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UK and Canadian Pension systems

This guide is designed to address the many common questions about moving between Canada and the UK, specifically focusing on the differences between their pension systems. It covers transfer rules, restrictions, and typical payment rates based on 2023 data. Please note that this information is for guidance purposes only and may be subject to change.

Canada Pension System

 

  1. Canada Pension Plan (CPP):

    • A contributory, earnings-related program funded by employee and employer contributions.

    • Provides benefits like retirement pensions, disability benefits, and survivor pensions.

    • Pension amounts depend on your contributions and the number of years you’ve contributed.

    • Indexed to inflation, increasing annually with the Consumer Price Index (CPI).

​​

  1. Old Age Security (OAS):

    • A universal pension funded by general tax revenues.

    • Available to residents 65 or older with at least 10 years of residency in Canada (40 years for full benefits).

    • Income-tested if you live in Canada (clawed back if income exceeds certain thresholds).

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  1. Private and Workplace Pensions:

    • Group Registered Retirement Savings Plans (RRSPs) or Defined Benefit/Defined Contribution workplace plans.

UK Pension System

 

State Pension:

  • Based on your National Insurance (NI) contributions.

  • Requires at least 10 qualifying years of NI contributions; 35 years for a full pension.

  • Paid to individuals 66+ (rising to 67 by 2028).

  • Indexed by the "triple lock" (the highest of inflation, wage growth, or 2.5%) for UK residents or those in specific countries.

 

Workplace and Private Pensions:

  • Auto-enrolment in Defined Contribution (DC) pensions for employees.

  • Defined Benefit (DB) pensions provide guaranteed income based on salary and length of service.

  • Private pension options like Self-Invested Personal Pensions (SIPPs) are also available.

Pension Transfers Between Canada and the UK

​Can You Transfer a Pension?

 

Yes, but specific rules apply:

  • Transfers are only possible if the UK pension scheme is registered under HMRC’s Qualifying Recognized Overseas Pension Scheme (QROPS).

  • Not all Canadian pension schemes qualify as QROPS.

 

UK to Canada Transfer Rules

  • You can transfer your UK pension to a Canadian QROPS, which might be an RRSP or other approved scheme.

  • Transfers may incur exit charges (25% tax for most non-QROPS schemes or under certain conditions).

  • UK lifetime allowance (LTA) limits apply to transfers; exceeding the LTA triggers additional tax charges.

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Canada to UK Transfer Rules

  • Canada does not restrict transferring Canadian pensions to a UK scheme.

  • Canadian tax rules apply to withdrawals made before transferring, so transferring pre-tax funds may not be feasible.

  • There’s no direct method to move a CPP or OAS to the UK, but private pensions can sometimes be managed internationally.

Why Transfer a Pension?

​

  • To consolidate pensions into a Canadian retirement plan like a Registered Retirement Savings Plan (RRSP).

  • To manage investments in local currency (CAD) and benefit from Canadian tax-deferred growth options.

  • To simplify access to funds in retirement, avoiding ongoing currency exchange issues.

Qualifying Recognised Overseas Pension Schemes (QROPS):

​

  • Transfers to Canada must be made through a QROPS, which allows pensions to move internationally without immediate UK tax penalties.

  • Only QROPS-registered providers can receive these transfers.

  • As of 2017, HMRC suspended all Canadian QROPS providers for non-compliance, but some were reinstated with stricter rules in 2019.

  • Beneficiaries must be over 55 at the time of transfer for new Canadian QROPS.

 

Defined Benefit (DB) Pension Transfers:

  • UK law requires advice from a Financial Conduct Authority (FCA)-regulated specialist for DB pensions valued over £30,000.

  • The transfer can be costly and time-consuming but ensures compliance and fraud protection.

 

Tax Implications:

  • Lump sum transfers are tax-free in the UK but fully taxable in Canada unless eligible for a special “section 60(j)” contribution receipt issued by the QROPS provider.

  • Withdrawals from the RRSP/QROPS are taxable in Canada as income.

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Early Withdrawal Restrictions:

  • No withdrawals are allowed before age 55 unless there are exceptional circumstances (e.g., long-term illness).

  • HMRC monitors withdrawals for five years (or ten if the transfer occurred after 2017) and imposes penalties for unauthorized withdrawals.

Benefits and Drawbacks of Transferring Pensions

 

Benefits:

  • Tax Efficiency: Funds transferred to a QROPS can be reinvested tax-deferred in Canada.

  • Currency Stability: Eliminates the need to manage currency fluctuations between GBP and CAD in retirement.

  • Investment Flexibility: Allows pension holders to align investments with Canadian regulations and personal goals.

 

Drawbacks:

  • High Costs: Professional advice, transfer fees, and currency conversion charges can reduce the value of the pension.

