GiantSantaCruzer

Hello folks, I'm a new user here but have lived in Vancouver for nearly 15 years....

I've looked through the financial wiki but just want bounce some ideas off people who have UK pensions and have, or are about to, retire in Canada.

I'm approaching retirement age and need to do some planning. I'm not sure how much I'll actually need to live off, so I'm not sure whether to give up work completely or whether to continue to work part time, and part of that decision process depends on how much tax I'll have to pay.

I'll have a (UK) tax free lump sum from a UK defined benefit pension of approx $58000 which, unfortunately, will be subject to Canadian tax.

I believe I have to declare this as income but I can pay the same amount into an RRSP (on top of my usual RRSP contributions) so at least I can get some of the tax refunded...

Are there any downsides to this approach? Obviously, I won't be able to spend the lump sum immediately (luckily, I don't anticipate needing to...) and if I get the lump sum whilst still working, I'll get a larger tax refund (as my total income will push my tax bracket higher) and then I pay a lower amount of tax when I eventually draw down on my RRSP when I give up work.

​​​​​​Is this correct? And does it make sense? My Canadian Financial Advisor isn't familar with UK pensions so I'm doing this research myself to start off with.

Also, how do you define how much is the most beneficial income to have during any given year? I understand that if your income is above a certain amount, then you play more tax, but, as I see it, additional tax at a higher rate is only payable on the balance over the tax thresholds. I probably need a 101 of tax and retirement planning! ;-)

(Sorry for a long first post!)

Farmer on a bike

Ones tax situation varies by each individual and their circumstances. Only a professional who has access to all of your personal information can advise effectively. I would not be using an internet blog for financial advice. Getting it wrong can be expensive.

For myself I ask a tax accountant for tax advice and a financial planner for investment advice. Financial planners are not trained or permitted to give tax advice. Any good accountant should be able to work with foreign sourced income, does not need to be a UK expert. There may be some tax credits available as well. No point living like a pauper to save a bit of tax.

Make sure you have the room in your RRSP to make any deposit, there are penalties for over contribution. RRSP calculation is made on the previous years income and the deposit has to be made by March 1. Unless you get your tax return filed and notice of assessment back before the end of Feb, the pension lump sum deposit may get reported in one year and come into the RRSP limit the following year. The rule of thumb is to deposit in years of high income to maximise the refund and withdraw in years of lower income to mimimise tax liability. RRSP is not as simple as report and pay tax on one side and drop a deposit into a RRSP on the other.
https://www.bnnbloomberg.ca/how-to-a...ooms-1.1569344

Gozit

To reiterate what farmer said above, don't take this as gospel, but it sounds like you need to tell your accountant you are getting a taxable lump sump of $58,000 and ask for advice about what to do with it. The fact that it is coming from the UK is rather immaterial, it is $58,000 of taxable income being added to your income for the year.

GiantSantaCruzer

Agreed I need professional tax advice but was just wondering whether any other forum regulars have done something similar...

I believe that CRA bulletin 528 applies to my pension, which, if I read it correctly, means that for the tax year I receive the lump sum, I get extra RRSP contribution room to pay the equivalent amount into my RRSP plus whateve contribution room my Canadian salary generates.

(My personal circumstances are actually fairly straightforward at the moment as I receive a Canadian salary and the "tax free" lump sum will be generated from a UK civil service DB scheme. The only thing I'm not certain about is whether I will actually give up working in Canada at the time I get the civil service pension)

scilly

We are also retired, for many years, and live in Vancouver. Neither of us had a UK pension as we left England so long ago.

A lot depends on where you live in Vancouver, ie housing costs, and the longer term plans for what you want to achieve.

We found that we actually had more income after we retired than before in one way, because we were not paying CPP and OAS, but we then had to pay out more every month on medical costs ......... BC Medical, Extended Health and Extended Dental .................. part of which had previously been paid by OH's employer.

We had an accountant until OH retired, and have since been dealing with a Financial Advisor who is also an accountant, so he does all our taxes. He's fantastic!! One of the best pieces of advice was to utilise the TFSA scheme. Do you have an RRSP coming up to retirement, in addition to CPP and OAS?

Edit:- The Financial Advisor who i also an accountant has been well worth the money he charges.

shelley748

to the OP dont you have the option of not taking the 25% tax free lump sum and increasing your UK pension instead?

GiantSantaCruzer

I don't think so but will double check with the administrators...

Johnboyuk

You will be taxed on a graduated scale which shows that the system is rotten and corrupt, favouring the government and the financal institutions. Nothing will change until the public realise that pension plans and RRSPs are nothing more than deferred taxation.

