Buying British Pension Eligibility

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Dejavu
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Re: Buying British Pension Eligibility

Post by Dejavu »

I have just done my 2011 Canadian Tax return. Having to now declare my British Pension Income for Income Tax purposes here in Canada, I am reminded that I opted to buy back some portion a year or so ago. Further, I now wonder if the monies used for the buyback might be a deductable expense, say"cost of earning investment income" or some such thing. This is based on the fact that the buyback money was taxed as income before the buyback and is now taxed again as new pension income. Any one dealt with this? Dejavu.
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Re: Buying British Pension Eligibility

Post by pmj »

For an annuity from a CDN insurance company you'd get a declared split of of each payment between "return of capital" & "interest income",

Is there any chance that you'd get a similar declared split from a UK insurance company? - it seems unlikely.

And - the UK pension is not an annuity in the proper sense of the word - so any such formal status and split seems doubly unlikely...
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Re: Buying British Pension Eligibility

Post by izzy »

Dejavu wrote:I have just done my 2011 Canadian Tax return. Having to now declare my British Pension Income for Income Tax purposes here in Canada, I am reminded that I opted to buy back some portion a year or so ago. Further, I now wonder if the monies used for the buyback might be a deductable expense, say"cost of earning investment income" or some such thing. This is based on the fact that the buyback money was taxed as income before the buyback and is now taxed again as new pension income. Any one dealt with this? Dejavu.
As far as I know you cannot deduct the buy back amount in Canada.It would be difficult to calculate it anyway,in fact in Australia there is/was a tax deduction of about 8% from each pension payment you receive from the UK- this apparently is purely arbitrary and was negotiated with the tax authories by the Australian resident British pensioners to account for the fact that there is no deduction for contributions even in the UK.I doubt CRA would accept this type of compromise as they might then hold that you should have declared the accrued pension on an annual basis or deducted it from your RRSP entitlement.It's a very grey area and personally I would leave sleeping dogs lie.As a social security pension it has special status under the tax treaty between Canada and the UK but I don't know how they would view the voluntary contributions that you made,especially if you made CPP contributions for the same years ,essentially a form of "double dipping".Australia has NO equivalent to CPP so the issue does not arise over there.
By the way I understand that it DOES qualify for the pension income tax credit and therefore for pension splitting with your spouse.
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Re: Buying British Pension Eligibility

Post by Dejavu »

Thx. to you both for your replies. I will indeed now "let sleeping dogs lie". As an aside, I had to file the data using a T1 adjust form as somehow it got missed off my Turbo Tax Netfile sent last night. So I have declared the income on line 115 and triggered the Pension Credit, on line 314. Which, due to the way its calculated resulted in an extra $5 refund!
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Re: Buying British Pension Eligibility

Post by petaling »

Few years back I apply for clarification but since then received one letter saying it is under consideration and then the trail got cold. ie the Big Stamp never came.Then life got in the way.

I lived as a student in the UK from 1972-1979, worked 1 year in the National Health Service before emigrating to Canada.

I am paying the top marginal tax rate in Canada,

should I still pursue this ,somehow ?

I am now 58 and wish to retire and visit the UK often as my daughter now works there.

However, I am afraid that what ever I get in the UK say 200 pounds per month may be eaten up by income tax in Canada as I hope to still work part-time from 60-70 generating $ 65000 (and some withdrawal from RRSP, other pension plan etc) per year

ie with all the efforts and contributions, my return would be worthwhile or not?
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Re: Buying British Pension Eligibility

Post by izzy »

No harm in enquiring whether you are eligible (the rules have been changing) but bear in mind that if you are a Canadian resident any pension payments will not be indexed to inflation from the date you first receive it,and of course there is foreign exchange risk.
As opposed to that you now need only 30 years contributions to qualify for a full pension,you can make voluntary contributions going back 6 years and if you are now 58 you should be able to contribute for 7 further years (if you are male,less if female since womens retirement age was historically lower) so 13 years contributions means over 30% of a full pension.As far as I know your spouse also qualifies for a pension of 60% of yours based on your contributions even if he/she never even set foot in the UK.If you are worried about being in a too high tax bracket you can defer the UK pension indefinitely on quite generous terms until you are in a lower one.
As far as tax is concerned you would be taxed in Canada not the UK on the pension which qualifies here for pension credit and therefore can be split with your spouse.
Try the CABP website for further information.
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Re: Buying British Pension Eligibility

Post by rocketboss »

pmj wrote:If you came here in 1982 after working 3 / 6 years in the UK I'd guess you are in your early 50's? If so, many of the transition rules for those retiring in the next 5 - 10 years won't apply - which makes the analysis a little easier. And if you are in your early 50's - you won't be able to make enough contributions to get the 30 years required for a full pension. I've ignored the contributions you've already made because they don't affect the relative outcomes of the alternatives (they would if you were able to reach 30 years).

