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French Assurance Vie (French Life Insurance investment policies)

Last updated October 2017
(Projet de Loi de Finances 2018)

Over a third of the French population has an Assurance Vie. 
As a French resident, it’s one of the best ways to protect & grow your savings efficiently.
It’s also suitable for providing retirement income - with no restrictions on when or how much you can withdraw.

As in all countries, the financial industry in France pays commissions and bonuses to bank, insurance & financial advisory staff - so be careful when taking advice!

Assurance Vie continues to offer many key advantages and should be carefully considered by anyone living in France.

Full details of President Macron’s changes to taxes were presented at the end of September (Projet de Loi de Finances 2018). This may result in slightly higher taxes on withdrawals after 8 years for new capital invested in assurance vie as from September 28, 2017 - and full details are given below.

President Macron has also annouced an increase in social charges from 15.5% to 17.2%.

All the key existing advantages remain - in particular rolling up of gains tax-free and separate/reduced taxation on inheritance.

This page outlines:

- What is a French Assurance Vie?

- What investments can be held inside an Assurance Vie?

- Guaranteed euro funds (fonds en euros)

- How to manage the Assurance Vie?

- Tax rules for Assurance Vie

- Costs of setting up and running Assurance Vie

- Luxembourg Assurance Vie

- Choosing the right Assurance Vie
 

WHAT IS A FRENCH ASSURANCE VIE?

An assurance vie is simply a wrapper that holds financial investments.
It is similar to a Life Policy in other countries - but there are some key French rules worth understanding.

You initially transfer money from a bank account into the wrapper.
This money - less any set-up fees - is then used to purchase financial investments from a specific list.
It is therefore critical to check the quality of the investment list.

The value of each underlying investment will rise or fall according to the investment chosen.
The total value of your assurance vie is simply the sum of all the underlying investments.
You can often track the value of your investments via internet on a daily basis.

At any time you can change the underlying investments (from within the insurer’s specified list). This enables you to manage the investments as actively as you wish - which is important if you are to get the best returns.

At any time you can sell underlying investments and request a cash withdrawal. This is known as rachat partiel and can be done automatically each month if you require a regular income. If the policy has been open for less than 8 years - or if significant amounts are withdrawn - French taxes may be due.

At any time you can close down the Assurance Vie and withdraw all the funds. There are usually no exit charges. Alternatively you can convert the capital into a life-time annuity.

On the death of the policy-holder, the underlying investments are sold and proceeds transferred to named beneficiaries - minus any taxes.

Assurance Vie must not be confused with Assurance Décès which involves monthly life-time insurance premiums and a guaranteed sum paid to the beneficiaries in the event of death. If you stop paying these premiums you receive no capital and effectively loose the value of all the premiums you’ve paid.

 WHAT INVESTMENTS CAN BE HELD INSIDE AN ASSURANCE VIE?

According to the French Code des Assurances, an Assurance Vie can hold almost any publicly quoted financial instruments as well as property and loans.

In practice, French Assurance Vie is focused on collective financial investments (ie managed funds)
... and “Euro Funds”.

There are thousands of managed funds available on the international markets.
Most Assurance Vie will however provide you with a limited list to choose from - with a choice of up to around 500 independent funds in the better contracts

Funds may be specialised in specific geographies (US, Europe, Emerging Markets, Latin America, ...) or specific sectors (Health, Technology, Commodities, ...).
Funds can be limited to shares or to bonds - or mixed with specific quotas for each.

Some funds are generic, leaving the choice between shares & bonds, regions & sectors, entirely up to the fund manager himself - depending on his view of the economic environment.

Examples of managed funds found recently in various Assurance Vie contracts include:
- Fidelity Europe
- Carmignac Patrimoine
- Blackrock World Gold Fund
- Invesco Energy
- Schroder Emerging Asia
- Pictet Robotics
- ...
(this list is purely for illustration and should not be seen as recommendations for any of these funds...)

