QROPS and Taxes: The Implications

If you hold a personal or company UK pension, and you’re a Canadian-resident taxpayer who will be living in Canada for at least 5 years, a Qualifying Recognized Overseas Pension Scheme (QROPS) transfer may produce significant tax benefits for you.

Please note that the following post does not constitute tax advice and for information purposes only. It is important you understand the UK and Canadian tax implications, so we encourage you to consult a tax professional before you act.

UK Tax Considerations

  • If your UK pension exceeds the Lifetime Allowance (LTA) threshold, any amount over the lifetime allowance limit is then taxed at either 55% (if you take it as a lump sum) or 25% if you take it any other way (e.g. through drawdown, UFPLS or buying an annuity). For example, if your pension pot totals £1,200,000 then the excess is £126,900 so your additional tax bill would be either £69,795 or £31,725. For 2021/2022, the LTA threshold is set at £1,073,100 so if the pension amount you are transferring is lower than this amount, you will not be subject to this tax.
  • Her Majesty’s Revenue and Customs (HMRC) may tax “unauthorized payments” from a QROPS.
  • HMRC requires that your QROPS provider report all transfers and withdrawals for 10 years after the QROPS transfer date.
  • If you move back to the UK, holding a Canadian QROPS generally does not provide you any tax advantages. However, the initial QROPS transfer to Canada is considered a Benefit Crystallization Event (BCE 8), which may help you avoid taxes associated with the LTA when you return.

Tax Considerations in Canada

  • With QROPS, your pension must be transferred into a Registered Retirement Savings Plan (RRSP). Typically, any income you earn in the RRSP is tax-exempt while the funds remain in the RRSP.
  • RRSP withdrawals are subject to withholding tax ranging from 10% – 30% in most of Canada. If you live in Québec, withholding tax rates are lower, varying from 5% – 15%.
  • Between the age of 55 and the end of the year you turn 71, you must convert your RRSP to a Registered Retirement Income Plan (RIFF). Like an RRSP, a RIFF is a tax-deferred account, but there is an important distinction: you must withdraw money from the RIFF, and this money is taxable in Canada. The amount you must withdraw depends on several factors and varies by province.
  • In the UK, you are allowed to withdraw up to 25% of your pension tax-free. Once you transfer your UK pension to a QROPS in Canada, though, lump-sum pension withdrawals are taxable, based on your marginal tax rate at the time of withdrawal.

QROPS Policies and Agreements Do Change

QROPS agreements involve tax revenue and negotiated financial agreements between governments, and not surprisingly, they can change quite frequently. As a result, it’s important to review the most current QROPS information as you consider your options.

We Can Help You Navigate QROPs Scenarios

Sterling Advisory can help you transfer your UK pension to Canada and help you understand the advantages and implications of a QROPS transfer, although you are advised to seek tax advice from a specific tax expert before you decide to move forward with any transfer. For more information about QROPS in Canada, contact us.

QROPs taxation can be a complex subject, and it is important to seek expert advice from your tax specialist before you make any pension transfer decisions.