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Taking UK pension pot as cash - tax implications?


Daft Doctor
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Hi

I am nearing the age when I could get my hands on a private pension pot of mine which is still in the UK. It will be worth a bit over the new £30k 'trivial commutation' limit, so until the new tax rules governing pensions (as announced in the UK budget) are introduced next April, ordinarily I would need to take it as annuity. If you can persuade your pension provider to give you it in cash, the situation for UK tax residents is that it becomes an 'unauthorised payment' and is subject to a one-off 55% UK tax charge.

My question is whether as a non-resident for UK tax purposes those tax charges are waived (in favour of it being declared as income in France), or if they are still paid but are later reclaimable. Has anyone out there got any first hand knowledge or experience? I should say that I have both phoned and emailed HMRC about this but am still waiting for any sort of answer. Many thanks in advance.
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As a gut feeling I would imagine that HMRC would insist on the UK tax charge remaining irrespective of where you now live but that you would not have to pay any more tax to France when you declared the cash here.

Why ? Because UK tax concessions were made on money saved into a pension.

Just my thoughts and they could well be wrong; it will be interesting to find out the correct answer.

Sue

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I would imagine that the 55% unauthorised payment charge would apply unless you transferred the pot into something else which was authorised, like a SIPP and then used the flexible drawdown option. It might mean you can't get hold of the whole pot at once, but may avoid the horrendous tax liability.

Like Sue, I am guessing, but my guess is based on recent research on this topic, as I will be in a similar position soon (but will probably wait until things become clearer after April 2015)
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Thanks for the replies. I appreciate the comments about tax relief having been given in the UK over the years on the contributions, so they'd want to enforce the charge despite my French residency. On the other hand, I also got full tax relief on all my superannuation contributions into the NHS pension scheme, and that pension is nonetheless paid to me gross and taxed wholly in France. I think it is more straightforward from April 2015 if the new proposed rules pass through into legislation. In that case, as the pot (less the first 25% which is tax free) would be simply treated as income, I would imagine that it would be wholly taxable in France and not taxed at all in the UK. It will be interesting to hear what HMRC say in response to my email and I will feed it back to the forum.
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[quote user="Daft Doctor"]Thanks for the replies. I appreciate the comments about tax relief having been given in the UK over the years on the contributions, so they'd want to enforce the charge despite my French residency. On the other hand, I also got full tax relief on all my superannuation contributions into the NHS pension scheme, and that pension is nonetheless paid to me gross and taxed wholly in France. I think it is more straightforward from April 2015 if the new proposed rules pass through into legislation. In that case, as the pot (less the first 25% which is tax free) would be simply treated as income, I would imagine that it would be wholly taxable in France and not taxed at all in the UK. It will be interesting to hear what HMRC say in response to my email and I will feed it back to the forum.[/quote]

I think the key here is that the UK will levy the 55% charge if the withdrawal of transfer is "unauthorised" and so the charge would be levied irrespective of your residency (UK, France or elsewhere). The other cases you mention are "authorised" withdrawals and are covered by the double tax treaty, so can be taxed in France under French rules. There is still the question of French tax on the 25% lump sum, since it would not be tax-free here in France, even though it is in the UK. The rules on taxation of pension lump sums changed in France fairly recently.

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My OH has direct recent experience of this.

Firstly, the UK reserves the right to tax any UK sourced income. Then, as a French resident, France has the right to tax you on your worldwide income but will afford you a tax credit for any income tax amounts already paid to the UK - based on your prevailing French nominal rates.

So...if you go ahead with your 'unauthorised withdrawal' ( i.e. before the new UK legislation comes into effect) - you will indeed be liable to the 55% UK levy.

If you wait until April 2015, then you can have your lump sum (or total withdrawal) which will be income taxed at UK AND French nominal rates - a tax credit being given by France for the equivalent French tax liability (again based on your French nominal rate).

So, you won't pay income tax twice but you will end up paying whichever is the higher of your 2 nominal rates in the UK and France.

However, you'll need to add on the prevailing French social charges relevant to private pension income - currently between 7.5-8.4% - depends on your circumstances. There are exemptions and reductions should you qualify.

Timing is of the essence at the moment so do take professional advice!

Chiefluvvie :-)
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Just a quick update on this. I was talking to my accountant about the subject and apparently if I wait until April 2015 (new UK rules) and take the whole of my UK private pension pot as a lump sum in one go, as a non-resident for UK tax purposes it should indeed only be taxable in France. Furthermore, I could opt for a fixed French tax rate of 7.5% on this lump sum, with 10% of the pot being exempt from all French tax (without an upper ceiling). There would be social charges of 7.1% to pay on the lump in addition to the income tax, but approximately 60% of the social charges could be put against tax in the following fiscal year.

The summary of this is much more favourable tax treatment of the lump sum in France than I had expected. Hopefully it will pan out like that!
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[quote user="Daft Doctor"]Just a quick update on this. I was talking to my accountant about the subject and apparently if I wait until April 2015 (new UK rules) and take the whole of my UK private pension pot as a lump sum in one go, as a non-resident for UK tax purposes it should indeed only be taxable in France. Furthermore, I could opt for a fixed French tax rate of 7.5% on this lump sum, with 10% of the pot being exempt from all French tax (without an upper ceiling). There would be social charges of 7.1% to pay on the lump in addition to the income tax, but approximately 60% of the social charges could be put against tax in the following fiscal year.

The summary of this is much more favourable tax treatment of the lump sum in France than I had expected. Hopefully it will pan out like that![/quote]

Hi,

  JohnFB is correct about the CSG , but it is still a good deal compared to the" old" UK system.

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Yes, sorry for the misunderstanding. I used incorrect nomenclature, but what JohnFB said is actually what I meant to say. Approx 60% of CSG would be offset against taxable income in the following year. So, as an example, if the lump sum involved was 50,000 euros, the one-off tax charge would be 3,375 euros (7.5% of 45,000). The CSG would be 3,550. Of that CSG however, 2,100 would be offset against taxable income in the following year, making a 630 euro tax saving (at marginal tax rate of 30%). The net payment in tax and CSG on the 50,000 would therefore only be 6,295 euros, representing a net composite tax/CSG rate of 12.6%. As Parsnips has already said, that's certainly a much better deal than the current UK system. As regards the new proposed UK arrangements, for that sort of sum the effective tax rate would only better the 12.6% in France if a full unused personal allowance could be offset against it, even allowing for the 25% tax free element.
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