Some contracts limit the choice to only one or two funds - often managed by subsidiaries of the same bank that is selling the assurance vie, and hiding significant internal fees and commissions.

You should remember that the performance of managed funds depends on the quality of the fund manager (and his team of analysts). Given the trials of the last 10 years, it’s normally feasible to identify the more competent managers.
Please contact us if you’d like our recommendations on managed funds and fund managers.

I generally advise against “funds of funds” since these often accumulate costs without justification.

 GUARANTEED FRENCH EURO FUNDS (FONDS EN EUROS)

All Assurance Vie contracts in France offer at least one guaranteed Euro Fund.

A Euro Fund provides significant security and often reasonable interest - whilst French bank savings accounts currently provide hardly any interest at all.

Euro Funds are almost always managed internally by the insurance company offering the Assurance Vie.
The assets are focused on government bonds - but can also include corporate bonds, shares and property.

Gains achieved during the better years are set aside to smooth out any difficulties in future years.
Most Euro Funds will have set aside gains in 2016 - and so should be able to compensate for ongoing low returns as well as losses when selling government bonds in the future.

The insurer guarantees the original capital (net of entrance charges) invested in the Euro Fund.
It is a virtually zero-risk investment - though the strength of the guarantee obviously depends on the solidity of the insurer.

Typical returns (net of all charges) on Euro Funds were:
- 2014: around 2.5% although good funds still achieved over 3.3%
- 2015: around 2.3% although good funds still achieved over 3%
- 2016: around 1.9% although good funds still achieved over 2.5%

Given that interest rates are likely to rise in the medium term - Euro Funds could suffer from the depreciation of their bond portfolios and average returns will remain low (probably around 1.4% for 2017). I therefore consider it critical to identify the “better” Euro Funds  - and improve overall performance of your Assurance Vie by investing in some carefully chosen stockmarket funds (known as Unités de Compte or “UC”)

Please note that it is also possible to have the same type of guaranteed fund - but in a different currency - such as GBP or USD - often though subject to a minimum investment equivalent to around 300000€.

Please note that as a result of the Loi Sapin II, in the event of a financial crisis, the French authorities can order insurance companies to temporarily cease payments to policyholders. Whilst this may sound worrying, we consider it a “sensible precaution” to prevent a panic run on insurers and the underlying government bonds held by those insurers.

 HOW TO MANAGE THE ASSURANCE VIE?

As described above, your assurance vie is generally invested in a mixture of share and bond funds. You can’t normally choose individual shares and bonds yourself - but you can choose mutual funds that will buy and sell at the individual level.

You must therefore identify appropriate funds run by good managers - and buy and sell those funds at the right moment.

There are many ways to do this:
- choose a single “generic” fund with a good manager - and let that fund manager get on with it
- choose a profile (prudent, balanced, dynamic) & review the corresponding funds proposed by the insurer
- choose funds yourself without any assistance - especially if you have appropriate experience
- choose funds with regular assistance from your IFA (and we would of course be glad to assist)

You can also nominate a specific fund management company to choose funds for you (known as “gestion pilotée”) - however, the company is rarely independent and will usually promote its own funds.

COSTS OF AN ASSURANCE VIE

The key costs to consider are:

  • Initial Set-up Fee (Frais d’Entrée)
    • Zero for most internet contracts - otherwise generally between 1 and 2%
    • Negotiation is always possible for larger amounts (over 100k€)
    • It’s worth remembering that there will normally be no further entrance fees to underlying funds
      (often 2-4% if purchased outside an Assurance Vie)
    • Part of the entrance fee goes to the intermediary...so ensure you receive some benefits.
      If Cabinet Gregory assists you, any commission received is fully transparent - and deductible against the cost of  advisory services provided.
       
