A favourable tax regime exists in France concerning lump sum pension payments, despite some recent trimming of these advantages.
Under the tax treaty between the UK and France most pension income is taxable in the country of residence, whether as income or as capital.
The only exception to this general rule is government service pensions - military, civil servants, teachers, local government, police - which are taxable in the UK. Further details about the taxation of such pensions can be found in our guide below.
Taxation of Lump-Sums in UK
Most pension schemes in the UK allow those with personal pension rights to withdraw up to 25% of their pension as a lump sum, which is generally tax-free.
Since the reform of personal pension schemes in 2014 certain groups with a personal pension now have the right to withdraw the whole of their pension as a lump-sum from the age of 55 years, when 25% of the lump sum remains tax-free, with the remaining 75% taxable.
The minimum rate of income tax in the UK is 20%, rising to a maximum of 45%.
However, the right to draw down more than 25% of your pension only applies to those in 'Defined Contribution' schemes (also known as 'Money Purchase'), where the funds are invested and the final pension based on the performance of that investment.
Those in 'Defined Benefit' schemes (also known as 'Final Salary') are not affected by the legislative changes and so ineligible for more than 25% of the pension as a lump-sum.
Taxation of Lump-Sums in France
There are three options open to taxpayers in France in the way a lump sum pension is taxed.
i. Marginal Rate - You can choose to make no specific provision and have the lump sum taxed in accordance with the tax rates and bands applicable at the time of receipt.
However, as the lowest tax rate is 14% (11% for 2020 income over €9,964), albeit after a zero-rate allowance of €10,064 on total household taxable income, this is unlikely to be the best option, except where it is a small lump sum.
ii. Quota Part - You can request the sum is calculated by adding a quarter of the net taxable lump sum to your other net taxable income and then by multiplying by 4 the tax then due, which is paid in a single payment. By this means the lump-sum payment does not push you into a higher tax bracket. This option is called the système du quotient. To qualify the payment must be greater than the average of total net taxable household income over the previous 3 tax years.
iii. Fixed Rate - You can opt for the whole of lump-sum pension to be taxed at a fixed rate of 7.5%. The lump-sum is not then taken into account in determining the tax payable on other income. This fixed rate option is called the prélèvement forfaitaire.
If you are proposing to take the whole of your pension as a lump-sum this is a potentially interesting option, although you also need to give consideration to your liability to social charges (see below).
However, it is only available if you receive the whole of the lump sum to which you are entitled, so that no part is deferred for payment at a later date, known as 'flexible drawdown'. Accordingly, if you are considering taking your pension in more than one lump sum payment you cannot use this option.
The other condition is that the contributions you and your employer paid towards the pension were tax deductible, or the lump sum was tax free, which is the case with most UK pensions. It is also only available where expressly demanded, when the decision is then irrevocable.
Until this year, one other option available was to have income treated as an 'exceptional payment' under which it was possible to divide the sum by four equal parts, with each quarter part added to your other income for each of the four years, thereby spreading the liability of the lump sum over the four years. This was called the système de l'étalement. As a result of the introduction of taxation at source last year (prélèvement à la source), for lump sums received since 1st January 2020 this option is no longer available.
Whichever of these options you choose, the pension is subject to a 10% allowance before becoming liable to income tax. So the 7.5% fixed rate method of taxation actually equates to a rate of income tax of 6.75%.
Many expatriates also consider transferring their UK private pension funds to a EU-based Qualifying Recognised Overseas Pension Scheme (QROPS). However, despite the widespread promotion of such schemes, Robert Kent of Kentingtons French tax and investment advisors states: "The tax treatment of such schemes in France is very uncertain, as there is a significant risk that it will not be taxed as a pension. If it is not accepted as a pension it is just a pot of money in trust with an immediate punitive charge of 60%!"
As a general rule, in addition to income tax, social charges (prélèvements sociaux) of 9.1% are payable on lump-sum pension payments, although a lower rate may be applied in the case of small lump sums.
However, you would escape social charges if you were either:
- In receipt of a government service pension;
- In possession of an S1 certificate of exemption for health cover;
- You had health cover entirely through a private health insurance policy.
With options 1 and 2 above the social charges are applied after a 10% allowance, but this does not occur with option 3, with the fixed charge applied on 100% of the sum.
The social charges are partially deductible for income tax, except for option 3.
This article is merely for general guidance. You are strongly advised to seek good professional advice on this issue.