Tax ruling on taking 2 pension lump sums/7.5% tax rate

Banking & Financial Tax & Social charges
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PS Larkswood I thought about your UK government pension lump sum. I don’t know much about this but believe they can be very restricted as to lump sum and transfers.

I thought the same as George1 ie “you’re st***ed”. But then I saw you have time and other sources of income.

If it was me I’d be looking year by year at any useable lump sum (bit by bit) or even partial transfer opportunities (bit by bit).

Also would some of those schemes have opportunities concerning spouse or dependents. Get hold of their uptodate small print and scour it. If at some point in the future you might decide to volunteer your skills in, say, Botswana either within a paid framework or unpaid depending, effectively residing there and having declared, ideally on 1st Jan or, to make sure, on the last working day of a previous calendar year, that you will be doing this from 1st Jan for a while tbd, it’s close in terms of other things for some but it looked like there might be a window after, say, 3 years. There might also be privileges if you became, say, a diplomat or some sorts of UN or similar employee. Wondering if DOM have any privileges

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Thanks for your interest @KarenLot.

FYI, On the local gov pension front when one comes to take the pension one can trade 1£ annual pension for £12 lump sum. It has to be done at the time of taking it. There’s an overall 25% maximum. One can also put off taking the pension, like the state pension.

Rough numbers for me are 6K pension or 4K pension and 24K lump sum.

The rate 12£ lump sum per £ doesn’t at first sight look very attractive to someone hoping to live longer than 12 years, especially with the pension being inflation linked.

However, I will be firmly in 30% France tax territory on the other pensions by then so a lump sum might work out - handy for the house buying front - but probably not if it propels the France tax into the stratospheric 45% band, as global revenue. I’ll have to crunch some numbers…

There is of course no requirement to take a lump sum - I could just take the full pension - or any sum.

I know there must be plenty of forumites here with gov pensions - maybe even in payment, with France taxable income too, e.g. state pension. But no one’s mentioning anything!

On the potential rescrit, wise words - best not to rock any boats / carts whatsoever - and as you say, the rules seem clear…

As my emergency tax might be 70K though I really will want to have it back quite quick - that pension definitely being the main house fund! Perhaps HMRC might be quicker for larger amounts. Or the P45 idea might work in the meantime. But as George says, at the end of the day it is only cashflow.

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I’d gathered so. Since you seem quite techie did you look at SSAS? Many off the peg have high management charges which might not work if you are small. But some probably findable more reasonable if you ensure you keep control in case of provider issues,. Interesting advantages as to investment types and shareability and a potential wrapper for income or transfer in. As well as potential holder for saving or applying capital in ways not available with other pension wrappers.

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Do P45. (I mean, keep it as a backstop if you can’t do any better.) Looks the best way of putting a cap on the cashflow withheld on first withdrawal, instead of emergency tax. But it seems your problem will be too much income attrributed to you personally. At a time when access to protected capital might be more useful.

Can any of it be moved eg to SSAS and perhaps, invested in a family business or business property. Or can other investments be used to provide capital, and the more restricted govt pension be used to provide income especially in view of govt inflationproofing and possible dependants’ provisions, in those other investments’ place.

Does all of it increase if deferred, can it be deferred only up to x age and how could dependants benefit

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I’m sure @larkswood12 has no doubt trawled regularly, and hopefully, through all the helpful Blevins Franks/French Property-type websites. The ones I looked at all confirmed the ‘orthodox’ view that the LG lump sum is taxable in the UK and is subject to exemption with progression (EWP) in France. That obviously isn’t much fun if larkwood would already be at 30% on taxable income in France, pre lump sum.

I came across one fairly wild idea raised on a forum from a retiring LG person, which began by not taking the lump sum. Instead the proposal was to take a loan from a French bank equivalent to the amount of the lump sum, pay off the loan over X years, from the regular pension, on the basis the interest charges would potentially be far lower than the increased French tax caused by EWP. Nothing if not creative…I couldn’t find out whether they actually went ahead with this plan!

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Yes I thought of that (the [esp. tax-deductible type of] loan and use pension to pay it off, but it sounded like investment bankers trying to pay themselves bonuses in wine held in entrepôt in Curaçao, or something. It’s just too transparently an artificial construct.

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@George1 @KarenLot

I’ve run some numbers for taking the lump sum through my simulation spreadsheet… I used pension figures for the year when I’d be taking it, i.e age 66 so including the state pension - but at todays amounts and France tax rates.

Trading 2K government pension for 24K lump sum creates an additional tax bill of 1600 - 1680 EUR. So not too bad. I’m not sure though how the 10% pension abatement will work though because I would be busting the limit of €4123.

Going forward one would pay about 170 EUR / year less tax for 2K less pension so in about 8 years I’d have ‘recovered’ the lump sum tax. And of course one would pay 400 / year less UK tax. But then not have the 16K in lost pension.

