Explained: The tax situation for British pensioners in France
France is a popular place for Brits to retire to, but if you're in receipt of a UK pension there are important things to think about in reference to French taxes and social charges, plus the changes that Brexit has wrought.
There are all sorts of good reasons to retire to France, but it does require forward-planning, especially when it comes to your pension.
There is no single rule for pensions and taxes, everything depends on the bilateral agreements between countries and the UK-France dual tax agreement (PDF) determines whether you will be taxed in France or the UK depending on the type of pension or pensions that you have - UK state pension, civil service pension or a private pension.
This article is intended as an overview of how the French system works when it comes to British pensioners. It is not intended as a substitute for independent financial advice and anyone considering a move should take professional advice based on their individual situation.
You should also consider if you have a pension from another country besides the UK, as different rules may apply based on that country’s bilateral tax treaty with France. Here is the situation for Canadian, American, and Australian pensions, and here is an overview of the system.
Taxed in the UK or France?
The first thing that many people ask is whether their pension will be taxed in the UK or France. And the short answer (as in so many cases when we deal with French admin) is 'it depends'.
If you have a UK government or civil service pension (eg a state school teachers' pension), then this will remain taxable only in the UK. Some old NHS pensions were considered 'government pensions', but modern ones might not be. You can check if your pension is classified as 'government' here.
You still have to declare this income to the French tax authorities, but you will not be subject to tax in France on it - although it will count towards your total household income, and could end up pushing you into a higher tax bracket.
The same is not true of private pensions: these are taxed in France, not the UK, as soon as you become a tax resident here. Confusingly, the UK state pension is also considered a private pension, even though it is paid by the government.
READ ALSO Who is 'tax resident' in France?
People living in the UK have their private pensions taxed upon distribution in the UK. Once you move to France, you will be paying French taxes - in order to ensure that you're not paying twice, you have the option either of paying the UK taxes and then applying for a reimbursement, or filling out an NT form and sending it to HMRC (who will communicate to your pension company) to receive your British private pension in gross.
If you have several different private pensions, you will need to fill out the NT form for each one.
It should be noted that you cannot get an NT code without first drawing and then reclaiming at least one small payment, so at least at first you will need to pay the UK tax and then reclaim it.
How to get your private pension
Determining whether you should take your private pension as a lump sum or a regular payment is a complicated decision, not least because there is not one single regime that covers all private pensions in the UK.
Getting expert financial advice is highly recommended.
The Local spoke with financial adviser Maeve Hoffman, from Spectrum IFA Group, to better understand some of the implications.
"Figuring out what to do with your pension should be part of your wider financial plans for your life. This may be your most important asset, besides your home, and the best answer for what to do with your pension is highly individual. There are no sweeping generalisations when it comes to advice on private pensions. Everyone's situation is different.
"You will want to start by considering whether you plan on being in France in the long-term. Some options could have serious consequences if you return to the UK shortly after," Hoffman said.
She advises always seeking out professional advice before starting to take money out from your pension.
"There are free, government-based services in the UK that can help you understand your private pension - Pension Wise and Money Helper. Before doing anything, you should consult the free services. Any financial adviser worth their salt would recommend this too.
"These services have begun to have longer wait times, so be sure to book well in advance of when you plan to draw from your pension.
"Then, you should speak to a financial adviser. Because of Brexit, you cannot use a UK-based financial adviser anymore - you have to use an EU-registered one. This has made things more complicated. When picking an adviser, seek out someone who has expertise on the local taxation rules in France, they should be regulated with the financial regulator where you and they live and work.
"Be smart and sensible. If you choose an adviser in Dubai or Spain for example, you will now be adding another regulatory organisation into the mix, plus another language," she said.
French tax system
The tax rate applied by French fiscal authorities will depend on how you receive your pension - either as regular income or as a lump sum.
If you receive it as a regular income, when doing your yearly French tax declaration, you will add up your pension income for that year and you will be taxed at the normal marginal rates for income (the barème). These rates go up to 45 percent (for the highest earners only) plus social charges if they apply (more on this below).
Pension income can also benefit from a 10 percent tax deduction, as long as it does not exceed €4,123 or fall below €422 per household.
Lump-sums are more complicated. Technically, French tax authorities would allow a return of once off pension capital to be taxed at a flat rate of 7.5 percent.
But in reality, Hoffman explained that anyone seeking to do this would need the express, written confirmation from French tax authorities that this rate will be applied.
