Protect your UK pension in France

Having worked all your life and contributed to your pension pot, if you retire to France you will wish to receive the benefit of your pension contributions in the most efficient way, with as few deductions as possible.

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 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. The taxable base consists of income less a 10% deduction, with a minimum for 2007 of €352 and a maximum of €3,446 per household.

Pension income is also liable to 7.1% social charges, although UK pensions are exempt provided you hold either Form E106 or E121. These forms are available from the Department for Work & Pensions (DWP, The Pensions Service, International Pension Service Tyneview Park, Newcastle upon Tyne NE98 1BA. Tel: 0191 21 87777).

There are four different types of pensions in the UK which will be treated for tax purposes in France as follows:

• State retirement pension: A UK state pension will be liable to French tax only and is paid gross in the UK.You can have your UK state pension paid into a UK or a French bank account. As a UK state pension is paid in sterling, the amount will have to be converted to euros and will be subject to the exchange rate at the time.

• Occupational pensions: A tax resident of France also pays French income tax only, as above, on UK occupational pensions. Unlike UK state pensions, some pension suppliers will not pay into a French bank account and you would need to ask your pension provider about this.

• Government service pension: A government service pension, however, remains taxable only in the UK, unless there has been a transfer out before the pension commences (and usually before age 59). There are a number of authorities that pay government service pensions, including the civil service, local authorities, fire brigade and police, but a pension from the NHS is not a government service pension. If in doubt you should confirm whether your pension is government service or not. It isn’t always obvious. In France, UK government service pensions are not taxed directly, but the income is taken into account for the purpose of determining the tax rate payable on other French source income (taux effectif) – and for the 7.1% social charges if payable (unless exempted as above).

• Private pensions and annuities: This type of pension is alien to the French system as they do not have personal pensions in the same way as we do in the UK. 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, although this is no longer generally available, particularly where the pension fund has been built up during the working life. Thus, personal pension funds are usually taxed in France as occupational and state pensions, above.

Tax-free lump sums Tax-free lump sums are not generally taxed in France, which is good news. There is no equivalent to this in the French pension system, and the French rules have been vague. It was generally accepted (although not in writing) that foreign pension lump sums were not taxable by French tax inspectors, although different inspectors in different regions have been known to take different views.

However, there are rumours circulating regarding issue of a law which will allow the French authorities to tax foreign pension lump sums received by French resident taxpayers. If enacted, the text is unlikely to have a retrospective effect unless it forms part of a rectificative tax law. This is still just a rumour, and it is not known if, or when, such a law may come into force. For the time being, if you take your pension lump sum while French tax resident, it is unlikely to be subject to tax.

Pension contributions If you are thinking of moving to France before you have completed contributions to a pension scheme, it may be possibile to deduct ongoing contributions to a foreign pension scheme while living in France, although this issue remains unclear.You can only make contributions to a UK pension fund for a limited time after leaving the UK, and these contributions are not particularly high.

National Insurance Contributions If you are considering moving to France before UK state 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 healthcare abroad, but Class 3 NI contributions protect entitlement to retirement pension and widows benefit.

The contribution rate is £7.80 per week (around £406 per annum) in 2007/2008. Voluntary UK top-up contributions may be paid at the Class 2 rate of £2.20 per week (or £115 per annum) in 2007/2008 if you are employed or self-employed in France and paying French social security contributions.

Full entitlement to state retirement pension currently only requires sufficient contributions in approximately 90% of the maximum working years (e.g. 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). For those retiring after 5 April 2010, this is reduced for both men and women to 30 years on contributions to receive the maximum UK state retirement pension. 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 taxefficient way once you have moved to France.

Bill Blevins is Blevins Franks’ financial correspondent www.blevinsfranksinternational.com

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