  • Complex Rules: Frequent changes in UK and Canadian regulations can complicate the process.

  • Limited Transfer Options: Only specific pension types and registered QROPS providers are eligible.

  • Tax Risks: Improper documentation or non-compliance with rules could result in double taxation or penalties.

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How Living Abroad Affects Pension Payments and Increases

 

UK State Pension: Inflation-Freezing Abroad

  • The UK pension retains its value but does not increase annually (no triple lock) if you live in certain countries, including Canada.

  • UK pensions are only inflation-indexed in:

    • The UK.

    • European Economic Area (EEA) countries and Switzerland.

    • Countries with reciprocal agreements (e.g., the USA, Australia, and New Zealand—but Canada is excluded).

 

Canadian Pensions: Indexing Abroad

​

  • CPP and OAS continue to be paid while you live abroad.

  • OAS is indexed to inflation regardless of your residency.

  • CPP remains indexed to inflation, with no residency requirement.

  • You may need to apply for benefits to continue receiving them abroad and report any address changes.

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Taxation of Pensions While Abroad

​

Canada:

  • Non-residents are subject to a flat 25% withholding tax on CPP and OAS unless a tax treaty reduces this rate.

  • The UK-Canada tax treaty reduces this to 0-15%, depending on your pension type and residency.

​

UK:

  • Non-residents are taxed on UK pensions unless a treaty applies.

  • The Canada-UK tax treaty can reduce or eliminate withholding taxes on UK pensions.

 

Key Considerations Before Transferring

 

  1. Evaluate Currency Risk:

    • Living in Canada but receiving UK pensions may expose you to GBP/CAD volatility.

  2. Research Double Taxation Treaties:

    • Ensure you understand the tax implications under the UK-Canada tax treaty.

  3. Review QROPS Eligibility:

    • Verify if your chosen Canadian scheme qualifies as QROPS before initiating a transfer.

  4. Understand Indexing Rules:

    • If you are abroad, UK pensions might stop increasing, whereas Canadian pensions continue to adjust for inflation.

  5. Consult Experts:

    • Seek professional advice from a financial planner familiar with cross-border pensions.

Example scenarios

Case 1: Retiring in Canada with a UK Pension

  • Keep UK pensions in GBP but withdraw periodically.

  • Convert into CAD as needed, considering exchange rate timing.

  • Claim CPP and OAS as usual.​

​Case 2: Retiring in the UK with a Canadian Pension

  • Receive CPP/OAS in CAD but transfer to GBP for use in the UK.

  • Explore transferring private pensions to a UK scheme if QROPS-qualified.

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Key Differences

  1. Indexing:

    • Canadian pensions (CPP and OAS) are indexed to inflation yearly.

    • UK pensions are indexed for UK residents or in certain countries (e.g., EEA). For retirees in Canada, UK pensions are frozen at the rate of first payment.

  2. Flexibility:

    • Canadian pensions allow deferral up to age 70 for increased payments.

    • UK pensions are more rigid in payment timing but can be deferred for higher amounts.

  3. Currency:

    • Canadian pensions are paid in CAD.

    • UK pensions are paid in GBP, with potential currency exchange impacts for those living abroad.

​​

If you have a mixed work history between the two countries, you might be eligible for partial pensions from both under the Canada-UK Social Security Agreement.

1. Canada: State Pension Payments

​

Canada Pension Plan (CPP)

  • Average Payment (2023): CAD $760.07/month.

  • Maximum Payment (2023): CAD $1,306.57/month (for someone who contributed the maximum amount for at least 39 years).

​​

  • Eligibility:

    • Starts at age 65 (reduced if taken early, as early as 60, or increased if deferred up to age 70).

    • Amount is based on your contributions and earnings during your working life.

 

Old Age Security (OAS)

  • Average Payment (2023): CAD $622.25/month.

  • Maximum Payment (2023): CAD $691.00/month (for someone with 40+ years of residency in Canada after age 18).

  • Eligibility:

    • Starts at age 65 (can defer up to 70 for higher payments).

    • Amount depends on years of residency in Canada.

 

Combined CPP and OAS:

  • Typical Total (2023): CAD $1,382–$1,997/month, depending on contribution history and residency.

2. UK: State Pension Payments

​

New State Pension (Post-April 2016)

  • Full Payment (2023-24): GBP £203.85/week (~GBP £882.70/month).

  • Eligibility:

    • Requires 35 qualifying years of National Insurance (NI) contributions for the full amount.

    • Minimum of 10 years of NI contributions needed for any payment.

 

Basic State Pension (Pre-April 2016)

  • Full Payment (2023-24): GBP £156.20/week (~GBP £677.53/month).

  • Eligibility:

    • Requires 30 qualifying years of NI contributions for the full amount.

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