Using today's numbers, and allowing that both contributions and pensions are indexed**, the simple payback for each contribution is 4 years (a full year's Class 3 contribution of 52 x £12.05 (2009/10) generates a pension of 1/30 x 52 x £95.25 (2009/10) = 52 x £3.175 - ie just a bit more than one-quarter of the contribution). [**I know that pensions aren't indexed for Canadian residents - but that doesn't significantly change the analysis.] This calculation ignores that you might have otherwise invested the money at a real rate of return over the intervening 10 to 15 years - so making a whole stack of assumptions on real rates of return, time periods, etc - let's arbitrarily say that the true payback period is 5 years. I've also ignored that contributions for the years 2005/06, 2007/08 & 2008/09 are payable at the older ±£8 rates - for which the payback is just over 3 years. And remember that April 5th is the last date you can pay the lower rate for 2007/08.

Firstly I'll assume that you are both the same age.
If you have enough cashflow to pay all of the contributions that you are entitled to make for both of you - you will get all of those contributions back in 5 years after you retire.

Or let's say you only have 50% of that amount available, and you deploy it equally to both accounts - again you'll get it all back in 5 years. But if you apply all of that lesser amount of money to one account - you will receive 160% of the "single" pension - so your payback will reduce to 5/1.6 = 3.125 years.

Alternatively, if one of you is older, personal contributions on that account will provide a single pension at that person's earlier retirement date - whereas contributions only on the other account will not generate the 160% "married" pension until the later retirement date - although the amount would be calculated from a higher base 'cos you'd have made more contributions.....and the base pension would also have seen ?1-2-3? years-worth of indexed increases before it was paid :? .

There's too many unknowns and variables (for me) to go much further - although you should know the answers to most of these items. And don't forget that this analysis also ignores the upcoming meltdown of sterling :cry:.

Edited 2010-03-04 22:18 EDT (replaced younger with older where bolded)
Oh well, planning feedback was excellent while it lasted!

I will reach state pension age 66 in 2020, my wife will reach her state pension age 66 in 2023.

With the pending UK pension reform 2013 (UK single-tier pension), I will be impacted significantly on the loss of 60% spouse entitlement. Despite this, we think we will be better off buying our pension eligibility on the assumption that similar annuity will cost much more than NIC class 3 payments.

I was talking to HMRC office in uk regarding the extension limit for NIC Class 3 payments. I was told that nothing has changed beyond 6 year time limit. Yet, this link, http://www.hmrc.gov.uk/ni/volcontr/whentop-up.htm#1 , clearly states that I can defer payments until 2019 without penalty. Here is the quote from this link.

Extended time limits for the tax years 2006-07 to 2015-16
If you are affected by the proposed changes to simplify future State Pension you have more time to pay voluntary Class 2 or Class 3 National Insurance contributions for the years from 2006-07 to 2015-16. The extended time limits apply if:
you reach State Pension age on or after 6 April 2016
and you make payment by 5 April 2023
The extended time limits are:
for voluntary Class 3 contributions, if you make payment by 5 April 2019 you will pay the contributions at the rate that applied in 2012-13 tax year for the tax years 2006-07 to 2010-11
for voluntary Class 2 contributions, if you make a payment by 5 April 2019 you will pay the contributions at the rate that applied in 2012-13 tax year for the tax years 2006-07 to 2010-11
for the remaining years up to and including 2015-16 higher rate provisions will not apply until 5 April 2019
if you make payment after the 5 April 2019 the rates may have increased

Am I safe in deferring payments?.....or just work with 6-year original rule? I don't want to lose out paying on previous years.

