Please feel free to contact the author for more information or answers for specific questions. The rules around transferring pensions change frequently. While believed to be accurate at the time of writing, September 2020, you should not rely in the contents of this document without checking with your own financial, tax a legal advisers about your own personal situation.
Introduction
Over the years, thousands of Britons who immigrated to Canada left a company pension plan behind. Thousands more Canadians who went to work in the UK for a while and then returned to Canada also left a pension plan there. Sometimes these plans were large and could play a major role in securing a comfortable income in retirement. Even small plans can boost income and make life a little better. Some people forgot all about their entitlements, never kept in touch with the pension plan trustees and never claimed what was rightfully theirs.
For much of the time, the only option was to leave the pension plan in the UK until the beneficiary reached the retirement age specified by the plan. At that time, the trustees of the plan would provide a list of options of what could be done with the proceeds. Years ago, many plans required the purchase of an annuity which often provided a monthly income until the death of the annuitant. Sometimes there was provision for a certain amount of the monthly payment to continue to be paid until the spouse of the annuitant also died. Nothing left for the relatives! Other plans provided for a lump sum withdrawal, often 25% of the total value, with the balance being used to purchase the annuity. That lump sum was often tax free in the UK but of lesser value to Canadian tax residents as all amounts taken out of a pension plan are taxable in Canada. However, it is now much more usual for plans to have a great deal of flexibility in how the proceeds may be used.
The UK has hundreds of different types of pension plans each with their own contribution and benefit rules. The glossary at the end of this document provides a summary and the reader may wish to consult that section if some of language in the body of this document is unfamiliar.
History
Last century, transferring a UK pension internationally was difficult and often required expensive, expert help but on “A-day” on April 6, 2006 everything changed. More properly known as Pension Tax Simplification or just “pension simplification”, new UK legislation was introduced with the aim of reducing the complicated patchwork of legislation so as to encourage people to provide for their own retirement. Eight tax regimes were combined into a single regime for all individual and occupational pensions. Harmony with other European Union countries’ pension rules was a consideration too. The legislation also addressed the pensions of people who were no longer resident in the UK and QROPS – Qualifying Recognised Overseas Pension Schemes – was introduced. Please note that the word “scheme” in the UK does not have the negative connotations of underhand dealing and corruption that is common in North America – it’s really a synonym of “plan”. QROPS are registered by Her Majesty’s Revenue and Customs (HMRC).
QROPS greatly simplified, standardized and facilitated the transfer of UK pensions internationally. Canada was a major beneficiary with hundreds of QROPS being quickly registered by the big banks and financial institutions – hundreds of millions of pounds flowed into the country and were converted to dollars to be invested in Canada.
The method adopted by the QROPS providers was to register the plan as both a Canadian Registered Retirement Savings Plan (RRSP) and a QROPS. Essentially the RRSP trust deed was amended to include the restrictions on withdrawals imposed by the HMRC rules.
The Process and Taxes
The transfer process is to collect information on the client’s pension(s) and complete the forms to instruct the plan trustees to transfer the lump sum value of each plan to the selected QROPS. The money is released, tax free from the UK. The QROPS receives the money in sterling and converts it to dollars. The client’s investment adviser invests it according to the client’s wishes.
The RRSP/QROPS provider issues a special contribution receipt known as a “section 60(j)” from the paragraph identifier in the enabling legislation of the Income Tax Act. On the next tax return, the client declares the entire amount as income and takes a deduction for the receipt. The net result is a tax free transfer out and a tax deferred investment in. After that, the plan behaves like a regular RRSP and can be “rolled over” and moved to a RIF in due course. Any withdrawal from the QROPS/RSP is taxable.
HMRC Rules
The stated aim of the QROPS rules can be summarized as not putting overseas beneficiaries in a better position than those people who have a pension plan but continue to live in the UK. Except for extenuating circumstances such as serious, long term illness, no withdrawals are allowed before age 55 – the UK’s defined minimal retirement date.
HMRC required the QROPS to report all withdrawals for 5 years and could assess an “Unauthorised Payment” penalty of 55% of any amount taken out directly or indirectly prior to age 55.
