The Federation of European Independent Financial Advisers

Last time we focused on the important area of inheritance planning and wills, outlining the value of careful planning, including mitigation of French inheritance tax using the Assurance Vie. This month, to follow on from that, we take a broader look at what options are available for generating a financial return on savings and investments in the current environment of such low interest rates globally.

As a reminder, we are Philip Oxley, Sue ReganRob Heskethand Derek Winsland. Together we form Spectrum’s team in the Occitanie.

What are current interest rates?
Most of us in developed economies have lived in a low interest rate environment for over 11 years. In the UK, for example, the base rate was 5.25% in March 2008. One year later, after the start of the global financial crisis, it was 0.5% and remained so for over seven years before a further post-Brexit vote reduction to 0.25% in August 2016. Recent years have seen small incremental increases to 0.75% before the impact of Coronavirus resulted in the rate being slashed to 0.1%. It has been a similar story in the US and the Eurozone, where the ECB base rate is currently 0%.

Why have interest rates been so low for so long?
There are numerous reasons. These include the cutting of rates following the global financial crisis of 2008/9 in an effort by central banks to stimulate economic growth (the same reason rates have been reduced during the Coronavirus pandemic). Beyond these economic shocks, there also seems to be evidence that central banks’ firm commitment to maintaining low and stable inflation has been successful. The primary tool central banks use when inflation threatens to take flight is to increase interest rates. In most developed countries, there has been little sign of this threat and therefore inflation and interest rates have remained at low levels.

Who has benefitted from this low interest rate environment?
In a word – borrowers! Consumers with mortgages, credit card debt or car loans, businesses (many of which rely on borrowings for investment or just day to day cash-flow requirements) and finally, governments, who typically rely on the credit markets to some extent to finance their spending.

Conversely, savers have suffered hugely during this low-interest rate environment, working hard to find some level of return on their funds. It has been particularly hard for those who rely on savings for their income, such as the retired and elderly. Similarly, risk averse consumers who avoid stock market investments, preferring a more cautious strategy to nurturing their savings, have been heavily penalised for this careful approach. And worse, there is no sign of any significant increase in rates in the foreseeable future.

In the search for financial returns, many in the UK have invested in tax-efficient products such as ISAs, Premium Bonds and other NS&I products, EISs and VCTs. But for those who have subsequently become a tax resident in France, it is important to understand that all these products are taxable here.

How can you achieve a better rate of return on your savings as a French resident?
One product stands clearly above all others, which is the insurance-based investment called an Assurance Vie (AV). The AV is a French compliant life assurance bond which provides numerous tax concessions on investment growth, income and capital withdrawals and significant advantages when it comes to estate planning (which was covered in detail in our last Newsletter).

The advantages of this product are numerous and include the following:

• Shelter from tax on all income and gains, and social contributions, whilst funds remain inside the AV. At the point of withdrawing funds, only the gain element is potentially subject to tax and social contributions.
• Access to capital at all times, although as AVs are designed for longer term investment, withdrawals in the early years will reduce tax efficiency and (depending on amounts withdrawn), may incur exit penalties. The tax efficiency increases over time as compound returns accumulate tax free, with the additional advantage after eight years of an annual tax-free withdrawal allowance of (currently) €9,200 for a married couple and €4,600 for a single person.
• The ‘tax clock’ to full tax efficiency starts on day one of the policy and funds added later benefit from this original start date.
• Estate planning flexibility in the form of protection from forced heirship succession law, allowing nomination of beneficiaries in accordance with personal wishes. Proceeds from an AV policy can be distributed between any number of beneficiaries, each of whom can receive €152,500 free of succession tax (so long as the policy was established and funded before the age of 70), with amounts in excess of €152,500 liable at 20% (and at 31.25% for amounts exceeding €700,000).
• Investment flexibility to match individual objectives, risk profile and currency preference (options including Sterling, Euro and US Dollar) and simplified tax reporting and annual declarations.

 

This tax efficiency is significant, with two simplified examples below illustrating what a valuable product the AV can be as a future source of income:

Example No. 1:

Fran is 52 years old and invests €120,000 into an AV
• 10 years later the fund is valued at €180,000
• Fran is now 62 years old and wants to draw an annual income of €12,000 per year (€1,000 per month)
• The gain on the investment is €180,000 – €120,000 = €60,000. As a proportion of the fund that is €60,000/€180,000 = 33.3%
• The gain element of €12,000 pa is 33.3%, i.e. €4,000
• Because Fran has held this AV for more than 8 years, the effective tax-free allowance for single people applies and is €4,600 per year. The gain element of drawing €12,000 pa is €4,000 (less than the €4,600) and therefore Fran will pay no income tax on drawing €12,000 per year from the AV.

Example No. 2:

Sam and Chris are 60 years old and invest €300,000 into an AV
• 8 years later the fund is valued at €400,000
• They are now 68 years old and want to draw an annual income from the AV of €25,000 per year (€2,083.33 per month)
• The gain on the investment is €400,000 – €300,000 = €100,000. As a proportion of the fund that is €100,000/€400,000 = 25%
• The gain element of €25,000 pa is 25%, i.e. €6,250
• Because Sam and Chris have held this AV for more than 8 years, as a couple their effective tax-free allowance is €9,200 per year. The gain element of drawing €25,000 pa is €6,250 (less than €9,200) and therefore they will pay no income tax on drawing an income of €25,000 per year from their AV.

Social charges apply to the gain element of withdrawals, at either 17.2% if France is responsible for the cost of your healthcare, or 7.5% if you hold an S1 certificate.

To produce a tax-efficient income stream later in life (including to supplement pension income in retirement), and to provide significant estate planning benefits (including protection from forced heirship laws), the Assurance Vie should for most people be a central feature of their financial planning strategy.

Finally, as a short-term solution for holding cash tax efficiently, there are three types of French bank accounts to consider. For general guidance, it is advisable to hold six months of your average monthly outgoings as a contingency fund for unexpected expenses. These accounts are detailed below:

➢the Livret A, available to both residents and non-residents, in which you can deposit up to €22,950 and earn interest of 0.5% per annum.
➢the Livret Développement Durable, available to French resident taxpayers only for deposits up to €12,000, also earning interest of 0.5%.
➢the Livret Epargne Populaire, available to French resident taxpayers only, paying an extra 0.5% interest for deposits up to €7,700 if your income does not exceed a certain threshold.

​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​The above article was kindly provided by The Spectrum IFA Group – Occitainie and originally posted at: ​​​​https://www.spectrum-ifa.com/investments-in-the-current-climate/