  • Annual Management Fee (Frais de gestion)
    • Usually around 1%
    • Slightly lower charges are often proposed by internet contracts
    • Part of the annual fee will go to the intermediary ...
      If Cabinet Gregory assists you, annual fees received from the insurer are fully transparent. Cabinet Gregory provides quarterly portfolio reviews & regular updated recommendations for each client. If fees are received directly from the insurer, there are normally no further charges for time spent on this service.
       
  • Gestion pilotée
    • If you delegate portfolio management to a third-party company there is usually a further charge (usually around 0.5%).
    • Cabinet Gregory can provide independent advice without involving this extra cost.
       
  • Transaction Charges (Frais d’arbitrage)
    • Often around 20€ or less for transactions carried out through internet
    • Otherwise transaction charges for most contracts are around 1%
    • Watch out for additional charges if you use “sophisticated” automatic transactions
      (eg “stop loss”)
       
  • Charges within the underlying funds
    • There are usually no entrance charges to managed funds purchased within an assurance vie
    • There will be annual management charges within each managed fund.
    • Given the extremely low returns on safer investments, lower-risk funds need to keep charges low. There’s litle point in buying a fund likely to achieve 2% gross if it charges 2.5% fees - in addition to your 1% annual policy charge.  
    • However, higher-risk funds may benefit from higher charges - if put to good use such as paying for high quality analysts to evaluate target companies.
    • You must therefore consider overall performance and quality rather than just charges - as well as your risk requirements.
    • In the event that the fund manager changes or the performance deteriorates, it is easy to switch to a different fund - whereas you cannot easily switch to a different assurance vie contract.

Hence the importance of choosing the right Assurance Vie from the start.

TAX RULES FOR ASSURANCE VIE

These rules are based on the Projet de Loi de Finances 2018. Formal parliamentary approval is expected before the end of 2017. If Parliament makes any significant changes to the rules (which we consider unlikely) we will obviously update this website.

(Please note that special rules apply to old contracts - opened before 1990 - which are not described here)

Most investments build up entirely tax-free inside the Assurance Vie wrapper.

Interest earned on the guaranteed Euro Fund is subject to social taxes at source (at the rate of 17.2% as from 2018). Stockmarket funds (UC) held inside an Assurance Vie are NOT subject to this immediate social tax.

Each time a withdrawal is made, the growth of the overall wrapper is measured.
The withdrawal is considered to be part capital and part gain – using the same overall growth factor.
It is this effective “gain part” within the withdrawal – and not the whole withdrawal itself - that is taxed.

At the time of withdrawal, the insurer will automatically deduct a tax “payment on account” (Prélèvement Forfaitaire Obligatoire - PFO) on the withdrawal gain at the rate of:
- 12.8% (+17.2% social charges) for contracts up to 8 years
- 7.5% (+17.2% social charges) for contracts above 8 years

When completing your annual tax return, you will choose between two methods for calculating the “definitive tax” (leading to reimbursement if less than the payment on account at the time of withdrawal) :

- either treating the “gain” as normal income (Impôt sur le Revenu - IR) which is added on top of your existing salary/pension/etc and therefore taxed at your top band rate. If you have limited annual income, this is often the best choice.
If the policy is over 8 years old, you receive an annual tax-free “gains” allowance of 9200€ pa (couple) and 4600€ (single).
Social charges at 17.2% are also applied on top (to which the tax-free allowance does not apply)

- or applying the following fixed rates for assurance vie which depend on the age of the policy and the amount invested.

    During the first 8 years, if the outstanding capital across all your assurance vie policies at the prior year-end was
    - less than 150k€: the “gain” is taxed at 35% if the policy is less than 4 years old and at 15% if the policy is between 4 and 8 years old
    - more than 150k€: the “gain” is taxed at 12.8%
    In both cases, social charges at 17.2% are also applied

    After 8 years, if the outstanding capital across all your assurance vie policies at the prior year-end was
    - less than 150k€: the “gain” is taxed at 7.5%
    - more than 150k€: the proportion of the “gain” relating to new capital added since 27/9/17 beyond the 150k€ threshold (as a percentage of total capital) is taxed at 12.8%. The remainder of the “gain” is taxed at 7.5%.
    In both cases, you receive an annual tax-free “gains” allowance of 9200€ pa (couple) and 4600€ (single).
    In both cases, social charges at 17.2% are also applied on top (to which the tax-free allowance does not apply)

    For contracts with dual policyholders (expiring on second death) the above mentioned 150k€ thresholds are increased to 300k€.

