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Pensions for Expats in France

Submitted: November 2013

Any expat should understand the basics of the French pension system, especially its political history, failing which a lot of money can be lost. This is because the bill for past political mistakes has not been paid yet.

France’s social security system is essentially financed through social insurance rather than taxes. It is not designed to be redistributive. Entitlement therefore primarily depends on your previous contributions into the system. There is, however, a social assistance programme (ASPA) for pensioners whose income is below €787.26 per month.

Although the French are increasingly saving for retirement in the private system (système par capitalisation), the social insurance system (système par repartition) remains predominant. France’s private retirement schemes are still a far cry away from Anglo-American private pension funds.

Retirement and social insurance in France

Political history

France introduced its first mandatory pension scheme in 1910. It was a compulsory private occupational scheme, wherein both employees and employers had to contribute, a bit like today’s Australian superannuation legislation.

World War II and Nazi occupation completely overhauled the system in order to make it based on social insurance. In 1945, the Socialist-led transitional Government confirmed the introduction of a universal socialised old-age insurance scheme. It is a wholly pay-as-you-go system, i.e. your contributions are used to pay the pension benefits of an existing pensioner. In return, tomorrow’s working age individuals will pay the pension benefits you accrue right now as a contributor. Demographics are therefore particularly important.

Fundamentally, nothing has changed since 1945. In other words, today’s pension system was forged at a time where the red sun of communism was at zenith.

Recent political issues

You might hear a lot of things about France’s economic woes right now. Most of them are actually attributable to France’s failure to enact the reforms it needs. Many call this cowardice or clientelist/short-termist politics. The truth is: this structural weakness will stay until French democracy is reformed, be it its institutions or their practice. Today’s economic crisis simply exacerbates the issue.

This is completely true of pensions. Pension age was cut from 62 to 60 when the Socialists returned to Government in the early 1980s. No political party actually bothered raising it until very recently. At the same time, life expectancy rose substantially, and the pension benefits bill spiralled out of control.

Make no mistake: this is far from being over, as the system is not expected to stabilise before the mid-2030s. Politically speaking, it would be very tough to reverse the promise that yesterday’s politicians made to today’s pensioners, i.e. that they can retire around 15 years before they reach national life expectancy.

The outcome: someone will have to pay. As expected, today’s working age individuals must pay for the political failures of past generations. Whether today’s young contributors will get value for money when they retire is all but certain.

Contributions

All workers in France are subject to social insurance legislation, which includes old-age insurance. Generally, employers pay 44%, employees pay 22% and the self-employed pay 45%.

Regarding pensions (assurance vieillesse), you must pay towards the basic pension (retraite de base) and supplementary old-age insurance (retraite complémentaire). As explained above, there are little redistributive effects, except that the young must pay for the elderly.

The rules can get extremely complicated if you get into the details, but generally employees have to pay about 13%, employers around 22%, and the self-employed about 24%. Some high earnings may be disregarded from the assessable amount.

It is worth noting that supplementary old-age insurance is a points-based system. Your points can be then converted into pension benefits, even if you live outside France and get a state pension from another country.

Benefits

In theory, you should get 50% of the earnings you used to have in the (averaged) 25 best years of your working life. There is no inflation adjustment for the purposes of the above.

Unless you were born before 1 January 1955, you cannot claim your pension before 62. In addition, you need to have contributed for a minimum number of quarters (trimestres validés), failing which a rebate applies on your pension benefit. At the moment, this minimum is 166 quarters (41.5 years) for an individual born in 1956. This can be reduced by one quarter per year for individuals born before then. However, Parliament is currently considering gradually raising the minimum contribution period to 172 quarters (43 years) for individuals born in 1973 or after (full implementation in 2035).

You can claim a full rate pension, no matter how many quarters you have paid into the system, when you reach 67.

Separate rules may apply for supplementary old-age insurance.

Private retirement saving

As a general rule, you are free to save as much as you like. However, you will have to save your after-tax euros and pay income taxes and social taxes on any investment income you make.

By concession, France has introduced many tax-efficient savings products or tax-sparing investment schemes (e.g. PEA, life insurance, Duflot schemes, etc.). An overqualified financial adviser would be happy to discuss these with you. See Wealth Management for Expats in France.

There are also occupational pension schemes (e.g. PEE, PERCO, etc.) and voluntary pension schemes (PERP). Basically, an occupational pension scheme attracts some tax relief but it is particularly interesting for the amount of extra-employer contributions (abondements) you can get each time you save money therein.

On the other hand, a PERP is the only scheme which is similar to Anglo-American pension funds. Contributions are tax-deductible up to the lower of:

  • 10% of your taxable income or €3,703 (whichever is higher), and
  • €29,265 per year.

The problem with French PERPs is that you can only withdraw 20% of your superannuation benefits as a lump sum. Otherwise, you must purchase an annuity.

International matters

Social security agreements

France may have entered into a social security agreement with your home country. These agreements are primarily designed to avoid discrimination and double social security coverage. They may cover employees as well as self-employed individuals.

In addition, social security agreements may “totalise” your periods of contributions or residence in France and in your home country. This is particularly helpful if your home country expects you to contribute for a long time (e.g. you must have contributed for 40 years to avoid a pension rebate).

International superannuation planning

Superannuation schemes are generally tax-efficient products, no matter the country in which they are opened. Thus, they are heavily regulated in order to avoid undue tax base erosion. Double taxation is possible though. Thus, you should check:

  • how your foreign pension payouts are taxed by the French Government (e.g. a US Roth 401(k))
  • when you can make tax-deductible contributions to a foreign pension pot (you cannot do this as you are resident in France), and
  • how your French pension benefits may be taxed in your home country.

Your home country may have a tax treaty with France to avoid double taxation on your foreign pensions. As a general rule, pension payouts are only taxable in your country of residence, but there are exceptions.

Retaining your foreign pension arrangements may be a practical option if you do not intend to stay in France. Nevertheless, cross-border superannuation planning is always on a case-by-case basis. It is strongly recommended to seek professional advice regarding this matter.

 

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