BexB

I hesitate to add another complication, but tax/your future retirement intentions may need to be considered too. Apologies in advance for the length of this post, you may also need a cold towel (better still, a cold drink) to read it.

Usual caveats to the below - just my understanding and not looking to give any advice. Any of the experts, feel free to pull apart. By pensions in the below, I mean occupational pensions, as opposed to UK State pensions.

In the UK, the advantage (an anomaly) is that you can take 25% of your pension as a tax-free lump sum. The rest is taxed as income. Consider £100 and let's assume your tax rate is 30%, the balance of £75 will suffer $22.50 tax and you will receive £52.50. So each £100 would produce a lump sum of £25 and an after-tax income of £52.50, total £77.50.

If however you're a Canadian tax resident when you draw your UK pension, the lump sum is not tax free. It is taxed as income - and possibly at a high rate if the lump sum is large and you have other income. The good news though is that you can "pension split" with your spouse. This means you could share your pensions equally for tax purposes, reducing the amount of tax paid. The tax rate could be around 20% (I appreciate this will vary with province), so £100 would produce an after-tax income of £80.

So it's rather swings and roundabouts, the UK may give a lump sum (handy for paying off the rest of the mortgage etc.), while Canada may give a higher net income.

So what does the above mean for potential decisions? Consider a couple of scenarios:

(1) (Less likely scenario).Someone currently in the UK, over age 55 (and therefore eligible to draw their pension), expecting to move to Canada soon. They could take the lump sum while a UK tax-payer and receive the pension in Canada. "Best of both worlds". If they did not actually want to receive a pension, this could be deferred (see end of post).
(2) (More likely scenario). Currently in Canada, over age 55, UK pension not yet started, thinking about doing so in order to supplement current earnings. If it is a final salary/defined benefit pension then I believe the option to take a lump sum is a one-off, when the pension commences. If the person did this, for the reasons explained above, the lump sum would not be tax-free. Now let's assume they eventually return to the UK to retire, there would not be the option to pension split. "Worst of both worlds".

There may be a way to avoid scenario (2), although everything would need to be weighed-up (as per previous posts). From April of this year, there is flexibility how pensions are taken ("drawn down") from personal pension pots. So it would be possible to transfer a final salary/defined benefit pension into such an arrangement. Let's assume the initial amount was £100 and by the time the person of scenario (2) returns to the UK they had drawn £40, with £60 remaining. They could then take 25% of the remaining £60 (£15) as a tax-free lump sum. Not quite the full £25, but better than having no tax-free option.

Shard

Not sure about all this.

However, in general, converting a DB pension to a UK personal pension (or a Canadian RRSP) is currently considered an inferior option. Particularly and index linked DB. This is because the investment returns in recent years have been lacklustre, and it is hard to achieve (let alone exceed) the guaranteed pension income offered by a good DB scheme.

Otto The Squid

I would tend to agree, but it would need personalised analysis. The partial good news from April 6th is that UK pension providers will insist that a UK FCA registered adviser signs off any transfer. It would mean that a proper analysis of what is given up is undertaken or there is no way a UK IFA woud sign it off.

I said partial, because I doubt a UK IFA has the local knowledge to advise the expat in the host country. In other words, Canadian based advisers are going to have to work with UK advisers. The cost will be higher I would guess but the outcome might be better. Who knows?

petesdragon

Hello, reading this very informative thread, didn't know about the changes to payment of pensions as of April 2015, i have been in Canada for nearly 4 years after I left the RAF ( 22 years done , immediate pension) , my question is , would i be better off paying tax in the UK on my monthly pension ? at the moment my pension goes into my UK account , no tax taken as I am not resident , but i got hammered by the CRA the last two years , the accountant said its because of the pension ,

Thank you for any help

BexB

I'm not a tax expert, but I don't think it matters where your income derives from (Canada or UK), it's just income to the CRA and taxable in Canada.
If you have a partner in a lower tax bracket than you it may be possible to reduce your tax by income-splitting, but I'm sure your accountant will be aware of this.

Collie

I'm no tax expert either but am probably in a similar position to you - drawing two UK pensions which are not taxed at source. I don't think you can choose where you pay your tax. If you're a long-term resident of Canada you will need to pay tax on your pension income to the CRA, if my understanding is correct. So every April I to get hit for a tax bill of many thousands of dollars from the CRA. To pay this I have a bank transfer set up which automatically siphons off 25% of my monthly pension income into a savings account - then I use this to pay the tax bill at the end of the year.

(If you WERE to pay UK income tax on your pension you'd have to pay tax on the whole amount again to the CRA - though you would be able to offset the UK tax you've paid against this amount because of the double taxation treaty. But this is a pain in the nether regions, and doesn't gain you anything as you end up paying exactly the same amount of tax.)

Bottom line: pension = income, and you need to pay income tax to the CRA on your income - though as the previous poster said, income splitting can help reduce the bill a bit (mine came down about $2000 because of it this year).