If you do not use an Assurance Vie you will pay either your top band rate income tax - or the new fixed rate tax of 12.8%- plus 17.2% social taxes - on all gains, dividends & interest credited to your portfolio each year - even if you make no withdrawals. Hence if your objective is long-term investment, it is generally of interest to use an Assurance Vie wrapper.

In the event of death, the proceeds are distributed to the beneficiaries (net of social taxes) and potentially subject to French inheritance taxes:
- Distributions to the spouse or PACS partner are exempt from inheritance tax
- All other beneficiaries have a specific assurance vie tax-free allowance of 152,500€ each
(unless investments were made after the policy holder’s 70th birthday).
- Any additional assurance vie distributions above these allowances are taxed at 20%, with an upper rate of 31.25% applying to any excess above 852500€.

Please note that the tax authorities can apply the rules and penalties of “abus de droit” if the only reason for setting up the Assurance Vie was to save tax...

Please contact us if you require further information or simulations of taxes on Assurance Vie.

 LUXEMBOURG ASSURANCE VIE (LIFE POLICY)

French tax rules allow you to open an assurance vie in any EU country and still obtain the same tax benefits - so long as the insurance company and individual make the appropriate declarations in France.

Luxembourg provides life policies that are particularly suitable for high net worth French residents & expats. These policies meet the French tax requirements, whilst benefiting from more flexible investment rules available under Luxembourg Insurance law.

There are many circumstances when a Luxembourg Assurance Vie can be appropriate, for example:

- to eliminate wealth tax on capital during the first five years of French residency
- to invest in a much wider range of financial supports - including individual bonds and shares
- to invest in multiple currencies (euros, dollars or sterling)
- to obtain a flexible life policy that will remain valid if you move to a different EU country
- to ensure services and documentation in English

To have access to the widest choice of supports you must create a “dedicated fund” or fond dédié (requiring a minimum investment of 250k€) to be held inside the Assurance Vie. This fund must have its own manager who must respect a pre-defined risk agreement specifying  types of assets to be held. For this, it is important to understand the different categories (N, A, B, C, D) permitted within Luxembourg rules.

However, you can also set up a “normal” Luxembourg Assurance Vie with a guaranteed Euro Fund and a standard list of managed funds - and without the higher costs of a full dedicated fund.

Fees are generally higher than for French policies.
Make sure you have written confirmation of all costs before proceeding:
- Entrance, annual administration, and transaction fees (payable to the insurer)
- Annual portfolio management fees - if you set up a “dedicated fund”
- Annual holding and transaction costs (payable to the depository bank)

Please contact us if you require full details of the rules, costs and suggestions for Luxembourg policies.

CHOOSING THE RIGHT ASSURANCE VIE

Apart from the above points, you should consider the reliability of the insurance company (in whose name all assets are held) and the ease of communicating with them.

When setting up the contract there will also be a number of questions to consider, for example:
- do I use the standard contract or should I use a “contract de capitalisation” (eg to reduce wealth tax)
- do I use the standard beneficiary clause or should I specify my own (eg to reduce inheritance tax)
- what should be the initial allocation of investments?

During the lifetime of the contract, you will probably need to:
- buy and sell investments within the assurance vie
- update details of beneficiaries
- organise withdrawals and declare/pay associated taxes

Cabinet Gregory has reviewed a large number of French (and Luxembourg) Assurance Vie contracts - including the latest  “zero entrance fee” internet offers -  please don’t hesitate to contact us if you would like assistance in choosing or organising such contracts.

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