The best bet is the UK's 20,000 GBP p.a. tax free allowance (savings and stocks and shares) which at least gives people a fighting chance of obtaining some financial independance during their lifetime without excessive taxation. All profits are free and clear of tax forever. However, Trudeau has reduced the TFSA allowance saying that it only favours the rich. As the Canadians say, 'go figure'. Despite what people think, the UK is not the most expensive place in the World to live.

Gozit

I believe BristolUK worked in the civil service in the UK, he may know. Paging Bristol.

susanmountain

My understanding of a defined benefit pension, is that , yes you can take a lump sum ( but only at the start of taking the pension) and a lower regular monthly payment. Or you can elect to not have a lump sum,a nd recieve a higher monthly payment. I am all for the latter, as I intend to live to 110 years old !!

Mordko

Not an accountant so could be wrong but bulletin 528 is unlikely to apply to your tax free lump sum. It would have applied if you were transferring your UK pension under QROPs or whatever its called now. Unfortunately you will have to pay Canadian tax on full amount and won’t get the extra RRSP room beyond the ~27k limit.

In general you don’t withdraw till you stop working, unless you are forced to. The retirement income you draw annually should be driven by what is safe to draw rather than by minimizing taxes. In my opinion the best withdrawal strategy is Variable Percentage Withdrawal: https://www.finiki.org/wiki/Variable...age_withdrawal

The link has a spreadsheet which you can plug your numbers in to get a feel for it. Financial Wisdom Forum has a lot of very knowledgeable people.

Once you know how much to withdraw, the next question is “where from and in what order”. Should it be TFSA, RRSP or non-reg? This is to minimize taxation. Its very difficult to get this perfectly right because the answer depends on future investment returns. There are software packages which help you make this call (using Monte Carlo simulations). I think you typically leave TFSA to the end. Whether you draw from RRSP early depends on the “risk” of hitting OAS thresholds, retirement age and the size of RRSP.

If you do seek paid professional advice, you need to pick very carefully. Many/most accountants don’t do this type of tax planning. You need to find the right one.

glendem4

For anyone near retirement and still in the UK, it makes sense to take your tax free lump sum BEFORE you come to Canada. If you already reside in Canada, I would ignore the "tax free" lump sum as it no longer applies and you will be liable to tax on ANY amount you withdraw.
To lower your Canadian tax liability, you could contribute to your RRSP. However, the RRSP is not as generous as SIPP contributions in the UK. In Canada you can only contribute 18% of your previous year income up to a limit of $27,230 for 2020. In the UK you can contribute 100% up to a 40,000 pound maximum ($68,000 CAD). The lowest Federal tax threshold tax bracket of 15% is just over $49,000. You have to pay provincial tax as well. In Ontario, the first $45,142 us taxed at just over 5%. The one advantage you have when you retire in Canada is the ability to split you retirement income with your spouse, potentially reducing your tax liability by a large margin. E.g. If your spouse has no/little income, but you have $100,000 as a pension in income, you can transfer $50,000 to your wife. Using the tax calculator, the tax paid on $100,00 is $25,454 in Ontario. Splitting your income results in a tax of $7657 for each person = $15,314 a saving of $10,240

Mordko

While technically UK allows to contribute a lot more into your pension, lifetime allowance imposes an effective limit on contributions. At a certain point contributing becomes inefficient.

Also noteworthy that the costs of investing in the UK are typically higher. SIPPs charge for the platform, for buying and selling shares and ETFs and the government charges “stamp duty”. All of these costs are either absent or avoidable in Canada.

glendem4

Platform fee using Vanguard is only 0.15% in the 🇬🇧 and their tracker funds are cheap as well. MER in Canada on funds are expensive in comparison at 2% or higher. The lifetime allowance is more a concern for high networth investors.

Mordko

Given how much many Canadians have within RRSPs, lifetime allowance likely to become a problem for most Brits investing over the Canadian RRSP annual limit of ~27K. That’s my point: UK contribution limit isn’t as generous as it appears.

You are right that as of last year Vanguard offers a decent option in the UK but they advertise 0.15% platform fee and 0.2% ongoing costs and, of course you are limited to only Vanguard UK products. They also estimate 82 GBP in total annual costs on a 20000 investment. Which is over 0.4%.

In Canada you could be easily paying less than 0.1% in annual costs and have access to thousands of products trading in Canada/US.

So even the Vanguard platform ends up costing 4 times what you would pay in Canada and that does not account for the stamp duty of 0.5% when you buy UK stocks.

Canadian mutual funds are indeed expensive but one isn’t forced to use them.