Tax Implications of Transferring a UK Pension to Canada
Decisions
about the right way to access your UK pension in Canada should never be taken
lightly, with the risk of exposing lifetime savings to substantial (and often
unnecessary) taxation.
Here
we explain the tax implications of a Canadian pension transfer and explore some
alternative options that may prove beneficial.
Please
visit our Expat Pension Planning Advice for Retirement in Canada article for
advice about protecting your pension benefits, or contact our retirement
planning experts for further guidance.
Taxes on Transferring a UK Pension to
Canada
There
are two primary taxes, ordinarily payable when moving UK pensions to Canada
through a transaction that changes the country in which your fund is held:
·
Overseas Transfer
Charge: HMRC levies a 25% charge against international transfers, where a UK
fund is moved to an overseas scheme.
·
Lifetime
Allowance: a transfer constitutes a crystallizing event, so if your fund is
worth over the allowance (or LTA), you can attract a separate 25% charge.
Expats
can offset one tax against the other, but the issue remains that UK pensions
transfers to Canada can be costly if not properly planned.
Drawing on a UK Pension in Canada from
Overseas
British
expats have several ways to avoid diluting their retirement pot.
A
potential solution is to keep your pension in the UK and draw on your fund from
Canada. In this situation, the applicable taxes include:
·
Income tax –
depending on your residency status, this could be levied at 25% on the
non-resident Canadian tax basis or charged as overseas income on the relevant
provincial tax bracket.
·
Foreign national’s
resident in Canada must report the income on their T1 return in Canadian
Dollars. For lump-sum payments, the exchange rate is calculated according to
the rate on the day the funds hit your account.
·
If you withdraw a
regular payment from a British pension in Canada as a foreign national, you
must declare your income in CAD using an average conversion rate.
It’s
worth noting that some pension providers only make transfers to UK bank
accounts. Alternatively, your pension fund may permit payments into an overseas
bank but will usually charge a fee to do so, plus the exchange rate conversion.
Retaining a British Pension in Canada
While
you can keep your UK pension as-is, the rules about making contributions vary
depending on the type of fund. If you remain a UK tax resident and split your
time between the respective countries, you may be eligible for tax relief.
Expats living abroad as tax residents will not qualify.
Your
income tax status depends on your residency position. UK tax residents living
overseas may fall into taxation categories in both countries, in which case
dual taxation agreements come into effect, so you don’t pay income tax on the
same pension income twice.
Taxes on Transferring UK Pension to
Canada via SIPPs
A
Self-Invested Personal Pension (SIPP) is beneficial to protect retirement
wealth as an overseas expat since the pension wrapper doesn’t leave the UK.
Funds
grow free from income or capital gains tax, with tax relief on contributions if
you remain a UK resident, plus a 20% governmental contribution.
As
a Canadian permanent resident, you are not eligible for UK tax relief and must
declare your SIPP income through an annual return.
Benefits of SIPPs Over UK Pension
Transfers to Canada
SIPPs
transfers ensure you are not exposed to the 25% Overseas Transfer Tax, which
may be pertinent in your decision-making.
You
have far greater control over how your pension fund is invested, with potential
investments including:
·
Shares
·
Open-ended
investment companies (OEICs)
·
Unit trusts
·
Cash
·
Property
A
SIPP transfer can consolidate multiple pension schemes, reducing overall fund
management charges and opening up opportunities for further diversification.
The
first 25% of withdrawals from a SIPP pension are tax-free, although subsequent
withdrawals will be taxed, and the LTA applies. Therefore, it may be practical
to consider distributing your fund across other investment opportunities to
limit your exposure and avoid accumulating pension savings over the £1.073
million threshold.
Are Pensions Taxable in Canada?
You
will need to pay Canadian taxes on your pension benefits as a tax resident, and
the exact percentage depends on your status and overall income:
·
Non-resident tax
is charged at a standard rate of 25% (with some exceptions).
·
Income tax is
based on earnings brackets like in the UK, with federal tax rates payable
across Canada and additional provincial taxes depending on where you live.
The
additional provincial income tax rate can make a big difference.
·
In Saskatchewan,
you’ll pay another 10.5% on the first $45,677 and 12.5% on income up to
$130,506.
·
Local rates in
Nova Scotia sit at 8.79% up to $29,590, and 14.95% on the next $29,591, up to
$59,180.
It’s
wise to seek professional financial advice to calculate your exact liability
since you also need to factor in the federal basic personal allowance ($13,808
in 2021) plus individual tax credits set by each province.
Investing Pension Funds Vs Transferring
UK Pension to Canada
A
further consideration for expats is that many investment programmers and
schemes are available, sitting outside the traditional pension fund structure
and with compelling advantages.
Expats
can choose to invest in non-Canadian held funds, or redirect a lump-sum of
their pension into a higher-yield opportunity, often circumventing exposure to
taxes such as the LTA, and without being subject to the Overseas Transfer Tax.
These
investment programmers can support your retirement aspirations, generate
reliable returns, and broaden your portfolio to protect your financial future.
QROPS to Canada Transfers
QROPS
transfers are perhaps the most common method of transferring a pension
overseas, but there are several caveats to be aware of.
The
most significant issue is that the Overseas Transfer Charge will apply,
reducing your pension fund by 25%.
Restrictions on Holding a QROPS in
Canada
In
some cases, a QROPS in Canada might be advisable, but this route isn’t usually
suitable if you plan to relocate back to the UK or wish to reserve the right to
do so since you need to live overseas to qualify.
This
transfer method does not allow direct property investments and cannot be
leveraged to apply for borrowing against the pension.
The Pros and Cons of Canadian QROPS
QROPS
are undoubtedly tax-efficient and allow for larger lump-sum withdrawals, but
there are pitfalls to be aware of:
·
Withdrawal of
HMRC approval – schemes are regularly added and removed to the approved QROPS list,
with minimal authorized plans.
·
Overseas Transfer
Charge – UK pension transfers to Canada attract a 25% tax, payable in full at
the time of the transfer.
·
Lost benefits – defined
benefit or final salary pension schemes offer a guaranteed income, plus cost of
living adjustments. If you transfer a UK pension to Canada, you forfeit your
right to those benefits.
These
issues demonstrate why it is strongly advisable to seek support when deciding
how to hold your pension fund.
Choosing the Best Way to Access a
British Pension in Canada
As
we’ve seen, the tax liability associated with your pension benefits varies
widely depending on whether you are a permanent Canadian resident, the type of
pension you hold, and whether you transfer your fund or reinvest in an
alternative structure.
Overseas
transfers are complex, and while we hope this summary helps showcase the
important factors, we cannot understate the power of professional advice.
If
you wish to explore all of your options to access your UK pension in Canada,
please get in touch with the Chase Buchanan team for personalized,
straightforward assistance tailored to your retirement circumstances.
Original source: - https://chasebuchanan.com/tax-implications-transferring-a-uk-pension-to-canada/
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