Also George - for your lump sum (s) I totally forgot to ask - do you have an S1 ? Otherwise if you are liable for social security contributions, then your France lump sum rate might have also been liable for some social charges. I have to admit I really don’t know - as I have an S1 I haven’t given it a thought up till now!

If you do pay social charges I presume you will have factored them in for your ongoing pension withdrawals.

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@larkswood12 I’l be very interested to see George1’s reply to this. After this I plan not to reply on this thread. As George1 took the initiative to take one for the SF team to get the Impôts answer on the rescrit to start it. And it’s fabulous information and I would like George1’s name to show against the topic aided and abetted by your good self.

Whilst we’re waiting for George1 I’m wondering about 2 things you’ve just said.

  1. thinking about it, why is your buyout multiplier offered to you at only 12x. Vague feeling shortly before retirement used to be nearer 20x, or more x if they wanted to get rid of you before your retirement :slight_smile: , at least in private db schemes.

Esp with inflation, 12x feels mean to get rid of the liability for paying your pension.

Is it worth enquiring with the scheme what factors are used to calculate this multiplier. And how has it evolved over time. And how will/may those factors evolve over time. Look up ‘mortality drag’ and scare yourself :slight_smile: , and see if covid long tail of mortality has been incorporated yet. That is, if the 12x in this scheme could be altered by mortality factors and is not fixed.

  1. is there a cap on the 7.5 reducing to 6.75? is it capped on gross of around 41000? eek.

I felt strongly that with the inflation protection and spouse protection in your government pension, you should maybe keep taking that as your pension plan and if you need capital, look at using other funds you have that don’t have those protections?

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I have about 7 years to go before I get to receive my UK state pension (and potentially obtain an S1). We are intentionally not in Assurance Maladie (ie are privately insured) to avoid significant social charges on the various pensions I’ve posted about recently. Premiums + estimated medical costs are substantially less than estimated social charges…

Interesting calculations on your lump sum issue. I wonder if that means you are leaning more towards not taking the lump sum?

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You’ve both given me a few things to think about so I’ve taken some time to mull over.

Generally your questions have made be reflect that I thought I might have too much pension coming in - more than needed (lucky me) - and less for example to travel the world in retirement. To your specific queries -

Government pension ? less generous since 2014 or before, it used to be 1/80th salary per year pension and 3 x that lump sum. Since 2014 I think it’s 1/49th of that years salary and no lump sum - except the 12 x exchange. I think the schemes have actuaries who might set some rates.

No, not at all, the prelevement 10% allowance is uncapped. Not to worry!

I’d thought I don’t really have much by way of capital - then realised I’m renting my UK flat - mortgage paid off. So there would be my capital. I presume I could remortgage buy to let to extract capital and use the pension to service or part service the loan. A quick look suggests it might not be too ‘expensive’ - and I’d probably get the tax back on the pension as a finance cost.

Perhaps a little bit like George’s comment

but if a UK loan, there would’t be a currency exchange risk.

Anyway plenty of time to think about it and when I come to have my financial advisor makeover doubtless they will have various suggestions – though assurance vie has already been mentioned in the initial discussions (the last one was with a Blevins guy).

Yes, perhaps I am now with Karen’s thoughts too.

My next big (company) pension event is actually next summer when I have either 10K or 7K + about 42K, so that’s about 1:14 ratio - it’s inflation proofed too, but capped at 5% and 2.5% RPI. So that’s maybe more favourable to trade for a lump sum. And all taxable in France being a company pension so quite straightforward.

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Would you have much of a UK CGT impact if you sold (/transferred) the UK property? If not then whilst a UK resident you could put it into its own Ltd as a landlord. Many landlords have done this in past few years faced with unfriendly tax and regulation changes. This gives you a lot of flexibility eg as to whether you take money out of the company and in what form, when, plus who owns the company. Keeps some more options and their timing open for the future. Depends on your view of the future UK property market (rental and sales).

Always look at the exit for any investment you make (or keep) either UK or France, and bear in mind that regulations and taxation may change.

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PS In well over 2 years of reading specialist finance industry press around these areas I have come to the conclusion there are a lot of sharks sround and professionals who will give advice and sell products that are not best. Some advertise prominently or have other coverage and can even be relatively well known but ‘found guilty of x by the FCA’ type things tend to stick in my memory - perhaps even the good firms get the occasional ding by their regulators.

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Ignoring the international aspects, doesn’t that potentially give rise to a double tax hit, if you put an appreciating asset into a company? In other words, hit 1 if you sell the property, and hit 2 if you extract the proceeds or later sell the company? Family members put their house into a company, alongside other assets, and then found they’d created a large cgt/corporation tax bill if they were to sell the property, and again if/when they either wanted to take out the proceeds, or sell the company? This was purely a UK only transaction. It’s absolutely not my particular area of tax, but we always had it drummed into our heads during technical training that thou shalt never put an appreciating asset into a company, unless you sell the company incl the appreciating asset. Possibly views have changed?

