July 03, 2023

Embracing Pension Freedoms for UK Expats in Canada: Unlocking Intergenerational Wealth Transfer Opportunities

Expat financial advice experts, Chase Buchanan Wealth Management, Canada team discuss intergenerational wealth transfer opportunities

UK pension freedoms were introduced fairly recently, in 2015. They brought in a range of changes to how pension savers and retirees access their pension wealth, from drawing down tax-free lump sums, customising periodic pension payments, and purchasing annuities.

However, tens of thousands of expatriates living in Canada may not realise that older pension schemes, and those contributed to before 2015, will not allow this level of flexibility, creating restrictions on the way British overseas expats can pass wealth to the next generation and finance their retirement.

The Canada expat pension experts at Chase Buchanan Wealth Management explains why this issue is particularly relevant to the 'baby boomer' generation, born between 1946 and 1964, and some of the potential financial restructuring solutions.

Expat Pension Funds Preceding UK Pension Freedoms

The first step to evaluating the suitability of your pension portfolio is to consider the terms and features incorporated within your current products. Many older pension plans that pre-date the Pension Freedoms Act do not include the ability, for example, to access pensions from age 55, set to rise to age 57 in 2028.

Newer pension products provide various benefits as an aspect of estate planning, where those with higher-value pension funds can leave their wealth to their loved ones and inheritors or gift lump sums tax-free, provided they do not pass away within seven years of the gift.

Other advantages linked with modern pension products and intergenerational wealth transfer include:

Paying pension wealth to an heir as a lump sum or draw-down pension tax-free where the individual passes away before age 75.
Distributing lump sum or drawdown pension benefits to heirs before age 75, taxed at the recipient’s marginal rate – ensuring a pension can still be passed on, tax liabilities notwithstanding.
Even where there are no direct beneficiaries, the fund can be transferred to a trust, where the holder passes away after 75, with a 45% tax obligation, meaning that the fund is not lost altogether.

UK expats living in Canada can plan accordingly to ensure they can leave pension wealth to the next generation and do not need to limit inheritors to a spouse or dependents – an especially notable option for those with significant pension funds that do not anticipate spending the total fund.

The challenge for expats with pension schemes that have not been updated to introduce pension freedom flexibilities is that their wealth protection and transfer opportunities may look very different, and solutions such as drawing down tax-free lump sums may not be possible.

Managing Older UK Pension Funds as an Expat in Canada

One of the appropriate resolutions may be to evaluate the efficacy of a pension transfer, with Self-Invested Personal Pensions (SIPPs) a possible way to capture the advantages of pension freedoms while building a long-term estate management plan.

Estate and succession planning require detailed analysis to assess the individual’s risk appetite, other tax liabilities, and pension access timings. Still, a transfer may be the first step.

Overseas expats are advised to assess their pension products as soon as possible to identify where retirement funds anticipated for use in the next few years do not facilitate all the flexibility we now regard as the norm with newer post-2015 pension schemes.

Another element is the potential for estates, including pension wealth, to be included in UK inheritance tax calculations, exposing wealth to a tax burden of 40% on estates valued at £325,000 or above – an area known to be under government consideration.

SIPPs for Canadian Expat Inheritance Planning

While a SIPP is one of several possible choices, there are advantages from an intergenerational wealth transfer perspective, alongside accessing pension flexibility:

Many SIPPs are outside of HMRC’s scope in terms of inheritance tax, which could make a substantial financial impact if expected reforms are introduced.
Pension holders do not need to sell an investment asset or fund included within their SIPP when transferring pension wealth to the next generation.
Beneficiaries can extract income from a SIPP at any age, although they may need to account for income tax depending on the circumstances.
Unlike other more limited pension schemes and annuities, including defined benefit schemes, the pension is transferrable and can be included in estate planning – the pension fund does not close when the owner and their spouse both pass away.

SIPPs are generally seen as more agile, customisable pension products in many ways, and there are no limitations around the number of times the same SIPP can be passed to a beneficiary, in contrast to defined benefit and annuity schemes, which permit retirement income contained within a wrapper to be passed on only once.

Of course, the viability of a pension transfer will depend on the individual's broader plans, investment portfolio, assets, tax position and other income sources. Extracting the full value of a SIPP within estate planning relies on having up to date documentation such as a will and expression of wishes, setting out how the individual would like their wealth to be distributed.

However, a professional wealth manager specialising in expat pension planning can provide further advice to ensure whichever route you choose aligns with your expectations and financial requirements.

Pension Transfers for Expat Retirement Planning

The best way forward for every UK national living in Canada, and with an older pension fund that excludes pension freedoms, or restricts intergenerational wealth transfer opportunities, should always be tailored to their circumstances.

Some expats may choose an alternative, reinvesting in a different product, retaining a UK pension as-is, or selecting a Recognised Overseas Pension Scheme (ROPS) through the HMRC-approved list.

There are pros and cons, and although a ROPS may be appropriate, there are caveats regarding investment customisation and freedom of choice to select diversified pension investments consistent with your risk exposure appetite.

For more information or to arrange a consultation to discuss the suitable ways to manage restricted-access UK pension funds as an expatriate in Canada, please get in touch with the local Chase Buchanan team at your convenience.

About Chase Buchanan Private Wealth Management

Chase Buchanan is a highly regulated wealth management company who specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA.

Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15.

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