Retirement Planning – Pensions

The most common sort of ‘pension’ is a unit-linked regular premium contract, which invests in a range of funds in the assurance vie fiscal framework. These plans are usually flexible and accept fairly low minimum monthly contributions and can be stopped and started when necessary. The main advantage of such policies is that there is no obligation to buy an annuity at retirement, where you may be stuck with low rates of return. In fact, it is possible to take the proceeds from the funds and invest in anything you think will provide a good return. Such policies would be suitable for clients who see their long-term future as being in France (and are therefore able to benefit from the assurance vie tax advantages at maturity).

For residents of Monaco or for expatriates who are unsure in which country they are likely to be living in future years, an offshore pension can provide flexibility because contributions can usually still be made from anywhere in the world. Such plans usually have a wide range of international funds in which to invest and accept contributions of any of the major currencies. At maturity, proceeds are paid out free of tax.

For French companies who want to set up a company scheme for employees, an ‘Article 83’ scheme can be used to make contributions which can be offset against tax. These schemes are very similar to UK pension schemes and can be used to motivate staff and maintain loyalty. The employer controls the extent of the contributions. This type of scheme might suit someone who wants to reduce his or her immediate income tax liability.

Self-employed French residents can also set up a similar scheme for themselves within the ‘Loi Madelin’ framework and they will receive the same kind of tax benefits. Once again, these have much the same advantages and disadvantages as UK pensions.

Some pension plans are structured so that the investment profile of the underlying investments changes over time. For instance, at outset the plan might be invested mainly in adventurous funds, which have greater potential for growth but are more volatile. During the course of the plan, the proportion invested in adventurous funds would reduce to be gradually replaced with more cautious funds, up to the point closer to maturity (and retirement) when the funds are completely invested in secure funds. The aim of such plans is to increase growth in the earlier years and then to concentrate on security in later years, to avoid a drop in value just before retirement.

Some people prefer to have more active control over their pension plans and they are able to choose from a wide range of investment funds, which can usually be switched at any time. Some diversification amongst equity, bond and property funds is usual and helps protect against extreme movements in any of these markets. In addition, it is possible to invest according to the amount of risk that each individual is prepared to take.

Many expats from the UK will be used to being obliged to take an annuity at retirement with at least part of their pension fund. This is still the case with some of the schemes mentioned above, where tax relief is given on contributions, but a large proportion of French plans are more flexible. For example, plans in the ‘assurance vie’ fiscal framework can take the proceeds as a capital lump sum and this can be switched or reinvested to provide income.

One option is to put the money in the bank but the low interest rate environment we are in today means that the rate of return is going to be fairly low. However, a good financial advisor will have a greater range of options available.

Another option is to invest in property and live off the rental income. However, there are a number of disadvantages, which should be considered before doing this. Property is not very tax efficient, money can be difficult to take out if the property market slumps, tenants need to be managed, maintenance costs need to be considered etc. Depending on the amount of funds available, direct investment in property is best as part of a larger portfolio of diversified investments. A property fund might be a simpler way of accessing the property market.

Many people invest in a bond fund or bond portfolio, as this can provide a high level of income but with a low level of risk to the capital. A bond fund can be accessed with relatively small amounts of capital. Plus, for those with capital over 150,000€ it should be possible to create a portfolio consisting of several investment grade bonds, with the income boosted by a small proportion being invested in a high yield fund. This combination can provide income over 7% and if capital preservation is part of the portfolio mandate then this should be sustainable for a long period of time with relatively low risk.

It is possible to transfer UK pensions into the offshore arena, as long as the new scheme is acceptable to the Inland Revenue, but each case needs to be assessed on it’s individual merits to see if it is worthwhile and cost-effective.

Most UK pensions can be elected to have tax deducted in France (the main exception being civil servant pensions).

If you are resident in France or another country, for tax purposes, then you are not able to contribute to a UK pension and should continue your retirement planning in your country of residence. The pension fund will not be lost; proceeds can be taken at the normal retirement date.

The UK state pension will be paid as normal. However, residents of certain non-EU countries will have their pensions frozen instead of being indexed. If you think this might be the case then it is necessary to take action in advance by establishing other sources of income in retirement. If you wish to find out if your state pension would suffer from this rule then please ask for information.