She also explained that the type of private pension matters when seeking to get the lump-sum flat rate.
"There are plenty of different types of private pensions in the UK, but the old 'defined benefit schemes' have been the gold-plated standard. These are the types of pensions that give you a portion of your salary for the rest of your life.
"In principle, you should be able to take out lump-sum of 25 percent of your 'defined benefit scheme' pension and be taxed at the 7.5 percent flat-rate. That being said, some people get refused, so you cannot make any assumptions and you need clarification from the French tax office.
"As for all of the other types of private pensions in the UK, like the money purchase or personal pension schemes, these are considered to be 'funds'. If you want to benefit from the lump-sum then you would have to take out the entire pension. You would not be able to just take out 25 percent and get the lump-sum rate.
"For anyone considering taking their whole pension and seeking to use the 7.5 percent rate there are conditions to be met, so I advise people to write to their French tax office and explain their own situation in detail. Be sure to clarify the tax rate you are seeking to have applied and ask what documents they would need from your UK pension company to confirm that the contributions to this pension have been tax deductible."
Pension transfers
Another question that is important for Brits to think about whether or not to transfer their pension into either a UK-based SIPP for non-residents, or a QROP (Qualifying Recognised Overseas Pension Schemes).
The SIPP will keep your pension in the UK, while the QROP moves it out of the UK, to Malta specifically.
For QROPs, the benefit is that your pension will no longer be affected by any changes to pension legislation in the UK. It can also be paid in euros and gross, so you would not need to get an NT code and reclaim any tax from the UK.
However, Brexit has complicated things and led to fewer UK-based SIPP providers with licences that allow them to work with EU residents.
As with the lump sum v regular payments question, getting independent financial advice is crucial. Pension transfers are very complex and can have serious consequences if done incorrectly.
What about social charges?
Deductions in France come in two types - impôts (taxes) and prélèvements sociaux (social charges).
People who retire to France (and have never worked in France) and have already reached the state pension age can apply for the S1 - this means that the UK continues to pay for their healthcare costs and they would not be charged prélèvements sociaux. Non-working spouses of an S1 holder can also benefit from this.
People who take early retirement and make the move before they reach state pension age may have to pay social charges until they reach the state pension age and can apply for their S1. However, there are several exemptions to social charges, so even if you expect a bill, you may not end up being charged. More information in our guide.
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There are all sorts of good reasons to retire to France, but it does require forward-planning, especially when it comes to your pension.
There is no single rule for pensions and taxes, everything depends on the bilateral agreements between countries and the UK-France dual tax agreement (PDF) determines whether you will be taxed in France or the UK depending on the type of pension or pensions that you have - UK state pension, civil service pension or a private pension.
This article is intended as an overview of how the French system works when it comes to British pensioners. It is not intended as a substitute for independent financial advice and anyone considering a move should take professional advice based on their individual situation.
You should also consider if you have a pension from another country besides the UK, as different rules may apply based on that country’s bilateral tax treaty with France. Here is the situation for Canadian, American, and Australian pensions, and here is an overview of the system.
Taxed in the UK or France?
The first thing that many people ask is whether their pension will be taxed in the UK or France. And the short answer (as in so many cases when we deal with French admin) is 'it depends'.
If you have a UK government or civil service pension (eg a state school teachers' pension), then this will remain taxable only in the UK. Some old NHS pensions were considered 'government pensions', but modern ones might not be. You can check if your pension is classified as 'government' here.
You still have to declare this income to the French tax authorities, but you will not be subject to tax in France on it - although it will count towards your total household income, and could end up pushing you into a higher tax bracket.
The same is not true of private pensions: these are taxed in France, not the UK, as soon as you become a tax resident here. Confusingly, the UK state pension is also considered a private pension, even though it is paid by the government.
READ ALSO Who is 'tax resident' in France?
People living in the UK have their private pensions taxed upon distribution in the UK. Once you move to France, you will be paying French taxes - in order to ensure that you're not paying twice, you have the option either of paying the UK taxes and then applying for a reimbursement, or filling out an NT form and sending it to HMRC (who will communicate to your pension company) to receive your British private pension in gross.
If you have several different private pensions, you will need to fill out the NT form for each one.
It should be noted that you cannot get an NT code without first drawing and then reclaiming at least one small payment, so at least at first you will need to pay the UK tax and then reclaim it.
How to get your private pension
Determining whether you should take your private pension as a lump sum or a regular payment is a complicated decision, not least because there is not one single regime that covers all private pensions in the UK.