Canadian QROPS were very popular and competition was fierce. Some participants were less scrupulous than others and eagerly transferred UK Personal Pension Plans with no contribution made by an employer. There is no written opinion that these qualify for the special contribution receipt that enables the tax deduction. Transferors risked having to pay a tax on the entire amount transferred.
HMRC Regulations changed frequently e.g. the reporting period for withdrawals was extended to 10 years and consulting advice is now required before a Defined Benefit plan is transferred. Also a 25% “Overseas Transfer Charge” was brought in if you transfer to a QROPS that is not in the country in which you live.
QROPS Shut Down In Canada
HMRC found abuses of the rules and shut down some QROPS in Singapore, Hong Kong, Guernsey, Australia and New Zealand among others. Even in Canada, where providers had agreed not to allow QROPS withdrawals before age 55, there are stories of a blind eye being turned when there was pressure from a client e.g. to get the first time buyer deposit on a house as is allowed for a regular RSP.
Citing breaches of the rules, at the beginning of 2017, HMRC closed all QROPS in Canada without notice. No new money could be transferred in and, until recently, there was no place for a QROPS/RRSP to go without facing tax consequences. Holders were essentially locked-in to their current provider.
Current Situation
Late in 2019, three companies set up new RRSP trust deeds and self-certified as QROPS providers in Canada. The new approach was to have no comingling of regular RSP contributions and transfers in from UK pensions. In addition, there was one big change that satisfied HMRC – no one is currently allowed to transfer a UK pension into these Canadian QROPS unless they have already reached the age of 55. That means that (taxable) withdrawals can safely begin right away. If a beneficiary leaves Canadian tax residency status within the first five full UK tax years – April 6th to April 5th – after the transfer, HMRC can assess a 25% tax penalty on the entire amount that was initially transferred. If the beneficiary does not pay, HMRC has the right to assess the QROPS provider.
Transfer Issues
Transfers to Canada are already being done successfully in 2020 but probably at a slower pace than in 2017 and before.
There were many reports of fraud, especially in the UK where unscrupulous advisers were transferring to plans where the bulk of the proceeds were subject to large fees and charges that made the advisers rich and the beneficiary much worse off. For example: https://www.theguardian.com/money/2019/jan/28/pension-scams-some-victims-have-lost-more-than-1m-to-fraudsters
Independent Advice
To protect potential transferors from fraud and from making investments that may result in lower income from a pension, the UK’s tax authority – Her Majesty’s Revenue and Customs (HMRC) – will not allow trustees to transfer a Defined Benefit (DB) pension with a value of £30,000 or more without the advice of a pension transfer specialist authorised and regulated by the Financial Conduct Authority (FCA).
This advice is not without controversy. A great deal of personal information is required to be provided and analysed for the consultant to provide independent advice that will satisfy the FCA requirements. The FCA conducts regular audits of the advice provided to clients and quite a number of consulting firms have been found wanting and have had their licences revoked. See: https://www.fca.org.uk/publication/policy/ps20-06.pdf
Some potential transferors object to the intrusiveness of the requirements, others simply baulk at the “nanny state” telling them what can and cannot be done with their own money. However: no advice, no DB transfer. The pension transfer specialists by law must have Professional Indemnity Insurance (PI) to cover claims made against them for bad advice and to obtain PI to cover QROPS transfers to Canada is very rare and very expensive and we are aware of only a handful of firms in the UK that have this. The premiums for this have substantially increased because of the amount of fraud and claim payouts. This cost has been passed on to the transferors in higher fees. Nonetheless, the transferor will be able to receive compensation from the consultant if something goes wrong.
Pension providers have no incentive to transfer the money because as soon as they do they lose revenue. It’s a fact of life that they will find a delay wherever possible. Coupled with the extra paperwork to ensure that FCA due diligence is satisfied, this can lead to a frustrating three months’ wait from the time a client instructs the transfer to the funds actually being available in Canada for investing. However, many people consider the benefits of controlling the pension asset in their own country to much exceed the initial difficulties.
