In general, some people want to retire in Canada and for that, they want to transfer their pension plan to Canada. In most cases, transferring a pension to Canada from another country seems to be rather advantageous.
However, one should always contact their financial planner before making such important decisions so that they can be sure of all the potential advantages and disadvantages.
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The information in this article is prepared by my team for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.
Benefits of transferring a pension to Canada
People should be aware that transferring a pension to Canada may involve taxes and it is wise to take note of all the details related to taxes before doing so.
Nevertheless, transferring your pension to Canada allows you to have a happy life after retirement.
By transferring the pension to Canada, an individual can reduce the paperwork involved, and would not be required to deal with many tax agencies.
Also, he or she can avoid the discomfort caused by the fluctuation in currency exchange rates which sometimes decrease in value while resulting in a loss.
If the individual dies, the assets would be held in Canada by that time and there would be a single tax agency to deal with.
However, transferring a pension into Canada is not as simple as it sounds because it is considered a complex process.
There are some factors to be taken into careful consideration such as the effective regulations, penalties (if any), income taxes, other taxes, etc., while transferring a pension into Canada or passing them on to the next generations after the death of an individual.
Eligibility
To know whether your pension qualifies to be transferred, two major aspects are to be noted. The first one is your residency status while the second one is the type of your pension plan.
To be able to transfer your pension to Canada, a person should be a Canadian resident for tax purposes. Some people might be citizens of Canada, yet they may not qualify as residents for tax purposes.
Apart from that, there may be certain terms and conditions of pension plans that won’t allow an individual to transfer their pension plans to Canada.
For instance, people can’t transfer their UK pensions to Canada until they reach a specific age. Therefore, it is highly suggested to be aware of all the terms and conditions of your pension plan before transferring the pension to Canada.
Foreign pension plan benefits to an RRSP
Well, to determine whether your foreign pension plan benefits can be rolled over to an RRSP, you must have to consult with your financial advisor.
The financial advisor would be able to tell if your pension plan is eligible according to the Income Tax Act.
If your pension plan is eligible, you will be allowed to make a special RRSP contribution. There won’t be a specific requirement of having an available RRSP contribution space for being able to profit from this option.
Even if your pension plan is not eligible, your funds can be transferred to your RRSP.
Nevertheless, you won’t be able to profit from a special RRSP contribution and your general contribution would be affected because of this. There is even a possibility of double taxation in such cases.
Taxes
The amount payable depends on various factors, which is why you should have proper tax calculations before you can transfer your funds.
The factors that are to be noted are the foreign taxes to be paid during the time of withdrawal and the credit for foreign taxes paid. Depending on the tax agreement held between Canada and the other country, income tax rules apply.
When a person is required to pay taxes in a foreign country, he or she can get all the funds or a part of the funds while being offered a tax credit on the foreign taxes paid.
This tax credit should be applied to their income tax return during the year in which they transfer the money.
The calculation of taxes tends to be quite complex, and some conditions are to be satisfied. For this, you must acquire advice from your tax planner or financial advisor.
Other fees
Penalties and some additional costs may apply depending on the amount that is withdrawn from the pension plan. Some other factors also influence these costs, i.e., age, duration of the pension plan, pension plan provider, etc.
These penalties and additional costs such as transfer fees are not eligible to be claimed as a credit for the foreign taxes paid.
Having discussed that, let us have a look at the scenario with the USA and France before we get to ‘Transferring UK pension to Canada’.
United States – In the United States, a 401(k) plan is similar to an employer pension plan in Canada, and at the same time, there is IRA that is somewhat similar to an RRSP.
In general, the contributions made to a 401(k) plan could be transferred to Canada, for which the contributions should have been made while the person was not a Canadian resident.
Along with that, a person’s residency status also has an impact on the rules and regulations related to pension transfers.
France – For some pension plans and annuities in France, taxes are imposed by the French government and not by the Canadian government. However, this would result in double taxation when the amount is transferred into your RRSP.
Transferring UK Pensions to Canada
To discuss the process of transferring UK Pensions to Canada, you must get to know some general information.
First, let us know what can be transferred and what cannot be transferred.
- Defined Benefit Pension
It is not possible to transfer defined benefit pension directly to Canada. However, arrangements can be made for pension payments to be due under some schemes.
By doing so, the payments would be made directly into the individual’s bank account after retirement as per the existential currency exchange rates at that time.
If the pension is not in payment, then a person can cash in the assets and make a cash equivalent transfer. This is calculated by an actuary (financial analyst) and won’t be the fund value.
In such a situation, the transfer can be made into a Canadian RSP. However, it is not so beneficial for an individual to opt for a cash-in value.
- Defined Contribution Pension
A Defined Contribution Pension scheme of the UK can be transferred into a Registered Retirement Savings Plan (RRSP) in Canada.
However, the transfer can be done only if the chosen Canadian product is present in the list of the UK ROPS (Recognised Overseas Pension Scheme).
- Income Drawdown
Income Drawdown of a pension scheme of the UK can be transferred into a Registered Retirement Savings Plan (RRSP) in Canada.
However, the transfer can be done only if the chosen Canadian product is present in the list of the UK ROPS (Recognised Overseas Pension Scheme).
- Annuity (in payment)
An annuity is a fixed amount that is paid to an individual every year, and it cannot be directly transferred to Canada.
Anyhow, arrangements can be made for pension payments to be due under some schemes, through which, the payments would be made directly into the individual’s bank account after retirement (as per the existential currency exchange rates).
- UK State Pension
If you have worked as an employee in UK’s public sector, then you won’t be allowed to transfer your government state pension to a Canadian state pension.
Nevertheless, you are allowed to claim your UK state pension after reaching the normal state pension age while living as a UK pensioner in Canada.
For this, the payments would be made directly into your bank account after retirement (as per the existential currency exchange rates).
- NHS (National Health Service) pension
NHS pension can be transferred to another UK pension scheme, but it can’t be transferred to Canada.
The reason for that is the availability of exceptional benefits offered with the NHS pension, which makes it to be one of the best pension plans all over the world.
Note – If you have a UK pension savings scheme, you should stop contributing towards it after moving to Canada within 5 years.
There is a limit, i.e., £3,600 per year, for 5 years and after that, the individual cannot contribute even if they have a UK bank account.
QROPS
In general, most people transfer non-government pensions to Canada with the help of Canadian QROPS RRSPs.
‘QROPS’ stands for ‘Qualifying Recognised Overseas Pension’ and ‘RRSP’ stands for ‘Registered Retirement Savings Plan’. Also, you might hear ‘RRIF’, which stands for ‘Registered Retirement Income Fund’.
Direct transfers can’t be made into QROPS RRIF and a person should transfer the pension to QROPS RRSP first before they can transfer their pension into a QROPS RRIF.
Any pension plan can be transferred to Canada, only with the help of a Qualifying Recognized Overseas Pension Scheme (QROPS) as it is the only financial instrument to do so.
In October 2019, there were only two companies that were approved by the UK government to maintain QROPS accounts. Those two companies were ‘IA Clarington’ and ‘IAG’.
However, in January 2020, another company named ‘Cidel Alternate Retirement Plan (CARP)’ was also added to this list.
You should also consider the availability of QROPS in Canada if you are already living in Canada or consider moving there so that you can get access to your UK pension.
Transfers made to ROPS, which is not qualified, would be considered an unauthorized payment while having a surcharge of 15% and can range up to 55%.
Some major benefits
Given below is a list of some of the major benefits of transferring pensions with the help of QROPS.
– You can bring back your investments into your home country.
– You will be able to avoid paying additional charges in the form of currency conversion charges.
– Complex tax issues could be solved on the surplus Lifetime Allowance (LTA) limits. By the time of writing this article, the current limit is at £1,073,100 while being further to UK’s March 2021 budget and is frozen until 2026. The tax on excess for transferring to QROPS is 25%.
– The income stream would be identified easily, and the chance of higher income is made possible.
– The funds are also flexible as they exist within an RRSP structure and are not locked in.
– The investment choices also increase by a lot, when a person opts for QROPS.
– The process of estate administration is also done easily and effectively.
Who needs QROPS
– Any person holding a non-state pension scheme who is a taxpayer in Canada and is willing to live in Canada for a minimum of 5 years.
– A person should have an age of at least 55 years to be able to open a QROPS account.
– Defined Benefit pensions and Defined Contribution pensions greater than £30,000, while having a guarantee of what a person would be paid when they retire require an FCA approved, qualified UK financial planner to complete analysis of a person’s pension scheme and offer a certificate of advice.
In the UK, the number of firms that have the required qualifications and specialize in this service is few. You can consult us to get the services regarding this aspect, which are proven to be beneficial.
– Public-sector pensions such as pensions related to National Health Service, Teachers, Civil Service, etc., might not be transferred outside of UK.
Crucial information related to a QROPS transfer
Let us now know about the important information regarding a QROPS transfer.
– Mutual funds and segregated funds are the only available options as of now.
– Most people don’t know the fact that a QROPS account can only be opened by an MFDA licensed advisor and not an IIROC broker.
– A QROPS can only be set up in the form of an RRSP or RRIF, while it is not possible to transfer to RRIF directly. Also, the individual should have an age of at least 55 years to be able to open a QROPS account.
– The minimum age requirement is 55 years according to the regulations in the UK, and the benefits cannot be enjoyed before that. Arrangements made in QROPS offer more amount of flexibility, the potential for higher income, and an increased amount of freedom compared to a UK pension.
– The transfers are made in British Pounds and the institution that receives them would convert the money into Canadian dollars as per the existential currency exchange rate of the day on which the funds are deposited.
– The preferred way of transferring funds is via an electronic wire transfer, and in some cases, it is done with the help of a cheque.
– Even if multiple pensions have been transferred, there is no necessity for opening multiple QROPS as a single QROPS should suffice.
– Defined Benefit pension transfers are much more complex and take up to 3-6 months to get deposited.
– Defined Contribution pension transfers happen within a few weeks as there is no requirement for advice.
Information on taxes
As with any other financial instrument, taxation is a very important aspect regarding QROPS, and therefore, let us know about the general information related to taxes.
Similar to Canadian RRSPs and RRIFs, withholding taxes are applicable on the funds withdrawn from a QROPS account and this specific amount is added to the individual’s taxable income in that particular tax year.
Non-UK residents are allowed to enjoy a tax-free lump sum amount of 25% of the entire funds in the account. The rest is taxed as income as per the Canadian tax rules.
It is better to contact your pension provider to know whether you can access the 25% before the pension transfer because it may vary.
The institution providing QROPS is necessitated to report all the transfers and withdrawals made from a QROPS in the first 10 years after the actual transfer date to HMRC.
People who transferred to QROPS before 6th April 2017 should have to be non-UK residents for at least 5 tax years before making a withdrawal.
For those who transferred to QROPS after 6th April 2017, the residence period was extended to 10 consecutive tax years. Keeping both instances in mind, the situation is often referred to as ‘5 or 10 years non-residence rule’.
Payments and transfers from a QROPS on 6th April 2017 or after that are subject to rules regarding UK taxation for five years after the transfer date, which is regardless of their residency period as a non-UK resident.
This is called the ‘5 years from Transfer rule’ and as a person has to be more than 55 years old to open a QROPS in Canada, there won’t be any tax implications.
When you are a UK resident while withdrawing from a QROPS, the member payment charges and taxes would be a lot.
When an individual’s payments come under the category of ‘unauthorized payments’, they are subject to UK taxes and other penalties (if any). The transactions are reviewed by the HMRC and there can be an unauthorized payment charge of 40% along with a possible surcharge of 15%.
Pension funds are generally tested against the LTA available, and there would be a fee of 25% known as ‘LTA charge’ imposed on the excess.
When the transferred amount does not exceed the LTA, there are no additional tax charges.
When the pension exceeds the usual LTA limit, it is suggested to contact a financial planner like us so that you can apply for pension protection, which can save a lot of money that goes to waste in the form of taxes.
Taxes imposed on the excess LTA cannot be claimed back with the help of any foreign tax treaties.
When you opt for a change in your residency status within the first 5 UK tax years, i.e., April 6th to April 5th, after the transfer has been made into QROPS, then the payment won’t be considered as a recognized transfer.
This means an unauthorized payment charge of at least 40% is applicable.
The overseas transfer charge of 25% can be avoided if the person can provide the information before the transfer. This indicates that the person is a resident of the country in which the QROPS transfer is being made.
The overseas transfer charge of 25% applies to the transferred amount if the individual becomes a resident of another country within five years as there won’t be any exemptions apply to the transfer by then.
Conclusión
Even though this method is considered an excellent opportunity for getting hold of the assets along with maximum flexibility, one should always be highly attentive to the planning process.
If not done properly, there can be heavy tax implications and additional charges as mentioned in this article.
The tax treaty between Canada and UK does not prevent the Canadian government from taxing people on their pension transfers. This treaty also makes it clear that the payments obtained from the UK and paid to Canadian residents shall only be taxed by the Canadian government.
Alternatively, you can find a UK pension plan that is suitable for your investment needs while living in Canada.
It is highly recommended that you opt for services from a financial planner before getting involved with the process of transferring pensions from the UK while being a resident of Canada.
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Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
