will be the same.
Investment choice – By moving an arrangement out of the UK there can be a much wider choice of investments available to the pension fund, with a more global focus which is particularly important in the current market conditions as some existing pension schemes can even be limited to just UK investments.
Is a QROPS still relevant to expat’s in France?
This will unsurprisingly depend on your individual circumstances, but some of the changes in the UK like increased drawdown limits have already been adopted by many QROPS jurisdictions. And when you take into account the other advantages mentioned above, using a QROPS still has a many advantages over leaving the pension in the UK. However as part of the proposed changes are subject to UK Government consultation period, for some individuals it might be the case that it is better to wait until these findings have been disclosed.
This information is only provided as a guide and is based on our understanding of current QROPS regulations, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different. If you have a question, want to arrange for a free financial review or just want further information I can be contacted on +33 (0)687980941, e-mail steven.grover@spectrum-ifa.com
Stick or Twist?
By Spectrum IFA
This article is published on: 6th June 2014
Stick or Twist? Or maybe both? Let me explain.
Thankfully, despite the ups and downs of the UK housing market and the £/€ exchange rate, there are still plenty of new expats arriving in France. It is noticeable though that quite a few of us are taking the decision to return to the UK. At first, this trend surprised me, but then I began to think about it in more detail.
I always have the same conversation with all my new clients. Where do you think you will be living in ten, twenty, or thirty years’ time? The most popular answer is here, in France. ‘Wild horses wouldn’t drag me back.’ ‘I’ve escaped from the concrete jungle, why would I want to go back?’ ‘ I only go back when I have to, to visit relatives. If they weren’t there, I’d never go back.’
That is of course the more entrenched end of the market. A lot of people will qualify their enthusiasm for being here by using the word ‘we’, and it is an important detail, conveying ‘I know where I want to be as long as my spouse/partner is with me, but I don’t know what will happen when that isn’t the case’. And just in the cause of balance, yes, I have met potential clients who said that they were here to try out the lifestyle, and if it didn’t suit, they would go straight back. That stance is however rare.
I then realised that time does, indeed, fly by. I’ve been talking to new expats for over eight years now, and we all get older. Some even wiser. Should I be surprised that some of my early clients have returned to the UK? Probably not. The reasons they give are interesting, and make a lot of sense. Illness and death are way up on the list of reasons to go ‘home’. Not your own death of course, but that of your partner. Widow(er)hood can be a lonely place. And we all know that the French health service is one of the best in the world, but it’s not English, is it? We might feel linguistically comfortable in a restaurant, a garage, or a supermarket, but when it comes to being interned in a foreign hospital with our internal organs at stake, it’s a different matter.
Divorce is another deal breaker, as is debt, but number three in my league table of reasons to be homesick is/are – grandchildren. A natural progression. We have children, they have children, and we feel a very strong emotional tie to those children. Being a thousand miles away doesn’t feel very good, and the pressure grows with them.
Where, you might ask, is this all leading? Am I reading a dissertation on the social demographics of Europe, or is this bloke supposed to be a financial adviser? Fair cop, let’s get back to finance. The reason I’ve been thinking about how and why some clients return to the UK is totally financial. I used to be a corporate foreign exchange dealer. An important part of that job was teaching clients how to avoid exchange rate risk, and how to eradicate it or at least manage it if they already had it. The problem with expats is what is avoiding risk and what is creating it?
If you relocate to France and it is your avowed intent never to leave these shores again, the only way to avoid F/X risk is to move all of your assets into Euro. At the other end of the scale, if you come to France for a three month holiday, you would be mad to change all your sterling into Euro, with the likelihood that you would change it all back again three months later. So where does this leave our undecided expat, who might live in Euroland for twenty years or more, but then return to the UK?
Stick or Twist?
Now my job starts to get a bit complicated. To give you the best advice on your investments and pension funds, I have to decide what your real expat profile is. Luckily for both me and my clients, the choice isn’t all black and white. There are shades of grey. You can indeed ‘stick and twist’ at the same time. I tend to take a different view of pension assets than I do to investment funds. One of the great selling points of transferring your pension fund outside of the UK is that you can invest it in Euros, but if there is even an outside chance that you will be spending your latter years in the UK, should you desert sterling? Don’t think I’m arguing against transferring your pension though. There are plenty of other benefits, and you can transfer and keep your fund in sterling.
Investment funds I see as being more flexible. I’ll take Assurance Vie as a given here. If you don’t know what it is, send me an email immediately. You don’t however have to make any full term commitment to either currency. You can in fact have both, and a number of clients are now taking that option. You can have as many assurance vie contracts as you like. This offers both flexibility of currency choice, and also of investment method.
To summarise then, my message is that it is important to get your investments into a tax efficient environment, but it is also important to decide what currency to be in at what time. I’d like to think that I’m in a good position to help you make those choices. If you have any questions on this, or any other subject, please don’t hesitate to contact me.
