Dumb Pension Question

Banking & Financial Tax & Social charges
1

Finally I got old and I have to open the drawers from hell and start opening 10 year’s mail about pensions. Or maybe avoid that a bit longer.

UK Employers pension from my youth kicks in this year at 60. It’s not that big but it’ll help. Two options are 3k a year or 2k a year plus a lump sum. It’s sort of index linked (old final salary scheme).

The lump sum makes more sense (it’s about 17 years worth of difference) - but it ain’t tax free in France is it?

My simple understanding is …

Standard pension goes in whatever box each year and there’s normal tax/social charges linked to total income - plus I imagine some faffing with HMRC. But fundamentally it’s income and tax is what it is.

Lump sum - no S1 - taxed/ss as a one off rather than as income (?). Plus I imagine there’ll be some drudgery with HMRC ? And obviously ongoing yearly declaration etc

Got a few months to decide. Just working out the tax bit.

Also

Does what I do with this “employer” pension affect what I can do with two small private UK pensions (neither amounts to much) be it now or 5 years down the track - in terms of lump sums.

2

It depends, is it a government employer pension?

3

I’m sure more knowledgeable people will reply, but having three index linked UK pensions, I’m happy that UK annual inflation tends to higher than here in France.

Also if it’s a UK gov pension, it will always be taxed at source, but the amount is far below the tax threshold.

Lastly, hopefully you’ll have a few more decades ahead of you, so maximising the index linked pension might be a good idea.

4

You have a long way to go before you get old! 60 is still middle aged now. You don’t get an S1 until you get your UK state pension which is another 8(?) years now.

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5

Bold of you to assume the State Pension will still be a thing in 8 years time.

6

It’s a reasonable assumption.

Whether the triple lock will still be there is another question.

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7

State Pension yes, Triple Lock maybe not.

(or ditto Lord Porridge)

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8

Assuming the employer contributions into the plan were not taxable on you etc, and assuming the lump sum is taxable only in France (ie isn’t a UK government pension), the lump sum could benefit from the 6.75% rate (net of 10% allowance) as long as you haven’t taken any other lump sums from the same plan. They do allow the balance of a plan to be paid out as regular pension thereafter, provided it’s separate and quite distinct from the lump sum (so for example if you’d been taking regular pension from it before the lump sum, that won’t work). See extract below from BOFiP document.

Box 1AM for regular pension, box 1AT for lump sum

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The Lump sum is also subject to social charges (unless you have private medical coverage/are not in Assurance Maladie). Regular pension is taxable as ordinary income and subject also to social charges.

You would need to complete Form France Individual (FFI). (several threads on this on SF) to prove French residence to HMRC. Pension provider will deduct UK tax but HMRC will eventually repay it on processing of FFI.

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No, you can have lump sums from each separate UK pension.

Hope this helps..

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9

By the way, there are no dumb pension (or tax) questions in my view - only the answers can be hard to fathom, sometimes…

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10

That helps. Thanks

11

Pensions can be complicated cross border. You have to do the maths. Other info you have not given which affects the maths are (but not all)

- are you entitled to an S1 when you reach UK state pension age? Have you worked in other countries?

- can you defer your employer pension until such time as you might obtain an S1, thus exempting you from social charges on the income and potential lump sum? How much would your pension increase by if you delay taking it. Is it worth doing so taking into account potential interest lost and inflation?

- you state the lump sum represents 17 years of pension and you’re 60? So if you live to 77, after that you’ll be ‘up’, if you don’t take it, and probably before that as Dr Mark mentions with inflation. How long are you going to live - as a not too bad actor mentioned - “do you feel lucky punk?”

- then, how much France tax will you pay on the xtra income, do you pay no tax at present, if so possibly you won’t pay tax on the additional pension. If you do, it might be taxed at 11%, if so that reduces the benefit of a lump sum taxed at 6.75% (plus potential social security payments).

- do you really need the money at the moment, like you say it will be useful, but is it worth paying extra tax now for a potential better quality of life later?

- so all these factors impact your decision. There’s the professional ‘in house’ SF pension guy, who can advise you, obviously as it’s his job you would pay him, no idea of how much he’d charge, the bottom line is I suppose if he can enable you to keep more of your money than you can, after his fee, then you’re still quids up? Perhaps also as you might be a person who possibly hasn’t planned for the retirement as you mentioned not opening the letters for the last 10 years, no offence meant here, smiley emoji kind of thing…

And you can also do research and ask more questions. Hope that also helps! I’m bound to have forgotten a few things.

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12

I have no specific pension advice to offer but I would say do listen to the experts like George and Larkswood, they really know their stuff on this topic.

And obviously get more specific (paid-for) advice tailored to your situation.

Here in the UK my IFA has helped me not only boost my pension funding but make it much easier to keep track of and manage, as well as giving me invaluable advice about retirement planning.

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As Larkswood12 says, “Do you feel lucky, punk?” is key. Is there anything which could indicate a shorter or a longer life expectancy. Some people might even get a health audit before deciding.

Also how strong is the index linking ? Is it capped ?
If it’s a Defined Benefit pension and taken as a pension then it dies when you do and there’s nothing left. A lump sum might let you bequeath something. Does the fund pay a pro rata widow’s pension to your spouse/partner? This can be very valuable meaning even more caution taking lump sum vs pension.

Evaluate the lump sum carefully as to what you’d be giving up for it - it’s done by a “commutation factor” and should be fairly standard, but may not be. Not all schemes are fair. Some are generous but that can’t be counted on.

Ask for a copy of all scheme rules - in full. They can’t refuse this. Things like starting your pension in one particular month of the year could mean you get the benefit of another year’s % increase if you pick the start date right - and it’s probably not your birthday (ditto for lump sum). Look closely as to whether taking it on 1st vs 31st of tje month matters (if there’s a choice of date anf not just of month).

Have you run the numbers on taking it all as a lump sum? (assuming this is permitted - it mifht help clarify thinking). Also find out asap if there is a requirement for “advice” from a financial adviser with permissions in the UK, for any choices you might make about lump sums. Getting this “advice” may not be straightforward if the funds are held in the UK if you are a French resident.

If someone’s in the UK or going to be UK resident at a point from 6th April 2027 onwards, then if tbey do have the other sort of pension, eg a personal pension, then unlike now, any unused pension funds they hold will become part of their estate for tax purposes from that date. Which has major implications if someone has their own pension funds and is reaident in the UK after that date.