Naynesh
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Re: Buying British Pension Eligibility

Post by izzy »

Not sure if this helps or complicates things but I'm posting it just for information. It's difficult to know what is best to do when you are working with a constantly moving target like this.
http://www.theguardian.com/money/2014/j ... NETTXT3487
Personally I doubt I would have bothered had I known how confused the UK would make this especially over the past few years but it's too late now, for me anyway. How the UK got a reputation for competence in public administration I don't know-things certainly seem to have changed in that respect!
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Re: Buying British Pension Eligibility

Post by rocketboss »

izzy wrote:Not sure if this helps or complicates things but I'm posting it just for information. It's difficult to know what is best to do when you are working with a constantly moving target like this.
http://www.theguardian.com/money/2014/j ... NETTXT3487
Personally I doubt I would have bothered had I known how confused the UK would make this especially over the past few years but it's too late now, for me anyway. How the UK got a reputation for competence in public administration I don't know-things certainly seem to have changed in that respect!
The proposal mentioned in this Guardian article seems to be a good deal for people reaching State Pension age in 2016. Note that this is in addition to NIC class 3 contributions.
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Re: Buying British Pension Eligibility

Post by izzy »

rocketboss wrote:
izzy wrote:Not sure if this helps or complicates things but I'm posting it just for information. It's difficult to know what is best to do when you are working with a constantly moving target like this.
http://www.theguardian.com/money/2014/j ... NETTXT3487
Personally I doubt I would have bothered had I known how confused the UK would make this especially over the past few years but it's too late now, for me anyway. How the UK got a reputation for competence in public administration I don't know-things certainly seem to have changed in that respect!
The proposal mentioned in this Guardian article seems to be a good deal for people reaching State Pension age in 2016. Note that this is in addition to NIC class 3 contributions.
Possibly but note that if you defer the pension (earning a 10.4% accrual rate) and use the money you would otherwise have paid for the class 3a contributions instead of the pension you would have received during the deferral, the result is similar except that the income you have foregone is before tax income instead of the 3a contribution which is after tax pounds!
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Re: Buying British Pension Eligibility

Post by parvus »

izzy wrote:How the UK got a reputation for competence in public administration I don't know-things certainly seem to have changed in that respect!
Which is why it is now, more or less, the financial capital of the world. :lol:
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Re: Buying British Pension Eligibility

Post by Benchwarmer »

I heard that under the British government pension reforms, the pensions of those government workers already retired were reduced. Is that the case?
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Re: Buying British Pension Eligibility

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Benchwarmer wrote:I heard that under the British government pension reforms, the pensions of those government workers already retired were reduced. Is that the case?
Very much doubt it. A year or two ago, the Romanian government tried to introduce an austerity program which included cutting (by 15%) the pensions of already retired people. The measure was declared to be invalid (IIRC for breaking a legal contract), rescinded, replaced by cutting 25% of active government workers' salaries.

Soon thereafter that government fell, replaced by another coalition, and reduced to a small minority in the next election. ISTR some references to the European Union re: legality of reducing pensions.
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Re: Buying British Pension Eligibility

Post by mudLark »

rocketboss wrote:...will cost much more than NIC class 3 payments.
Why pay the class 3 and not the class 2 rate?
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Re: Buying British Pension Eligibility

Post by pmj »

mudLark wrote:
rocketboss wrote:...will cost much more than NIC class 3 payments.
Why pay the class 3 and not the class 2 rate?
The rules that allow you the option of paying Class 2 rates are very restrictive. IIRC, you'd have to become self-employed during the week following the last Class 1 payment on your behalf as an employee - an unlikely act of forward-planning at the time of leaving the UK for foreign pastures ...
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Re: Buying British Pension Eligibility

Post by izzy »

pmj wrote:
mudLark wrote:
rocketboss wrote:...will cost much more than NIC class 3 payments.
Why pay the class 3 and not the class 2 rate?
The rules that allow you the option of paying Class 2 rates are very restrictive. IIRC, you'd have to become self-employed during the week following the last Class 1 payment on your behalf as an employee - an unlikely act of forward-planning at the time of leaving the UK for foreign pastures ...
Not quite...

http://expatfinancialcents.com/2012/03/ ... ributions/
It is confusing though!
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Re: Buying British Pension Eligibility

Post by pmj »

izzy wrote:
pmj wrote:The rules that allow you the option of paying Class 2 rates are very restrictive. IIRC, you'd have to become self-employed during the week following the last Class 1 payment on your behalf as an employee - an unlikely act of forward-planning at the time of leaving the UK for foreign pastures ...
Not quite...