Getting expert financial advice is highly recommended.
The Local spoke with financial adviser Maeve Hoffman, from Spectrum IFA Group, to better understand some of the implications.
"Figuring out what to do with your pension should be part of your wider financial plans for your life. This may be your most important asset, besides your home, and the best answer for what to do with your pension is highly individual. There are no sweeping generalisations when it comes to advice on private pensions. Everyone's situation is different.
"You will want to start by considering whether you plan on being in France in the long-term. Some options could have serious consequences if you return to the UK shortly after," Hoffman said.
She advises always seeking out professional advice before starting to take money out from your pension.
"There are free, government-based services in the UK that can help you understand your private pension - Pension Wise and Money Helper. Before doing anything, you should consult the free services. Any financial adviser worth their salt would recommend this too.
"These services have begun to have longer wait times, so be sure to book well in advance of when you plan to draw from your pension.
"Then, you should speak to a financial adviser. Because of Brexit, you cannot use a UK-based financial adviser anymore - you have to use an EU-registered one. This has made things more complicated. When picking an adviser, seek out someone who has expertise on the local taxation rules in France, they should be regulated with the financial regulator where you and they live and work.
"Be smart and sensible. If you choose an adviser in Dubai or Spain for example, you will now be adding another regulatory organisation into the mix, plus another language," she said.
French tax system
The tax rate applied by French fiscal authorities will depend on how you receive your pension - either as regular income or as a lump sum.
If you receive it as a regular income, when doing your yearly French tax declaration, you will add up your pension income for that year and you will be taxed at the normal marginal rates for income (the barème). These rates go up to 45 percent (for the highest earners only) plus social charges if they apply (more on this below).
Pension income can also benefit from a 10 percent tax deduction, as long as it does not exceed €4,123 or fall below €422 per household.
Lump-sums are more complicated. Technically, French tax authorities would allow a return of once off pension capital to be taxed at a flat rate of 7.5 percent.
But in reality, Hoffman explained that anyone seeking to do this would need the express, written confirmation from French tax authorities that this rate will be applied.
She also explained that the type of private pension matters when seeking to get the lump-sum flat rate.
"There are plenty of different types of private pensions in the UK, but the old 'defined benefit schemes' have been the gold-plated standard. These are the types of pensions that give you a portion of your salary for the rest of your life.
"In principle, you should be able to take out lump-sum of 25 percent of your 'defined benefit scheme' pension and be taxed at the 7.5 percent flat-rate. That being said, some people get refused, so you cannot make any assumptions and you need clarification from the French tax office.
"As for all of the other types of private pensions in the UK, like the money purchase or personal pension schemes, these are considered to be 'funds'. If you want to benefit from the lump-sum then you would have to take out the entire pension. You would not be able to just take out 25 percent and get the lump-sum rate.
"For anyone considering taking their whole pension and seeking to use the 7.5 percent rate there are conditions to be met, so I advise people to write to their French tax office and explain their own situation in detail. Be sure to clarify the tax rate you are seeking to have applied and ask what documents they would need from your UK pension company to confirm that the contributions to this pension have been tax deductible."
Pension transfers
Another question that is important for Brits to think about whether or not to transfer their pension into either a UK-based SIPP for non-residents, or a QROP (Qualifying Recognised Overseas Pension Schemes).
The SIPP will keep your pension in the UK, while the QROP moves it out of the UK, to Malta specifically.
For QROPs, the benefit is that your pension will no longer be affected by any changes to pension legislation in the UK. It can also be paid in euros and gross, so you would not need to get an NT code and reclaim any tax from the UK.
However, Brexit has complicated things and led to fewer UK-based SIPP providers with licences that allow them to work with EU residents.
As with the lump sum v regular payments question, getting independent financial advice is crucial. Pension transfers are very complex and can have serious consequences if done incorrectly.
What about social charges?
Deductions in France come in two types - impôts (taxes) and prélèvements sociaux (social charges).
People who retire to France (and have never worked in France) and have already reached the state pension age can apply for the S1 - this means that the UK continues to pay for their healthcare costs and they would not be charged prélèvements sociaux. Non-working spouses of an S1 holder can also benefit from this.
People who take early retirement and make the move before they reach state pension age may have to pay social charges until they reach the state pension age and can apply for their S1. However, there are several exemptions to social charges, so even if you expect a bill, you may not end up being charged. More information in our guide.
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