Tax Issues
Without an RRSP 60(j) receipt the entire amount transferred to Canada would be taxable.
In its simplest interpretation, Canada’s Income Tax Act really only provides for one special case that covers UK pension transfers and that is where a company has made some financial contribution to a retirement plan that benefits an employee. If the company has made contributions, the QROPS provider may issue the RRSP 60(j) receipt. Without such employer contributions it is, at best, unclear whether the receipt should be issued. Indeed, one interpretation is that, in Canada, plans without employers contributions are not pension plans at all and the holders should be declaring the income and capital gains from such UK plans on their annual tax returns.
As long as the normal Defined Benefit and Defined Contribution plans set up by UK companies have contributions made by the company they can be transferred to a QROPS in Canada. It does not matter if the employee/beneficiary also made contributions to the plan.
Glossary
The UK has many different types of pensions including:
Defined Benefit (DB) plan
A Defined Benefit (DB) plan, is a retirement account for which both an employer and employee make contributions that promise the employee a set payout at retirement e.g. two thirds of final salary. On the day a beneficiary leaves the company, the final salary is frozen at the amount that was being earned at that time. DB plans will “inflation proof” that amount by increasing its value in line with inflation so that the pension actually received when your retire will have the same purchasing power as on the day then beneficiary left. That is a valuable feature and the lump sum transfer value that the beneficiary could get when transferring out the money from the plan will be much higher because of it. However, for Canadian residents, retirement expenses will be growing in line with Canadian inflation (which could be quite different from UK inflation). So a transfer to a QROPS may be a better fit with retirement plans. While the funds are in British pounds and you retirement expenses are in dollars, the exchange rate can have a significant impact on retirement income.
Defined Contribution (DC) plan
A Defined Contribution (DC) plan is a retirement account where both an employer and employee make contributions to an employee’s own individual retirement pot – the employee has flexibility to take the income any way they wish but the amounts depend on how much was contributed and how those contributions were invested. If a DC plan remains in the UK it is most likely to be invested in British pounds. British investments often grow in line with British inflation and hopefully plus a little something. If you have left the UK for good you may be more interested in Canadian inflation and investing in North American stocks. Some of your retirement income will be in British pounds but expenses will be paid in Canadian dollars – a mismatch. You could avoid this exchange risk and transfer the DC plan proceeds to a QROPS. The money can be invested according to your wishes until you are ready to retire.
Personal Pensions
Personal Pensions are pensions that are arranged by yourself. They are sometimes known as defined contribution or ‘money purchase’ pensions. The amount paid as a pension depends on how much was paid in, how the fund’s investments have performed and how and when the money is paid out. Some employers offer personal pensions as workplace pensions. If a company makes contributions to a personal plan, it could be eligible for transfer to a QROPS.
The UK has many different types of Personal Pensions including:
A Stakeholder Pension is a form of defined contribution personal pension. They have low and flexible minimum contributions, capped charges and a default investment strategy for those that don’t want too much choice. Some employers offer them but can be started oneself.
A Self-Invested Personal Pension (SIPP) is a pension ‘wrapper’ that holds investments until retirement income is drawn. It is a type of personal pension and works in a similar way to a standard personal pension in which investments are managed within a selected pooled fund. The main difference is that with a SIPP there is more flexibility with the investments that can be chosen either by the beneficiary or paying an authorised investment manager to make the investment decisions. SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they want to. However, SIPPs can also have higher charges than other personal pensions or stakeholder pensions. For these reasons, SIPPs tend to be more suitable for large funds and for people who are experienced in investing.
For more information see: https://www.gov.uk/pension-types
Please feel free to contact the author for more information or answers for specific questions. The rules around transferring pensions change frequently. While believed to be accurate at the time of writing, September 2020, you should not rely in the contents of this document without checking with your own financial, tax a legal advisers about your own personal situation.
This article was written by:
Ron Craig
Managing Director
PensionTransfer.ca Limited
157 Adelaide St. W., Suite 707
Toronto, ON, Canada
M5H 4E7
1 (888) 504-4042
Have questions?
Speak to a QROPS expert at 1 (888) 504-4042.
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