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That’s why I mentioned think about exit from any investment before going into it - but not just for that.

Though I did a stint with a firm that had its own ex- HMRC tax adviser (the firm was located within a monastery :slight_smile: ) . His standard solution to families included to transfer shares in the company that owned any asset rather than the assets themselves, I suspect at that time some of the ownership structure might have been in particularly selected jurisdictions - I can remember Jersey featuring.

My fave is the SSAS (only commercial property though not residential so prob not for the house) because as well as some company-type advantages, generally pension type advantages seem to have been left still in place by govt and I am optimistic this will stay the case for quite a while - but that’s just my guess.

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I spoke to SL this morning…They were very happy to let me withdraw a nominal amount to trigger emergency tax, then a more substantial amount in a few weeks time, when HMRC should have issued a proper cumulative code… Interestingly they said that,using HMRC’s emergency code calculator, even withdrawing £100 or £500 was too small to trigger emergency code BUT it would be enough to prompt HMRC to issue a cumulative code automatically within a week or two…

So I will withdraw £500 (not sure what code they’d use) but not apparently at emergency rates, then take out a larger withdrawal in about 6 weeks time.

I’m very grateful indeed, Karen, and larkwood for raising the whole sequencing of small initial withdrawals followed by larger ones, to deal with excessive withholding… I’d not really considered this before…Obviously it is “only” cash flow at the end of the day, given French tax residence, but tactically the less HMRC is holding of your money, pending DTA refunds, the better.

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I haven’t really paid attention to this thread but, in my COVID-addled state, I thought I’d take a look.

I’ll be a government pensioner at the end of next year and this thread makes me think that I’ll need the next year to figure out the best approach on what to take and when. I suspect I’ll be going to the beginning and reading it all again.

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For completeness, I’m posting my confirmation of the operation of the 10% pension abatement limit of 4123 EUR across the two types of pension -

those taxable in France (box 1AS); and

those taxable abroad (UK) and taken into account for the effective rate. (Box 1AH) (I.e. ‘government’ pensions.

Using the simulator, in summary the 4123 EUR operates as a single limit, is applied across both pension types and is prioritised in allocation to those pensions taxed in France (1AS) - which is what one would expect (or hope).

Entering 45K only for 1AS produced reference revenue of 40877, so the full 4123 abatement was applied.

Similarly, entering 45K only for 1AH was the same result.

To determine how the abatement operates across the two different pension types, entering 50K for 1AS and 22.5K for 1AH produced global income of 68377 and taxable revenue (Revenu net imposable ) of 45877 - so the entire abatement was applied to the France taxable income. (50K - 4123).

Using 22.5K for each of the two types of pension income 1AS and 1AH produced Revenu net imposable of 20250 so 2.25K was deducted from 1AS. - the full 10%

The global income was 40878 which accords with the remaining amount of abatement 1873 (4123 - 2250) being deducted from 1AH giving 20628 I.e the France taxable of 20250 and amount added for effective rate of 20628, I.e. total 40878.

So if a government pension lump sum is declared in 1AH it’s likely that, apart from inflating the tx bill for France taxable pensions, the 10% abatement might be restricted.

The possibility may be raised that it might be beneficial to to ‘bring forward’ the cashing in of such pensions to an earlier French tax year especially if there would be no, or little, France taxable income in that year - though careful thought must be given to any reductions in the pension for early redemption - it may not be worth it.

PS I’m looking forward to @George1 's update on how he got on with his pension’s UK tax code - hope it’s all going smoothly George.

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That is a fascinating (for us tax geeks!) experiment you’ve carried out. I’ve not seen such a comprehensive exploration, and analysis before, and am deeply impressed.

Thank you! SL are in the midst of consolidating my two DC schemes. Once they’ve done that, they will pay out a nominal £500 to hopefully trigger the cumulative PAYE code, and I will then start taking the first of 5 annual instalments from the Defined Contribution pension (bridging until my Defined Benefit pension, see below, kicks in). I will report back on whether the nominal payment triggers the cumulative PAYE code.

Meanwhile I am toying with trying to work out how Labour (if they win the next election) might tax pensions that are not yet in drawdown. They announced they would reintroduce the Lifetime Allowance (LTA) tax that the Conservatives will fully abolish from 6 April 2024. I would be impacted by the LTA (incl up to 55% on lump sums) if reintroduced at the same level as now. One option is to take a lump sum prior to a general election. However taking a defined benefit pension early almost always causes a reduction in what they will pay me for the rest of my life obviously. A tricky one, not knowing what LTA replacement, if actually reintroduced, might impact on something as vital - to me - as my future DB pension.

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Thanks for compliment - and update! Decisions eh…

For various reasons (which I’m happy to communicate via PM if you’d like) can I ask - is this consolidation simply for admin ease and could you have made a withdrawal from one pot and then the HMRC code when received would be applied by SL to both pots?

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1pot=1tax code