In the wake of street protests against government reforms, Steven Grover demystifies the state pension system in France and the changes to retirement age.
Millions have taken to the streets to protest against the French government’s proposed overhaul of the state pensions system and the progressive raising of the retirement age from 60 to 62 and the full pensionable age from 65 to 67 between now and 2018. Both houses of parliament have adopted the key clauses of the pension reform bill with the Senate due to follow suit imminently. A final vote is expected in late October to fully pass the bill.
Under the current rules, both men and women in France can retire at 60, providing they have paid social security contributions, although they might not be entitled to a full pension until they are 65. If the new rules are adopted this will rise the retirement age to 62 by 2018, and the pension age to 67, which the government says will save €70 billion.
So how does the state pension system work?
The amount of pension received will not change, and even if the changes to the retirement age and required years of contributions are adopted, it will still be one of the most attractive state pension schemes in Europe.
Retraite De Base
Currently for a salaried person (and auto-entrepreneurs) to receive a full basic pension they must have contributed for at least 164 trimestres - so 41 years, this is slightly dependant on age but is the case for those born after 1952. The Retraite De Base is managed by the Caisse Nationale d’Assurance Vieillesse (CNAV).
A full pension is calculated as follows:
• Take the average of the 25 highest paid years in your career (linked to inflation).
• Your pension is then 50% of this amount, though it is capped by using the social security annual ceiling (€34,620 in 2010). So the maximum pension would be 50% of this – i.e. €17,310 per annum.
• If you don’t qualify for a full pension then you have the option to either purchase additional trimestres, which can be expensive, or you can take a reduced pension which is proportional to the number of trimestres you have contributed for, i.e. if you had 123 trimestres your pension would be 75% of what your full pension entitlement would have been.
The biggest drawback with the Retaite De Base is that it is based on the principle that people currently working are funding the pensions for those who are already retired. This is being compounded by the number of pensioners rising due to the post-war baby boom and unemployment levels continuing to increase month on month. As a consequence the number of people funding pensions is decreasing so it has become harder to maintain this model. According to government sources France’s pensioner population is forecast to rise to 18 million by 2020 and 23 million in 2050. Therefore if nothing is done the existing pension deficit of €32 billion could rise to some €50 billion a year by 2020 and to €100 billion by 2050.
All employees also benefit from a retraite complémentaire for which contributions are compulsory. Arrco (Association pour le régime de retraite complémentaire des salariés) covers all employees in the private sector. Management staff (cadres) also must contribute to the Agirc (Association générale des institutions de retraite des cadres) supplementary pension.
In return for the contributions paid, employees obtain pension points on a monthly basis. These points give the right to a supplementary pension income at the legal retirement age. The pension will be financed by the contributions of those who are still working, and payment of the pension is guaranteed because the contribution by those working is compulsory.
The amount of points received is calculated as follows:
• Divide the value of contributions by the purchase price of a point (€14.4047 per point for Arrco, and €5.0249 per point for Agirc for 2010).
• At retirement the accumulated points are converted into euros by multiplying them by the value of each point. (€1.1884 per point for Arrco, and €0.4216 per point for Agirc in 2010). This calculates the annual pension entitlement.
For professions libérales it is a lot more complicated as the régime de base is managed by the CNAVPL (Caisse nationale d’assurance vieillesse des professions libérales) and is based on points system like the Arrco/Agric instead of taking an average salary.
Artisans and commerçants still come under the same régime de base as employees, but this is overseen by the Régime Social des Indépendants (RSI).
For the retraite complémentaire it is again complicated as there are 11 different organisations who manage it for this sector, based on profession. Most people will probably be attached to the Caisse Interprofessionnelle de Prévoyance et d’Assurance Vieillesse (CIPAV), this includes auto-entrepreneurs and again functions on a points system like the Arrco/Agric.
What private schemes are available?
The main private, personal pension is the Plan d’Epargne Retraite Populaire (PERP) which was only introduced in 2003. Anyone can save from as little as €50 per month into a PERP. The investor then receives an income tax credit for payments made into it, up to 10% of their revenues from professional activity the year before (after deducting 10% for professional fees). This is however limited to eight times the annual amount of the sécurité sociale ceiling, so a maximum deduction of €27,696 for 2010, and the minimum deduction is 10% of this ceiling (i.e. €3,462).
With most contracts it is possible to stop making payments for a time or to increase or reduce the payments as the situation demands. The payments made into the PERP are locked until retirement when the investment ‘pot’ is used to buy a type of annuity which, according to the terms of the contract, can be fully passed on to the surviving spouse on death.
The only circumstances under which money can be taken out of the PERP before retirement is if the investor’s business activity is ceased due to a liquidation judgment or if they contract an illness/disability that makes it impossible to exercise their profession. In some cases it is possible to recover some or all of the PERP in the case of divorce, or the death or incapacity of a spouse.
An assurance vie contract may be a more appropriate place to save on a monthly basis, as the withdrawals from such a contract are not required to buy an annuity and do not have to be held until retirement age. The premiums invested do not receive income tax credit or rebate but withdrawals are taxed at very low rates, especially after the contract has been in place for more than eight years.
In addition, and especially if portability of pension income is a concern, many “offshore” assurance vie providers offer tax compliant investment and savings products in other European jurisdictions. So for example if the policyholder was to move back to the UK from France, then the French assurance vie policy could be converted to a locally tax compliant UK ‘version’ with no cost and would still offer favourable taxation on withdrawals.
Over 22 million individuals or couples have either invested lump sums or save regularly into assurance vie contracts, and neither French capital gains tax nor income tax applies whilst the funds remain inside the policy. Even when an amount is withdrawn only the growth element is taxable. Any gains are liable to ‘social charges’ of 12.1% when they are drawn down, plus taxation on a sliding scale depending on how long the policy has been in force:
35% for a policy less than four years old,
15% for policies between four and eight years old and
7.5% for all policies over eight years old.
After eight years there is also an annual tax-free allowance of €4,600 (single person) or €9,200 (married couple) of gains.
For those French resident British expatriates who intend to retire permanently in France and who have pension funds left in the UK, it is a very good idea to investigate whether transferring and consolidating their UK pension funds using a Qualifying Recognised Overseas Pension Schemes (QROPS) or Qualifying Non-UK Pension Schemes (QNUPS) would help their situation in France and offer more control over taking non French pension benefits.
The information provided in this article was obtained from public sources including the AGRIC, ARRCO & CNAV websites, and is only provided as a guide based on our understanding of current legislation. If you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.
Steven Grover is a partner with the Spectrum IFA Group in Paris: