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 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 that could potentially be payable when moving UK pensions to Canada through a transaction that changes the country in which your fund is held:

• Overseas Transfer Charge: HMRC may levy a 25% charge against international pension transfers, where a UK fund is moved to an overseas scheme.
• Lifetime Allowance: Although currently abolished, there is a potential that a change in government will lead to the reintroduction of the allowance, also known as the LTA. Should that happen any crystallisation event, including a pension transfer, could result in a separate 25% tax charge on the balance above the threshold.

Expats subject to both types of taxation against a pension transfer may be able to offset one tax against the other to some extent, but the issue remains that UK pension 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 are as follows:

• Income tax – depending on your residency status, this could be levied at 25% on the non-resident Canadian tax basis, called Part XIII tax, or charged against overseas income on the relevant provincial tax bracket.
• Foreign national residents in Canada must report their pension 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, ensuring you don’t pay income tax on the same pension income twice provided you submit the appropriate declarations and claims.

Taxes on Transferring a UK Pension to Canada via a SIPP

A Self-Invested Personal Pension (SIPP) is a possibly beneficial route to protecting your retirement wealth as an overseas expat. Because this product is a pension wrapper, it means your fund does not leave the UK.

Funds grow free from income or capital gains tax, with 20% tax relief on contributions if you remain a UK resident. For example, if you deposit £800 into a SIPP, the tax relief associated will add an additional £200.

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 mitigate any potential exposure to the 25% Overseas Transfer Tax, which may influence your decision-making. You also 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. Therefore, it may be practical to consider distributing your fund across other investment opportunities to limit your exposure.

Are Pensions Taxable in Canada?

You will need to pay Canadian taxes on your pension benefits whether you are categorised as a tax resident or non-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 $52,057 and 12.5% on income up to $148,734.
• 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 ($14,156 to $15,705 for 2024) plus individual tax credits set by each province.

Investing Pension Funds vs Transferring a UK Pension to Canada

A further consideration for expats is that many investment programmes and schemes are available, outside of 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, and without being subject to the Overseas Transfer Tax.

These investment programmes can support your retirement aspirations, generate reliable returns, and broaden your portfolio to protect your financial future.

Recognised Overseas Pension Scheme Transfers to Canada

Recognised Overseas Pension Scheme (ROPS) 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 may apply, reducing your pension fund by 25%.

Restrictions on Holding a ROPS in Canada

In some cases, a ROPS 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 ROPS

ROPS are 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 ROPS list, sometimes with very few authorised schemes available.
• Overseas Transfer Charge – UK pension transfers to Canada can potentially 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 manage your pension fund.

Choosing the Best Way to Access a British Pension in Canada

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 Wealth Management team for personalised, straightforward assistance tailored to your retirement circumstances.

*  Updated April 2024