Many people who have ties to the U.K. have decided to settle in Canada. If your clients or prospects fit that description, and they have U.K. pensions, you may be able to help them to bring those pensions to Canada.
Since April 2006, individuals with U.K. personal pensions can transfer these assets to Canada. The tax rules in Canada allow for pensions to roll over into an RRSP without the use of RRSP contribution room if certain conditions apply.
- The transfer must be a lump sum and not periodic payments.
- The payment must be in respect of employment services rendered by your client, their spouse or common-law partner, or former spouse or common-law partner while non-resident in Canada.
- When transferring, they must be a Canadian resident taxpayer.
As long as these criteria are met, and the plan is not considered unfunded (an unfunded pension is one where contributions made to the plan by current employees are immediately paid out to pensioners), the plan can transfer to a Canadian RRSP on a tax-deferred basis without the need for RRSP contribution room. What makes this transfer even more attractive is the fact that if the receiving institution is a Qualified Recognized Overseas Pension Scheme (QROPS), the transfer can be done without any tax being withheld in the U.K. Here is a list of QROPS providers.
When the money comes to Canada, it is included as income for the year on the individual’s tax return, but the amount that is being contributed to the RRSP is classified as a transfer to an RRSP when the client is preparing his or her taxes. As a result, there are no tax implications on this transfer. When the money is withdrawn from the RRSP, it is included as income for the year of withdrawal.
In 2015, there were changes to the QROPS transfer requirements to recognize that certain public-sector U.K. pensions are unfunded and cannot be transferred to a QROPS. If you have clients who have U.K. pensions with the following carriers, they will not be able to transfer the plan to Canada:
- National Health Service pension scheme
- Principal Civil Service Pension Scheme
- The Teachers Pension Scheme
- The three pension schemes for the police, fire-fighters and the armed forces
Clients who hold these pensions will need to leave them in the U.K. and draw a pension from them in retirement.
Another change is that all U.K. pensions over £30,000 must have a Financial Conduct Authority (FCA) advisor review the transfer. It is the responsibility of the individual transferring the plan to find an FCA advisor. The FCA website offers direction on finding a U.K. advisor.
Steps to transfer a U.K. pension to Canada
To begin, your client will need to contact the U.K. provider and explain she would like to transfer the plan to a Canadian QROPS. She should also ask for the Cash Equivalent Transfer Value (CETV) of the plan, and determine the forms the U.K. provider requires in order to move the plan to Canada. The financial institution in Canada will also likely have forms that need to be completed.
Read: How to find old 401(k)s
Generally, once the required forms are completed (both U.K. and Canadian forms) and sent to the receiving institution in Canada, that institution will set up the Canadian RRSP and request the transfer of the U.K. provider. It takes approximately six to eight weeks from the time the relinquishing institution receives the transfer request for the pension to be transferred to Canada.
Since the money being transferred originally came from a pension, the U.K. will not allow the accountholder to access this money prior to age 55. As RRSPs don’t normally have withdrawal restrictions from a Canadian tax perspective (just withholding tax), the QROPS provider (Canadian financial institution) will need to monitor the account to ensure withdrawals are not made prior to age 55. When an individual retires, as long as they are 55 and older and have been out of the U.K. for five or more U.K. tax years (a U.K. tax year is from April 6 to April 5 the following year), her RRSP or RRIF will no longer have restrictions, and withdrawals can follow the regular withdrawal rules.
If your clients have lived or worked in the U.K. and have a U.K. personal pension, there is an opportunity for you to help them move the plan to a Canadian RRSP. Each client’s situation is different but for some, consolidating their assets in one country may be beneficial. Either way, it gives you an opportunity to discuss this with your clients and let them know this is another area where you can help them.
A reader asks: “I have a prospective client who, in 2013, moved his U.K. pension to Canada where it was registered as an RRSP. He is now a permanent resident. He would like to transfer the RRSP to our firm. It is an ordinary RRSP (not locked in), but the firm where the RRSP is held has rejected our transfer request as we are not a QROP-approved firm. It seems to me that would only be important from the standpoint of moving the original pension money over to Canada. Does HMRC (U.K.’s CRA) tax earnings made abroad when you are no longer a resident?”
Jacqueline Power, Mackenzie Investments, answers: “There are restrictions on QROPS assets. If the individual is under 55, he is not permitted to move the plan or make withdrawals from it. If he is over 55 but has been out of the U.K. for less than 5 U.K. tax years, he is unable to move the plan. The Canadian QROPS provider is required to report withdrawals back to HMRC for 10 years.”