Tax Implications of Transferring a UK Pension to Canada

1
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.
2
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.

3
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 nationals 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.
• Its 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.

4
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
dont pay income tax on the same pension income
twice.
5
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 doesnt
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.
6
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.
7

• 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.

8
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, youll 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.
• Its 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.

9
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.
10
Restrictions on Holding a QROPS in Canada
In some cases, a QROPS in Canada might be
advisable, but this route isnt 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.

11
Choosing the Best Way to Access a British Pension
in Canada
As weve 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.
For more information Please click on-
https//chasebuchanan.com/ Contact us- 44 (0)
01228525045