jerry brewer

Hi All.
Just wondered if anyone here had experience of a tax free lump sum payment from a UK pension ( civil service type ), when retiring early, the pension dept in UK say the lump sum is tax free, but the yearly pension payment would be taxable. ( they know I am in Canada )
Anyone know if I have to pay tax on the lump sum in canada, or just tax on the profit/gain from any investment.
I realise the annual payment would be taxed in relation to the amount of income I have in each year.
Any comments/thoughts welcome.
cheers
Jerry

Novocastrian

Did you receive the lump sum before or after you became a tax resident in Canada?

JonboyE

I think Jerry has been here for quite a few years. If he is getting the lump sum now it is, unfortunately, taxable in Canada.

Almost Canadian

How much contribution room do you have available for your RRSP? If possible, I would chuck it all in there.

jerry brewer

Hi All,
Thanks for the replies, I thought it might be to good to be true when the UK pension office told me it would be tax free.
My RRSP contributions have been zero, as I am in another civil service type pension here, So I may just sink it all into rrsp and defer the tax for another couple of decades.
I don't want to defer payment of the pension, due to the way the UK pensions seem to be going.
Cheers
Jerry

Novocastrian

Are you quite sure about that? Your payments into your "civil service type pension" scheme reduce your RRSP contribution room.

Just look at your latest tax return to find out what room you have.

getoutofbritainquick

I am in the same boot as you. UK previous company pension pays out in January and we would have to give the Canadian Goverment $52000 in tax from the lump sum - I still cannot work out why they should be entitled to any of it, maybe the capital gain since we have been in Canada like investments but not the entire lump sum. Unfortunately as johnboy indicates its a tax grab by the Canadian goverment which you can do little about, bless them.

The options are:-

1) to pay the tax (you can pension split with the wife)
2) Transfer money into an RRSP if you have room
3) Dont take the lump sum and take additional pension payments (again pension split with the wife) - I am considering this option as the most feasable (and safe!)
4) Hide it somewhere safe Risky

We are considering retiring to Cyprus (pension income is taxed at 5% if the country still exists) in the next ten years (getting fed up with the ten months of rain every year) to retire and are looking at options of putting the entire pension in an off shore account and not bringing anything into Canada Unless anyone has any better ideas?

jerry brewer

Hi
Thanks for the reply, I think 1-3 are the only real options.
I like 1 & 2 as it gets the money to canada with me, but option 2 locks it in until 67 I think.( I do have room )
And option 3 leaves it in the UK with the worry that the goverment may change the pension.
I am wondering if it is possible to do a split with option 1 & 2, failing that I think it will be option 3, so I am e mailling the pension dept to see if this is allowed.
Think its time for me to talk to a financial adviser.
cheers
Jerry

JonboyE

There is no need for option 2 to lock away the money. Take the 25% lump sum. It is tax free on the UK. In Canada you receive the money and pay it into an RRSP of your choice. With most RRSPs you can withdraw money whenever you want.

You show the 25% as an addition to, and the RRSP contribution as a deduction from, your taxable income on your Canadian tax return so there is no net tax effect.

getoutofbritainquick

Jerry let me know how you get on when you contact your UK pension provider to see if this is feasible? I am assuming you do not have to take the lump sum and can have it paid as additional pension? I am waiting for my final year pension statement from National Grid UK before I contact them. Even if you take the additional pension I have worked out that it will take 25-30 years to make up the lost cash so its a big hit. The only exemptions I can find is if you have a UK military pension and they have a special arrangement with the Canadian government. There doesnt appear to be many financial advisers which know both the UK and Canadian systems -Johnboy is about the only guy I know who has knowledge of both systems.

feelbritish

My hubby transferred one of his private pensions via a Canadian Investment group, it took almost a year and now we wonder if it was worth it? We have decided not to stay and retire here. Get a Financial company to handle it and make sure it is one that is approved by the Canadian/UK government!

agr

Not sure what special arrangement for military pensions you refer to. Many BE members are ex-military and the question of Canadian taxes on a gratuity that's free of UK tax has been discussed extensively over the past few years. No unique solution has been identified. Perhaps there's an arrangement for people transferring from UK military to Canadian military?

getoutofbritainquick

Looks like my buddy who was in the army is telling porkies! He assures me he does not pay Canadian tax on his UK military pension even though he lives in Canada - perhaps he is just not declaring it?

mjwalker007

Hi Jerry,

There is also the option to transfer the full transfer value of your pension fund to an RRSP in Canada without any tax liability to the UK before retirement. This option would only work if you did not want to take the tax free lump sum, as in Canada, the RRSP does not allow 25% of your pension fund to be accessed tax free as a UK pension would.

However, the benefits of transferring the pension fund to a Canadian RRSP would be that at retirement, as you will then be receiving your pension income in Canadian dollars and you would be able to draw the pension at your normal retirement, just as you would of if it had still been in the U.K .

If you retire in Canada, but leave your pension in the UK, once the pension pays out you will have an income that will forever fluctuate as every month this would have to be converted from GBP to CAD.
This has caused great problems for many retirees over the last few years who have been in this position, as this has seen their pension income drop by nearly a third.

The reason for this is because the exchange rate has dropped and has reduced the actual income they receive once converted into Canadian dollars, something which you would have no control over whatsoever.The whole idea of a pension is to receive a stable, regular income into retirement, something that cannot be achieved if your income is reliant on the exchange rate every month.

There are also RRSP plans that will provide a guaranteed income for life at retirement, whilst providing your beneficiaries with the full value of your pension funds on death.This is very similar to final salary schemes in the U.K, but with the added benefit of the full value of your pension fund rolling over tax free to your beneficiarys RRSP on death, as opposed to many final salary schemes in the UK only providing your beneficiary a pension income of 50% on death, therefore the beneficiary losing half of your pension income overnight on death in retirement.

Transferring the U.K pension to a Canadian RRSP before retirement really all hinges on whether you need to take the lump sum from your pension fund at retirement or not.

jerry brewer

Hi All,
Many thanks for all the replies, I will have to have to figure out which advisor to contact when I have time.
Luckily I have at least 13 months before the first option date and if neccessary can postpone the option for upto 5 years after this date.
Cheers
Jerry