Pension transfers to QROPS for UK expats and internationals have been possible since 2006, but they are not without issues and challenges.
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A brief history of QROPS and overseas pension arrangements
“It all started with the UK government’s wish, in 2006, to simplify what was, up until that point, a confusing mismatch of pension rules that had been amended by each successive governmental administration”, explains Russell. “While there was a recognized need to maintain the existing regime to protect UK tax revenue, there also was a cross-party consensus that the pension landscape needed to be simplified.”
As part of this pension industry ‘spring clean’, the UK government announced that it would now allow individuals who had accumulated UK pension rights to transfer them to overseas arrangements. However, these overseas arrangements needed to be structured to conform to the main UK pension rules – most notably the youngest age from which benefits could be withdrawn, and the percentage of benefits that should be set aside for pension income.
The QROPS decision was not entirely as a consequence of the April 2006 Pension Simplification regime; pressure was also emanating from the European Commission to allow EU nationals to move their pensions within the European Union. The new QROPS regime would allow the UK to honour this EU Freedoms requirement.
“All of a sudden, thousands of UK citizens who had accumulated UK pension rights and were now living abroad, looked to take advantage of this new opportunity to transfer their UK pension benefits to QROPS”, says Russell. He adds that “some of these pensions were ‘defined contribution’ (so, effectively, pots of money that had been built up in UK pension schemes); however, the vast majority were ‘defined benefit’ (also called ‘final salary schemes’), which meant that the retiree would give up the safety of these final salary pension schemes in favour of a lump sum transfer value to be transferred to their QROPS trust structure.”
The 2015 UK Budget brought further reform, making the pension income withdrawals much more flexible. Gone were the limitations on how much you could take and when: Flexible Access Drawdown (FAD) was born. FAD would very soon become a feature of many EU QROPS schemes, most notably those offered from the EU member state of Malta.
The pitfalls and challenges of QROPS
So, all is well and good? “Well, unfortunately not for many who made the decision to transfer”, deplores Russell.
He notes that “it is important to say that, for the right individuals in the right circumstances, there can be some considerable tax and investment advantages to transferring to QROPS.”
However, he also adds that “in parallel with the exponential demand for QROPS also came a new group of ‘newly minted’ financial sales people who were, for the most part, unqualified and unregulated. These were more focused on generating commissions than actually providing clients with a suitable, effective overseas pension investment solution.”
According to Russell, “the unfortunate outcome is that there are now countless QROPS clients holding arrangements that are, at best, ill-suited to their individual circumstances.”
Poor quality QROPS advice has come about as a consequence of the structure of the international financial advice market: financial institutions are paying commissions to advisors, rather than advisors charging their clients transparent management fees.
“Unlike consumer goods which we buy, use and then discard, a QROPS is a service”, explains Russell; “a long-term financial undertaking which not only needs to be set up properly initially, but also tracked and managed as market conditions develop, and as the individual client’s circumstances evolve”.
QROPS holders need ongoing advice when they switch from the ‘capital accumulation’ stage to the ‘drawdown income’ stage of their pension. This advice gap effectively means that many pensioners enter the most critical stage of their financial planning life cycle, retirement, lacking advice.
Tips to avoid QROPS issues
Finding a fee-based advisor
For Russell, the most important advice is that “a QROPS (or really, any other investment or pension scheme) should be arranged by a professional advisor on a fee-only basis.” This ensures that the QROPS client receives advice throughout the investment process, not just at the beginning. “If the client becomes unhappy with the advice that they are receiving, they are able to simply ‘turn off the tap’ and change QROPS advisor”, he explains.
So, if you’re currently holding a QROPS, and are either unhappy with the advice that you have received, looking to change QROPS advisor, or about to enter the income drawdown stage, what can you do to improve your situation?
Changing investment arrangements, QROPS company or trustee
Reassuringly, Russell says that “the first thing to mention is that all is certainly not lost.” He explains that most of the investment products and wrappers that were used (and continue to be used) by international financial sales firms have a 5-10-year investment period, so once you are beyond this investment period you are able to completely switch out of your current investment arrangement and into something that will provide a much better pension investment solution.
“Don’t despair if you are still within the exit penalty stage”, he says; “a fee-based advisor can still help with your QROPS”. An extra management fee will need to be applied, in addition to the fees that are already being charged. But fee-based advisors will almost always be able to cut other hidden fees, so the extra management fee that they charge can be recouped by other, sometimes significant cost savings. “They do this as their only agenda is to make you money,” explains Russell, “not to line their own pockets with commissions payable by the investment wrappers.”
Most fee-based international advisors are willing to provide a free-of-charge, ‘QROPS Health Check’ which would allow you to understand in simple, unbiased terms, what exactly you have and what improvements can be made.
How do you find a trusted QROPS advisor?
You need to ensure that the advice you are receiving is genuinely independent. “This means that the advisor isn’t paid a penny from any provider or financial institution” explains Russell.
“Do not feel overwhelmed by the vast number of firms offering ‘advice’ on QROPS”, he says. “A knowledgeable, independent advisor can make improvements to your QROPS immediately, potentially saving you thousands of pounds in fees and dramatically improving your investment returns.”
The number of truly independent, fee-based, international advisors providing unbiased advice on QROPS (both initially and with effective ongoing management), is low compared to their commission-based advice counterparts; however, there are still plenty to choose from. A cursory Google search for ‘Fee Based QROPS Advice’ should provide plenty of advisory firms for you to choose from.
As a final piece of advice, Russell recommends that, if possible, “you should seek out advice from a Chartered Financial Planner, as you will know that the advisor is holding the most advanced qualifications in pensions and investment”, and has met exceptionally strict criteria defined by the professional body of which they are a Chartered Member.
After working as a stock broker in London, Russell Hammond started advising expatriates and internationals on financial planning, investments, and pension transfers 13 years ago. As a Chartered Fellow of the Chartered Insurance Institute and Chartered Member of the Chartered Institute for Securities and Investment, Russell provides high quality, fee-based, advice to his diverse international clientele.Ask Russell for financial tips