Tax on Pension [ 中文 ]

TAX ON PENSION

 

There are two categories of pension:

• State pension, and
• Private pension.

A resident individual can have a state pension, private pension, or both. 

 

Pensions can also be divided into two types: -

• A defined benefit plan - a DB plan specifies exactly how much retirement income employees will get once they retire;
• A defined contribution plan - a DC plan only specifies what each party – the employer and employee – contributes to an employee's retirement account. 

The basic difference is what each plan promises its participants

 

Country rules - Canada, the United Kingdom

 

Tax relating to pension in the U.K. normally include the following: -

1. Contribution to the pension,

2. Income earned from the assets in the pension,

3. Distribution received from the pension.

Broadly speaking:

• income that is paid into a private pension is exempt from income tax;

• income earned from investments within the pension fund is also exempt (and capital gains are exempt from capital gains tax);

• money received from the pension is taxed.

This is often referred to as "exempt-exempt-taxed" or "EET" treatment. 

 

Comparison - UK and Canada

 

Private pensions

In the United Kingdom	In Canada	In the USA
ISA Individual Savings Account	TFSA Tax Free Savings Account	Roth IRA Roth Individual Retirement Account
Self-invested Personal Pension (SIPP) for employees		401k plan
Small Self-Administered Scheme (SSAS) for self-employed or owner-directors	Registered Retirement Savings Plan (RRSP)	401k plan

 

Comparison – <Exempt-Exempt-Taxed, the E-E-T route>

	Contribution	Earning	Withdrawal	Withdrawal age
Canada (RRSP) [E-E-T]	Tax-exempted, subject to the limit of 18% of reported income or CAD $27,830 (2020)	Tax-exempted	Taxed	at age 71
The U.K. (SSAS) [E-E-T]	Tax-exempted, subject to limit GBP 40,000 per year	Tax-exempted	Taxed	at age 75
The U.S. [E-E-T] 401k plan	Tax-exempted, subject to the limit of $20,500 under age 50 and over, $27,000 [*]	Tax-exempted	Taxed	at age 72

[*] 2023 adjustment

401(k) plan limits	2022	2023	Change
Maximum salary deferral for workers	$20,500	$22,500	+$2,000
Catch-up contributions for workers 50 and older	$6,500	$7,500	+$1,000
Total contribution limit	$61,000	$66,000	+$5,000
Total contribution limit, plus catch-up contribution	$67,500	$73,500	+$6,000

 

 

Savings Account Comparison - <Taxed-Exempt-Exempt, the T-E-E route>

	Contribution	Income earned and gains after contribution	Distribution/withdrawal
Canada (TFSA)	Taxed, contribution limited to CAD $6,000 per year	Tax-exempted	Tax-exempted
The U. K. (ISA)	Taxed, limited to GBP20,000 per year	Tax-exempted	Tax-exempted
The U.S. (Roth IRA)	Taxed, limited to US$6,000 (or 7,000 for those aged 50 or above)	Tax-exempted	Tax-exempted

TFSA = Tax-free savings account; ISA = Individual savings account; Roth IRA = Roth individual retirement arrangement

 

Recommended articles:

• Taxation of private pensions explained [read]
• 401(k) vs. RRSP: What’s the Difference? [read]
• Tax-Free Savings Account: What To Know? [read]
• TFSA vs. Roth IRA: A Comparison of Tax-Free Accounts in Canada and the U.S. [read]