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A recently reduced pension allowance could put some of your UK retirement savings in the firing line for 55% tax. While this may affect around 360,000 people, expatriates in France can take advantage of opportunities to safeguard their pension funds.

The lower lifetime allowance

The UK government limits how much you can hold in pension savings without having to pay extra tax. This ‘lifetime allowance’ has gradually fallen from its 2011 high of £1.8 million to £1 million this April – £250,000 less than last year. Even before this reduction, more people than ever were paying higher taxes on their pensions. In 2015-16 the Treasury collected 62% more – £126 million in total – than the previous year from people who breached the allowance.

How could it affect you?

In practice, it means anything over £1 million in UK pension savings may be taxed at 55% when you take it out or pass it on after death as a lump sum. If you take this as income, it is liable for 25% tax.

For pension funds worth £1.5 million, for example, this translates into a £50,000 tax charge on income and a hefty £275,000 if withdrawn as a lump sum. Remember, this is on top of the tax payable on anything under the threshold.

You are liable for these taxes whether you are a British resident or not. Usually, UK pension income for French residents is paid gross in the UK and then taxed only in France, thanks to the double tax agreement. However, for those over the lifetime allowance, the excess will be taxed in the UK first and cannot be claimed back.

Although it is possible to pay just 7.5% in French tax if you take your UK pension all at once as a lump sum (and hold EU Form S1), this becomes less appealing if you attract UK tax rates of 55%.

Will you be caught out?

While £1 million in pension savings may sound like a lot, you could go over the threshold without realising it. The value of all your pension funds combined (excluding the State Pension) counts towards the lifetime allowance. This includes usually generous ‘defined benefit’ (final salary) company schemes and ‘defined contribution’ pensions – where the value depends on how much has been paid into the scheme in contributions. Remember your pension funds will grow over time and it may be that years of investment growth tip you over the limit.

Even if your pension reaches the £1 million limit, there is a question of whether that will be enough to sustain you in retirement. In this current environment of low interest rates and unsettled stock markets, a £1 million defined contribution pension fund may only provide a retirement income of £21,000 a year. Ten years ago, with a higher lifetime allowance of £1.5 million and more favourable economic conditions, you could receive an annual retirement income of around £50,000 without breaching the allowance.

This presents a dilemma if you want your pension to provide an adequate retirement income. To achieve your goals, you may need to go over the lifetime allowance and suffer higher taxation. Expatriates should seek advice on pension transfer options that may boost retirement income in a more tax-efficient way.

What should you do?

Pensions are complex, and calculating your lifetime allowance is no exception – you may have already used up more of your allowance than you realise. Even if you are under the limit when you start drawing benefits, your funds could grow and trigger the tax penalty in future. Talk to a specialist adviser to check whether you’re affected by the new lower limit and discuss your options.

It is possible to secure a higher limit by applying for lifetime allowance protection from HMRC. However, this usually has strict conditions attached, like making sure your fund does not receive any new contributions or investment growth, so guidance is advised.

Finding the best option for you

Many Britons in France transfer their UK pensions to a Qualifying Recognised Overseas Pension Scheme (QROPS) to benefit from more tax-efficient arrangements. While this also limits your exposure to lifetime allowance penalties, taking regulated advice is crucial to both determine whether this approach is suitable and avoid pension scams.

If you transfer one or more pensions into a QROPS and your total fund value is under £1 million, you will not be taxed on the transfer from the UK, otherwise you will be liable for 25% on the excess. However, once in a QROPS, your funds are out of reach of further lifetime allowance charges, no matter how much you have in total or how you access it. You may be better off transferring and paying any tax charges due now before your funds increase in value and attract further taxation.

Another option for expatriates in France is to take their UK pension as cash and reinvest into a tax-efficient assurance-vie. While this offers advantages, there are differences between providers and jurisdictions that could affect tax benefits. It is important to take personalised advice and explore all your options. 

If you decide that transferring is right for you, now may be the time to act. There is strong speculation that the UK government will introduce an ‘exit tax’ on pension transfers for non-residents. If this becomes part of the post-Brexit landscape, there may be a limited time to transfer without penalties.

Personalised professional guidance is essential to outline your full range of options while taking the complex French and UK tax implications into account. An adviser with cross-border experience can establish a tailor-made solution to ensure you are in a strong financial position to enjoy your retirement in France.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.

Any questions? Ask our financial advisers for help