Is it Time to Reform Assurance Vie ?
Thursday 23 February 2012
The French government audit office has called for a reform of the hugely popular assurance vie investment policies.
Assurance vie plays a central role in the long-term investment and savings plans of most French nationals.
It is also the investment of choice of many expats who relocate to France with a lump sum burning in their pocket to invest.
It is not difficult to see why.
As the French audit office (Cour de Comptes) itself says, 'In comparison with other savings schemes, assurance vie policies offer an exceptional combination of diversification of investments, liquidity, remuneration and security.'
As a result 41% (17 million) of households in France hold one or more an assurance vie policies, which accounts for 35% of their total savings.
The total amount invested is nearly €1.4 billion, three times the amount held in Livret A and other bank savings accounts.
The policies take different forms, with different levels of risk, although those with a contrat d'assurance vie en euros ensure that their capital is guaranteed.
They should not be confused with death policies (assurance décès), for these policies are definitely about generating a safe and suitable return in your own lifetime - the main reason why they are called assurance en cas de vie!
Nevertheless, they are also exempt from inheritance tax (up to a limit), and are frequently used for inheritance tax planning purposes.
So if they are so popular, then why is it that the Cour des Comptes thinks they are in need of reform?
Not surprisingly, within a national context in which tax breaks are being reduced those available to assurance vie are considered too costly.
The auditors have some difficulty in putting their finger on what is the precise cost, but they estimate €1 billion.
This figure excludes the loss of revenues from the inheritance tax break, which the auditors were unable to assess, but which they consider 'is a substantial advantage for a (wealthy) minority of savers'.
The other difficulty they have with it the policies is that they do not achieve their main economic objective, which is to contribute to the growth and development of the national economy.
The auditors seem to lament the fact that the insurers invest the proceeds where they will earn most for their clients, frequently in government bonds, but also in companies abroad.
Thus, one-third of the sums placed are in government bonds, of which two-thirds are placed abroad with foreign governments.
Of the investment of the assurers in corporate bonds, 60% are in companies abroad.
Less than 10% of total investments are held in the shares or bonds of French companies.
The problem for the auditors is that EU regulations forbid them from recommending that the proceeds should only be invested in French companies, due to the rules on the free movement of capital.
So as much as they may be concerned at the lack of support to home based companies, they come up with no recommendations for a more protectionist approach to investment of the funds.
Given the increased risk to savers of insisting on more investment in companies, the auditors fall back on recommending that tax incentives be geared more strongly to getting households to hold on longer to their policies, and so make better provision for their retirement.
Accordingly, they recommend that the tax benefits start not from the time the policy was opened but is related to the dates of the premium payments. These tax benefits currently mean that the tax rates on withdrawal are optimised after the policy has been held for at least eight years, a period which would be lengthened under the auditors proposals.
They also recommend a wider reform of the taxation of all forms of investment and savings, with a view to giving priority to savings and income for retirement.
Duncan Campbell, Associate Director at financial services specialists IFA Siddalls comments that, 'In the last year or so the French government has been ‘chipping away’ at the tax breaks offered by assurance-vie policies.
However, the wide appeal of this product to all sectors of the French population presents something of a two-edged sword. The substantial value of funds invested may make the assurance vie an appealing target for government advisers keen to invent new ways to reduce the government’s budget deficit.
Nevertheless, it is ultimately the elected policiticians who make the final decisions on new fiscal measures and most assurance-vie policyholders are also voters.
On balance this is likely to curb enthusiasm for over-radical change and I believe the assurance vie will still continue to offer exceptional financial planning opportunities for French nationals and expatriate residents alike.
However, with every change in the tax rules it is more important than ever to take professional financial advice to maximise the tax breaks that remain available.'
This article was featured in our Newsletter dated 23/02/2012