A Qualifying Recognised Overseas Pension Scheme (QROPS) is a pension scheme established outside of the UK which meets certain HMRC requirements allowing it to receive transfers in from UK registered pensions. QROPS were introduced on 6April 2006 following pressure from the EU to honour the ‘freedom of capital movement legislation’. The main benefit of a QROPS over a UK pension is the potential for greater investment freedom and an opportunity to minimize your tax liability, depending on your own circumstances.
What is the Overseas Transfer Charge (OTC)?
The OTC was introduced on 9March 2017 to combat the use of QROPS as a tax avoidance vehicle. Broadly speaking, the OTC is a 25% tax charge on the value of a transfer from a UK pension scheme to a QROPS. It generally applies if you are transferring your pension to a country in which you are not resident.
Why review a QROPS?
In the UK, financial advice is a strictly regulated profession and advice can only be provided under a clear and transparent fee basis by those that are qualified to a minimum standard. Outside of the UK however, advice is still predominantly less well-regulated, advisers less qualified and advice offered on a commission basis. Therefore, you must undertake your own due diligence on potential advisers as many different approaches are used, some of which are much more expensive than others.
QROPS can still be suitable for a non-UK resident but a good starting point is to seek independent advice on a fee basis from a qualified adviser to ensure that you are receiving advice that is in your best interests – not just your adviser’s!
You may be one of the many expatriates who now holds a QROPS. If this is the case, you aren’t alone; there are hundreds of millions of pounds invested into QROP schemes around the world. Understandably you may be concerned about your pension as a result of a transfer to a QROPS and getting a second opinion is a good place to start. This will either give you peace of mind that you are well looked after or highlight potential issues which we can look to rectify before too much damage is done.
Given the often-fragmented regulatory frameworks available offshore, the near absence of qualified advisers and the incentives on offer for advisers to take particularly damaging actions, it’s not hard to see why so many expatriates end up in an inefficient QROPS. The good news is that even if you have already moved your pension scheme, we can assist in maximising its potential by using clear and transparent advice to help get your QROPS back on the right track.
What are the typical red flags to look for with a QROPS?
There are several key red flags to be aware of. One is that you have a QROPS at all, although there are usually some genuine planning opportunities that can be achieved with a QROPS. Generally, there are a handful of warning signs to look out for:
- How did you find out about the opportunity to invest in a QROPS? Did you get a call out of the blue promising to unlock your ‘frozen’ pension and make it ‘tax-free’? Both statements are potentially incorrect, but are frequently the reason many people move to a QROPS.
- Are you aware of the total costs of your QROPS? A professional advisory firm will provide you with a full breakdown of any initial and ongoing charges, with justification of each element. They should also be able to offer products at a lower cost than you can source them yourself, rather than adding a margin to the cost of any products to bolster their profits.
- Were you advised to transfer your UK pensions into a QROPS with the investments managed inside an expensive commission-paying product? Typically, these will have long lock-in periods and little flexibility. Potentially an offshore bond was advised within your pension due to tax efficiency, in reality pension rules normally overrule the ‘efficiency’ that an insurance bond might provide especially if it was sold on a high commission paying basis which was undisclosed. The key with any pension product is that you retain flexibility, the product costs are disclosed, reasonable and you receive a high level of ongoing service on your overall financial planning to ensure your pension is and continues to be appropriate for you. Upon reviewing QROPS plans, we often see upfront commission to your adviser being a driver of the selected approach which can sometimes lead to a lack of ongoing service and lack of flexibility.
- Have you experienced a stagnant pension value over several years? Typically, it can take a few years to realise the disconnect between flat fund performance and the upward trend of investment markets. The main driver of flat QROP performance is the total costs charged; we have seen these being over 6% a year. This level of charge, although often undisclosed, can jeopardise the opportunity to make an investment return for all but the highest risk investors.
- Do you have investments with guarantees such as structured products? These highly complex instruments are suitable for sophisticated investors only and are rarely recommended to retail clients in the UK (the average pension holder).
- Has you adviser shared a new idea to move your portfolio around different investments seemingly with no difference to the performance or in the worst cases a continued slide in value? This may indicate your adviser is ‘churning’ your portfolio. This is where initial commissions are generated each time you move money between funds, and this is the driver of an investment switch rather than your best interests.
Fees vs commission what is the difference?
The UK regulator gave a definitive answer when it banned commission from UK financial advice at the end of 2012, thereby enforcing all financial advice be paid for on a fee basis. The same is not yet true in the offshore marketplace so you may be a target for individuals that look to gain from your pension fund.
Commission itself is not the problem. The issue is that the low-cost products and investments don’t have the built-in profit margin required to pay out upfront commissions to advisers. We use low-cost solutions because in the long run we believe it is better for our clients. Clients that choose to work with us are happy to pay, safe in the knowledge that they are getting the best products for them.
A financial adviser’s job should be to review your finances and provide independent, conflict-free advice on the best course of actions to meet your goals and objectives. It goes without saying that it is difficult to do this with one eye on the level of commission that a product generates.
We have an ongoing commitment to provide an excellent service for all of our clients. Our advisers work with intelligence and professionalism to create trusted, long-term client relationships. To discuss your own QROPS or pension requirements in more detail please contact your nearest office.