How to make QROPS work for you
Chartered Financial Planner Russell Hammond, APFS MSCI, expands on some key points about QROPS and how QROPS can be best managed to work for you. One of very few advisers to expatriates holding the coveted ‘Chartered’ title, Hammond is non-commission based and operates exclusively on a fee-only basis.
Are you one of the half a million Brits who leave the UK each year to live elsewhere? If so, and you have pensions in the UK, you may have been wondering how to ensure your financial security for the long term and have thus been looking at making a transfer to QROPS. If you’ve started to have a cursory look on the web, you’re probably feeling quite overwhelmed by the vast number of firms all promising to ‘help’ with your transfer to QROPS. Read on to get to a place of understanding where you will know exactly what to look for in deciding how to best proceed with QROPS.
QROPS – in short
One of the best ways to simplify the ongoing management of your pension assets when you become an expatriate is to make use of a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is an overseas pension, established outside of the UK, which meets specific criteria to allow for the transfer in, and subsequent management and access of, UK tax-relieved pension funds.
Allowing for the transfer in of both defined benefit and defined contribution pension schemes, many expatriates see QROPS as a mechanism to augment their current pension arrangements and thus improve their overall financial position. Though, as you would expect, there are many points of consideration for any pension transfer.
Some of the main benefits of QROPS – in brief
- If you die while living overseas, your beneficiary could avoid paying tax on your pension if you die after the age of 75. Currently, in the UK, pensions are taxed on beneficiaries at their marginal rate of tax when the pension holder dies after the age of 75.
- QROPS can offer greater investment flexibility than your pension in the UK, allowing access to a wider range of investments. Some UK pensions will not allow non-UK residents to alter their investment mix.
- QROPS allow for your pension to be denominated in a currency other than GBP, thus removing your currency risk.
- QROPS income can be structured in order to ensure that your local income tax liability is minimised — where there is a transfer from secured to flexible benefits.
- Your UK pension could default to an annuity or already be tied into one. Annuities are not required within QROPS, giving you the flexibility to spend your pension as you wish.
Some of the disadvantages of QROPS – in brief
- When transferring to QROPS, you will lose the benefits that come with your current UK pension, which may include a secured income for defined benefit schemes or guaranteed income rates (GARS). Therefore, it is wise to seek professional advice on this, or any other, pension transfer.
- You lose the regulatory oversight of the UK financial services regulator (the FCA). However, the financial services regulatory environment in some other jurisdictions could be considered equally robust.
- Costs, associated with the initial transfer, and the subsequent maintenance of the QROPS may be greater than if your pension remains where it is.
- QROPS may lose status which could require you to move your QROPS to an alternative jurisdiction. When this happened in the past (e.g. Guernsey) QROPS holders were not penalised and were able to continue to maintain their existing QROPS arrangements.
- Existing UK advisers may be unable to advise on QROPS; thus, it is often required to seek out an adviser, specifically for your QROPS transfer needs.
- Advice on QROPS has, from some quarters, come from loosely regulated, poorly qualified firms and advisers, and has, therefore, been of relatively poor quality for some clients. See tips below!
QROPS advice: tips and things to avoid
If you’re looking to transfer your UK pensions via QROPS, you need to take professional advice. However, how do you know that the advice you are receiving is the best advice?
Follow the four ‘tips’ below to put yourself in the very best position, ensuring that you extract the most from any QROPS arrangement:
1. Regulation is important — check it and double check it
It can be easy for a company or individual to appear professional and well-regulated: a slick website, an eye-catching logo or a smooth-talking adviser may go to some lengths to make you think you are dealing with someone reputable. However, it is fundamentally important to thoroughly check that the person or company is approved to practise in the particular field of advice that you need.
With a well-regulated and client-focused organisation or individual, you can be certain of a service that it is holistic, impartial and genuinely professional. Don’t be tempted by polished branding or an organisation that may happen to be in the same town as you; a well-regulated adviser will make themselves available to you wherever they might be based, whether online or over the telephone. It is also a good idea to avoid firms based in less well-regulated areas of the world.
2. Adequate capitalisation and indemnity insurance, in case things go wrong
Consider the financial crisis back in 2008 and the financial uncertainty surrounding the UK’s withdrawal from the EU. Sometimes events beyond our control have an impact; it is rare but things don’t always go the way we plan, no matter how robust the plan. Check that your potential advisers have adequate indemnity cover or adequate capitalisation. If they are good, and well covered, they will not mind proving the fact.
3. Qualifications are vital
The field of financial advice services is unique. At times it can be alarmingly easy for advice to be dispensed by a firm or individual not properly qualified to do so. Financial advice comes in many different forms and across a wide range of fields. It is important to verify your adviser’s suitability for your particular field of interest. It is important to bear in mind that strong qualifications are no guarantee of instant success, but they can go a long way towards giving you a professional, impartial and considered service.
High-level qualifications also mean an adviser will have the confidence to know when there is a need to liaise with other professionals to bring you the best possible service. Poor service can occur due to many things: ignorance of proven investment practices, greed for commission, or just a lack of attention to detail. Again, any firm or independent adviser who is client focused will not mind you establishing their qualifications and suitability to offer you the advice you need. If possible, try to work with a Chartered financial adviser. Chartered Financial Planner status is awarded to advisers reaching a high level of qualification, and a minimum number of years practicing as a Financial Planner by the Chartered Insurance Institute in the UK. Chartered status means that the adviser is at the very top of their profession for knowledge acquisition and professional development. In the UK, the top 10 percent of advisers are Chartered, while around 1 percent of advisers working with expats are Chartered. Importantly Chartered status should be taken as more of a quality indicator rather than as an assumption that the advice provided is regulated by the UK FCA.
4. Choose fee-based advice over commission-based advice every time.
Any financial adviser worthy of the name should expect to practise on the basis that they only receive a fee as long as the client is happy with the service that is provided to them. Commission-based advice goes against everything a client-focused, impartial adviser stands for and, in truth, should be outlawed worldwide.
The above statement may seem harsh, but I make no apologies for it. I regularly come across heart-breaking and disgraceful examples of clients being taken advantage of by commission-hungry salespeople who work hard to mis-sell an image of professionalism, only for the client to be cast aside and forgotten about later down the line. The client is then beside themselves with worry and a QROPS portfolio that is both expensive, inconsistent and stands no chance of generating robust and consistent long-term returns.
Offshore bond structures
Professionally, I am not against the idea of using offshore wrappers, such as those provided by Old Mutual International (OMI). A large percentage of my clients use them. However, it is essential that the client must always opt for a non-commission structure from OMI or other providers. Always bear in mind that a fee-based adviser has little or no allegiance towards any company or financial institution; essentially, they’re not looking to earn commission. The focus for a fee-based adviser is the best performance, the most cost-effective structures and long-term client satisfaction. It cannot be stressed enough: it is important to insist that your financial adviser operates on fee-based terms, with no minimum periods of investment, and no lock-in or exit fees.
Russell Hammond / Expatica
Russell Hammond is Expatica's finance expert and an Investment & Pension Advisor at AES International.
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