Freedom, transferability, taxation : the future Pacte legislation signals a revolution in retirement savings

Despite all the pronouncements, warnings and other pressures exerted by the banking and insurance industries, the upcoming legislative package known as Pacte has already chalked up one achievement by putting the interests of the retirement saver first. The new measures announced by the Minister of Finance have indeed promised greater freedom of choice, greater administrative simplicity and greater transparency in scheme management. What a pleasant surprise! The official detailed announcement of these measures is expected early June, in the meantime let us take a look at the main points known to date.

Freedom: more possibilities of taking a lump-sum payment.

The possibility of taking one’s pension savings as a lump-sum has been at the centre of heated debates between insurance professionals and the Finance Ministry but is clearly one up for the saving public. Up to now, except in special cases, people with private retirement saving plans (PERPs, Madelin-type policies or article 83 schemes) took payment on retirement in the form of a lifelong annuity. In the future, they will be able take an immediate cash payment of that part of their retirement savings originating from additional voluntary contributions, incentives or profit-sharing.

Insurers are of the opinion that this will mean newly retired people will wrongly assess their financial needs for later in life and will spend such lump-sums all too quickly. Obvious having that choice can lead to people making mistakes! We would like to think that this new freedom will be used with discernment. Making retirement savings more accessible may well make saving for retirement much more attractive at a time when this looks too much like life insurance.

Transferability: monitoring investment performance made easier.

Taking savings as a lump-sum reinforces the impression that the investor actually owns his or her retirement savings. This is also the case with transferability, which will allow an employee to transfer his/her savings from one plan to another, without too much hassle: Today, when someone leaves a company and has an “article 83” private scheme then he/she must leave the policy with the former employer. If the new employer does not offer the same plan but prefers a Perco scheme then things get quite complicated. If, after that, the employee sets him/herself up in business then they become eligible for a Madelin scheme. And so, that person now has retirement savings spread across three asset managers and subject to three different tax packages – with the unpleasant feeling of not controlling one’s savings.

In view of these difficulties, the French Insurance Federation (FFA) suggested designing a new product to be called Revavie which would bring together Article 83, PERP and Madelin contracts into one scheme. This proposal, which excluded PERCO schemes, also raised new questions relating to the convergence of these three schemes but was finally superseded by the right to transfer retirement savings.

Taxation: additional voluntary contributions to be tax deductible.

All these measures of simplification and freedom would not have had the same flavour without a boost from the tax man. The Finance Minister has therefore decided that voluntary contributions paid into all these schemes would be tax deductible in that year, up to the limits in force. An opportunity that is certain to attract a lot of people. Obviously, if contributions come with tax deductibility then they will become taxable once paid out. The icing on the cake is the fact that an extra tax allowance of 10% will be offered on payment taken in the form of an annuity.

It has also been announced that the flat-rate levy on employers’ contributions (the so-called forfait social) will be reduced on schemes offering manager-guided funds that invest part of their assets in SMEs and mid-caps. In the first instance, these two conditions are designed to place retirement savings in a long-term perspective by increasing the share of more dynamic investments. In the longer run, the aim is to redirect part of people’s savings in France towards corporate financing i.e. the real economy.

When all is said and done, the Pacte legislative package looks like it brings enough surprises to kick-start a rather lethargic retirement savings market. It is worth mentioning that the retirement savings build-up is scarcely more than 200bn Euros whereas life insurance accounts for seven times more. For once, the reform broached is not just a bunch of paraphernalia that claims to be good for the saving public but which no one can make head nor tail of. On the contrary, the simplicity and freedom in the measures announced are a real breath of fresh air for the saving public. And these are concepts we find soundly attractive. 

Damien Vieillard-Baron.