Capital Gains Tax and the Expat Property Owner
By Spectrum IFA
This article is published on: 28th May 2014
You have realised your dream, bought a property in France, perhaps as a holiday home to start with but now you have moved here, maybe to work, or perhaps you have retired. The big question is what to do with your property or properties in the UK?
When moving to a new country many people are a little nervous about letting go of their old one, rightly so after all holidaying is one thing, but living in a foreign country quite another. So often people keep their property in the UK, for a while at least, however this can have Capital Gains Tax (CGT) implications on a future sale.
A tax treaty signed between France and the UK which became operative on 1st January 2010, meaning that for former UK residents now resident in France, they are liable for french CGT on the future sale of any property including your former main residence. However no liability will apply in the UK.
Main Residence
If you sell your UK home when you move to France or within a relatively short space of time (usually within a year) then no CGT will be payable in either France or the UK. If however, you hold into it for a while ( then or rent it out) then you will pay CGT on it in France just like any other maison secondaire, with no allowance being made for the fact that it was your main home for a period of time.
Buy to let
If you sell your UK buy to let property when you move to France rather than at a later date then you will pay UK CGT. To work out how much tax you will have to pay, take the selling price of the property, then deduct the buying price. You can deduct the costs of buying and selling, e.g. solicitor’s fees, stamp duty, estate agents fees, advertising etc. You can also deduct the cost of
improvements to the property but not routine maintenance and repairs. There is also an annual exemption allowance (£11,000 for 2014/2015 tax year). CGT rates are 18% or 28% for higher rate tax payers. HMRC website provides a step by step guide.
Any buy to let properties that you own in the UK and subsequently sell after you become a french resident will be liable to French CGT.
Ownership
An important point to note, if you are married, but your UK property is only in one person’s name, it may be sensible to transfer the property into joint names prior to any sale to reduce any potential UK CGT liability. There is no CGT payable between spouses/civil partners and the CGT calculation on sale will be based on the original purchase price for both parties.
In France Gift Tax applies between spouses and applies to gifts made in the previous 15 years so it is sensible to take advice from a professional before taking any action.
French CGT
Like UK CGT, you start with the sale price and deduct the purchase price plus any associated buying and selling costs and costs of improvements (but not repairs or DIY, invoices need to be provided from registered builders etc). If you have owned the property for more than five years the notaire can apply an allowance of 15% of the original purchase price of the property – even if you haven’t done any work!
For EEA residents the starting rate for french CGT is 19% plus 15.5% social charges however these start to reduce on a sliding scale from year 6 of ownership onwards. After a full 22 years have passed the CGT reduces to nil, however it is 30 years before the social charges reduce to nil. Additional charges apply for gains above 50,000 euros.
Working out when, where and how much Capital Gains Tax you should be paying can be quite a headache and the best thing to do is take advice from a professional.
This article is for information only and should not be considered as advice and is based on current legislation. 25/05/2014.
Producing Income from Your Investments
By Peter Brooke
This article is published on: 13th April 2014
If you’ve managed to put aside money for your retirement, good job — no one else has been saving for you. But how do you change the balance of your assets to be able to draw an income to supplement a smaller, land-based income or to pay for your lifestyle into retirement?
* Restructure your investments before you need the money. This gives you time to ride out any difficult market years before you retire or move ashore. Crises in stock markets always affect stocks in pre-retirement worse, so protect the value of your funds in the few years running up to taking an income, but keep one eye on inflation as this will reduce the buying power of the “pot” of money you’ve built up.
* Consider the total value of your retirement assets — shares, pensions, funds, investment properties, cash and bonds — as one entity. Then ask yourself, “If I had all of this as cash today, what assets would I buy to give me the income I need?” This question helps you reassess all your assets and bypass any loyalty to a certain asset type, such as property. If Dave bought an apartment nine years ago for €180,000, rented it out and paid off the mortgage, and the apartment is now worth €280,000 with rent at €1,000 per month, after management charges, this works out as a 3.8 percent yield. Dave may do better using the money from the property elsewhere, perhaps by reinvesting in bonds.
* Once the income starts, look at each asset class in terms of income stream and cash flow rather than capital appreciation. It’s important to try and grow the “pot” to beat inflation, but the income is paramount. Yields on equities today are outstripping most government bonds; the capital may fluctuate but the income will remain. To draw an income of €3,500 per month, you need an asset pot of approximately €900,000. With €42,000 per year, a proportion of the cash can be put in longerterm assets (property, equities, etc.) to help grow and replace the funds you withdraw.
Many yacht crew have a large proportion of their assets inside insurance bonds, as they offer tax-advantageous growth and income. However, some don’t offer a way to take a “natural income,” as the funds are all accumulating-type funds. The income that you draw down by cashing in fund units affects the underlying balance and needs to be rebalanced with a steady internal income stream.
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
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.