Is your advisor benefiting more than you?

In April 2006 new legislation in the UK introduced the concept of Qualified Recognised Overseas Pension Schemes (QROPS). The motivation was to allow anyone with a UK pension who had left the country or who was planning to leave the country to transfer their pension savings to an overseas pension without incurring the 55% tax that would otherwise be levied on such transfers.

Legislators clearly had the intention of allowing individuals more flexibility with their pensions and to prevent their savings from being eroded by tax. On the face of it, it was a positive move.

However, good intentions don’t always lead to good outcomes. This is not because there is anything wrong with the concept or with the products, but because they have led to the growth of an ‘advice’ industry with some questionable practices.

Over the last number of years, a growing number of firms have been cropping up all over the world, including in South Africa, claiming to specialise in QROPS products. They encourage those with UK pensions to transfer them into QROPS on the basis of a range of supposed advantages.

The most widely trumpeted of these is their tax efficiency. The UK currently has a ‘lifetime allowance’, below which contributions are given tax relief, but above which benefits are heavily taxed.

Moving your money into a QROPS would avoid this limit. However, since the limit is currently £1.25 million and will drop to £1.0 million in April next year, only a small percentage of people are really affected.

Another tax issue put forward by those promoting QROPS is that pensions in the UK may face a 45% tax charge on the death of the main member, with only the remainder being left to a nominated beneficiary. However, this only applies to members over the age of 75 and is only in place until April 2016. After that date, good planning would make it possible to avoid this tax altogether.

There is therefore little reason for anyone under the age of 74 to even be worried about this, and yet it is widely repeated on websites promoting QROPS.

These examples highlight the kind of marketing used for these products. Generally, they only tell half the story.

In fact, many of the supposed advantages of QROPS are now available in the UK. For example, there is no need to buy an annuity with a UK pension any more, a number of UK providers allow multi-currency funds, and there is huge flexibility in investment choices. In other words, it is not necessary to move your pension out of the UK to reduce your currency or market risk.

It also appears that those marketing QROPS are using the fact that the UK has dropped the lifetime allowance for pension funds to argue that people are better off moving their money elsewhere as further detrimental changes might follow. However, without knowing what those changes might be, how does anyone know whether they really need to avoid them or not?

It is also highly debatable whether all of the offshore jurisdictions being promoted as QROPS havens are as safe and well-governed as they are made out to be. A popular jurisdiction for those selling QROPS in South Africa is Gibraltar, where pensions are not a regulated activity, there is no financial services ombudsman and the Gibraltar Financial Services Commission does not resolve disputes between consumers and licensed firms. It’s difficult to argue that investors will receive better protection there than in the UK.

So why do these firms argue so enthusiastically in favour of QROPS?

Unfortunately, the answer is that there is a lot of money to be made in selling them. The potential commissions are significant.

Independent analysis of these products has shown that, depending on how they are structured, investors can pay up to 18% of their savings in often undisclosed or hidden fees in the first year alone. That means that they need to be very sure that the benefits they are getting are worth it.

This is the crux of the argument, because there are some instances in which a QROPS would make sense. These are, however, a minority of cases generally involving high net worth individuals with very specific circumstances.

They are not products that are likely to work out in favour of the majority of savers. Apart from whatever up-front commissions and fees might be payable, the products themselves are significantly more expensive than self-invested personal pensions (SIPPs) in the UK (which are similar to retirement annuities in South Africa). While a SIPP might attract fees of £150 to £250 a year on average, a QROPS costs between £750 and £1 000.

For UK expats living in South Africa (and indeed anywhere in the world), it is therefore very important to consider your options carefully before making the decision to move your pension savings into a QROPS. And that means getting advice from more than one source.

It is unlikely that any financial adviser in South Africa could be an expert on both UK pensions and all QROPS jurisdictions. That would require having multiple qualifications from different countries.

It could therefore be argued that one of the best courses of action for anyone with a UK pension is to get a thorough comparison of the benefits of keeping that money in the country against moving it elsewhere. That could well mean making use of a UK-based and qualified adviser for the former and a locally-qualified and informed adviser for the latter.

Bear two things in mind when doing this: firstly, if you are told that you don’t have to pay for ‘advice’, chances are that you are being sold a product and not being given advice. And, secondly, scrutinise the regulatory permissions of the firm ‘advising’ on the product. If it is not regulated to give pension advice, and if it turns out to be detrimental to your wealth, your options for recourse will be limited.

Having specialists in their respective fields provide an unbiased and complete comparison between the tax treatment, benefits and options available from the different products is the best way to get an unbiased and complete comparison. It might also be the only way to be sure that the product you are being encouraged to take out is really beneficial to you and not just the person selling it.

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