http://expatfinancialcents.com/2012/03/ ... ributions/
It is confusing though!
I investigated that possibility when the option of buying-back additional years became more widely-publicized in ?2008? - and to obtain Class 2 eligibility it was necessary that one had made continuous payments. Given that the payment of Class 1 contributions was an entirely invisible process when employed, it's doubtful that many employees even gave this a thought at the time .... and I doubt that many emigrants maintained employment right up to the day of leaving! Additionally, the right to make retroactive payments does not have indefinite life - so if one had left more than nn (?6?) years earlier it would not be possible to catch-up those Class 2 payments when the option/right became known.
ISTM that the right to pay Class 2 rates is more theoretical than real :(
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Re: Buying British Pension Eligibility

Post by izzy »

pmj wrote:
izzy wrote:
pmj wrote:The rules that allow you the option of paying Class 2 rates are very restrictive. IIRC, you'd have to become self-employed during the week following the last Class 1 payment on your behalf as an employee - an unlikely act of forward-planning at the time of leaving the UK for foreign pastures ...
Not quite...

http://expatfinancialcents.com/2012/03/ ... ributions/
It is confusing though!
I investigated that possibility when the option of buying-back additional years became more widely-publicized in ?2008? - and to obtain Class 2 eligibility it was necessary that one had made continuous payments. Given that the payment of Class 1 contributions was an entirely invisible process when employed, it's doubtful that many employees even gave this a thought at the time .... and I doubt that many emigrants maintained employment right up to the day of leaving! Additionally, the right to make retroactive payments does not have indefinite life - so if one had left more than nn (?6?) years earlier it would not be possible to catch-up those Class 2 payments when the option/right became known.
ISTM that the right to pay Class 2 rates is more theoretical than real :(
I don't think you are right. I paid Class 3 for a number of years and then switched to class 2 without problem. I'm now age 72 so things may have changed since but it wouldn't hurt to enquire whether you can too, Check NI 38(you can google it) .Read from page 9 on and fill in the form. I know they won't refund the difference for years you have already paid at Class 3 though.
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Re: Buying British Pension Eligibility

Post by mudLark »

izzy wrote:don't think you are right.
Neither do I.

Methinks you should apply to pay the class 2 rate, as suggested by izzy. The worst that can happen is they turn down the application.
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Re: Buying British Pension Eligibility

Post by john5655 »

I've been interested in this subject for some time as I will reach UK state retirement age in 2020. The moving goalposts have been a nightmare for all the reasons covered by previous posters. I now wish to restart paying voluntary NICs to get my contribution record up to the new threshold of 35 years, after they reduced it to 30 years just a few years ago. I too would like to pay Class 2 as the rate is significantly less than Class 3, but as I now do not work it seems I am ineligible. Here's what the NI38 document has to say (with emphasis added by me
You may choose to pay Class 2 NICs to help you qualify for contribution­based Employment and Support Allowance and Incapacity Benefit when you get back to the UK, as well as State Pension and bereavement benefits.
You can pay Class 2 NICs if you are employed or self­employed abroad and if you satisfy the following conditions:
• you have lived in the UK for a continuous three­year period at any time before the period for which NICs are to be paid. (If you have lived or worked in another EEA country or in Turkey, time spent there may help you to meet this condition), or
• before going abroad you paid a set amount in NICs for three years or more (this will be checked when you ask to pay Class 2 NICs), and
• immediately before going abroad you were ordinarily an employed or self­employed earner or registered unemployed in the UK.
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Re: Buying British Pension Eligibility

Post by pmj »

Is there anyone here, receiving a UK state pension, who has chosen the "pay-to-foreign-bank-account-in-foreign-currency" option? If so, are the exchange rates reasonable? At your bank, do those C$ payments from abroad attract any fees?
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Re: Buying British Pension Eligibility

Post by rocketboss »

I reached UK pension eligibility in Oct. 2020.
If I apply for pension now(ie. one year later), I understand that my pension will increase 5.8%(1% every 9 weeks).
Does anyone know if I will be eligible for the cost of living increase that occurred in April 2021?

Thanks!!
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Re: Buying British Pension Eligibility

Post by Mordko »

Nope. Only if you move south of the border.
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Re: Buying British Pension Eligibility

Post by rocketboss »

Thanks. I am aware that annual cost of living increase doesn’t apply for Canadian already on uk pension. But, what if you haven’t started claiming pension yet?
I suspect answer might be the same.
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Re: Buying British Pension Eligibility

Post by Mordko »

Yes, it is the same. Which is why it makes no sense to delay.
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