Comprehensive pension guide for UK expats

One of the downsides of being an expat are the dreaded cold-calls from companies offering a ‘free financial review’, ‘free financial advice’ or a ‘pension review’. I had a bit of a rant about it in a recent article. I’d never deal with a company that cold-calls me, it’s an absolute. Those calls usually result in a short response demanding they remove our number from their databases. They rarely do.

It is a fact of life that we sometimes need to use accountants, lawyers and financial advisers. Personally I’ve never worked with any professionals other than through personal recommendation. It’s usually reasonably easy to check out the credentials of most professions, but not so easy to check out expat financial advisers, and if we get it wrong… well, we’ve all heard the horror stories.

As a result of the article mentioned I got into a conversation with Christopher Lean, and it occurred to me, setting aside my distaste for cold-callers, I actually know very little about pensions. Christopher has years of experience with both UK and expat finances, and from those conversations he and I (mostly Christopher to be fair) have put together a guide to help us expats in Spain, and beyond, do our own due diligence before engaging the services of a financial adviser.

We’ve selected three subjects; fees and costs, qualifications, and QROPS (since we get the hard sell on the latter constantly). Before we start though, do just let me point out that Christopher is not selling anything, and he has no vested interest. He is passing on his knowledge, no strings…. We’re both of the mind that if we can stop one person making a mistake then the time spent on this guide is more than worth the time. So, here we go…

Comprehensive pension guide for UK expats

How should expats choose a financial adviser?

Fees and Costs

Q: Is financial advice free?

A: Most professions will offer an initial consultation without charge to explain their services and will provide potential clients with a schedule of fees. No profession provides free advice services.

Q: So, how can I be offered free financial advice?

A: This type of adviser will not issue an invoice. The adviser is looking to sell a product to obtain commission on the sale. Typically, the adviser will state that all the advice is paid for by the insurance and investment company and not by the client. Comments include “We receive standard commission fees from the providers, so clients do not pay us directly”.

Q: Is this true?

A: The month after a client buys a product, the investment or insurance company pays the adviser commission from the money received from the client’s investment. So, I would say that is pretty direct, and so not true. The problem is not so much the commission, many would prefer to pay their adviser this way, the problem is the failure to disclose how much commission is being paid or lying about it.

Q: Isn’t it less expensive for a client to use this “free advice” service than pay fees?

A: In most cases it is far more expensive, some of the commissions paid for lump sum investments can be between 8 to 12% of the initial monies invested. A transparent or fee based adviser may charge a fraction of that.

Q: Does this make a difference to the investment, can you give me an example?

A: It can make a huge difference. Often people are persuaded to invest their money into insurance bonds for “tax efficiency” where the charges are significantly greater than a lower cost investment platform that is used, for example, by investors in the UK. These are available to expats, but rarely offered.

Q: If someone were to invest about 50,000 Euros for about 15 years, could you give an indication of the difference I could expect between these insurance bonds and a platform?

A: We can use an example of a 50,000 Euros investment and make an assumption the funds grow at, say, 7% over that period – funds that allow multiple currencies.

1. After 15 years, the funds in one of the well-known and expensive insurance bonds would be 75,886 Euros
2. The same funds on a typical low cost platform would be 103,882 Euros, a 27,996 Euro difference.
3. But, sometimes situations may require early access to funds that were not expected (University fees, new car/house etc). Platforms have no early penalties for cashing in funds. In this case, if the investor needed to cash in the funds after 4 years there would be a difference. The funds from the platform, penalty free, would be 59,625 Euros. The insurance bond would be valued at 52,171 Euros BUT the encashment value after penalties would be 50,501 Euros.

Does that answer your question about how expensive “Free Financial Advice” can be?

Q: What should expats ask?

A: They should agree what fees or commission the adviser will charge and get in writing, this should not be dependent upon a particular product being bought. If the adviser does not agree to this, then find another adviser. There is no obligation to disclose these fees in many countries, but then there is no obligation to use an adviser that hides this information either.

Qualifications

Q: Many expat advisers seem to claim that they are fully qualified and qualified to UK standards. Is this correct?

A: No, very few meet the current UK minimum regulatory qualification level. Fully qualified is a throwaway and meaningless statement, a lawyer, accountant or engineer would never make such a claim- even though qualified.

Q: Why do the advisers claim to be UK qualified if they are not?

A: They are often referring to the out of date Financial Planning Certificate that used to be the minimum entry level qualification. The levels have increased significantly recently and now only Diploma level qualified advisers (DipPFS/Dip FA) and above are at UK standard.

Q: Does my expat adviser need to have these higher level qualifications?

A: Not if the local regulator does not insist on it. To be clear, there are many decent, honest and very experienced expat advisers who do not make such unfounded claims and may not have or need these qualifications if there is no complex financial planning needed by their clients. I would suggest expats avoid advisers that gild the lily with claims of UK qualifications and claims of UK experience that may not bear scrutiny.

Q: Can I check the qualifications if they make such claims.

A: In the first case, ask for evidence. The Chartered Insurance Institute has a link to check out their members. Any person using the following titles, that is not a member, should be reported to the institute-

Ordinary –   CII (Award) /FAIQ   (NVQ level 2)

Certificate – CertPFS (NVQ level 3)

Diploma –   DipPFS (NVQ level 4- UK entry level minimum)

Advanced Diploma- APFS/FPFS (Level 6 – professional)

Check your CII adviser here.

In all other cases, ask for a copy of the certificates and look at the relevant institutes’ websites

Institute of Financial Planning

Securities Institute (this broken link will be updated when they finish building their new website)

(CISI does not offer pension qualifications)

Q: Are there any titles that we should be wary of?

A: Unfortunately, some may use titles from institutes without being members, and some use defunct titles that no longer exist or have never existed or even have little to no relevance to expat financial advice.

Examples include;

FPC – This refers the defunct Financial Planning Certificate, it was never an allowable CII title

CII – This is not actually an allowable title. It does not exist as a title. It is just the name of the institute and is often used by CII student members (not qualified- used just to get their name on the CII register to give the impression of qualification)

CISI – As CII above.

MLIA/FLIA – Member or Fellow of the Life Insurance Association that no longer exists.

CeMap – An NVQ level 3 exam that used to be the minimum for providing UK mortgage advice. Hardly relevant for expat financial advice.

I would suggest that expats should be wary of advisers that market themselves using such titles.

Q: Are there any specific qualifications that I should ask to see?

A: Anyone offering pension transfer advice should really have G60, AF3 or APMI qualifications (Pension exams recognised in the UK for advisers to give pension transfer advice on what is, after all, a UK pension). In fact, from April 6^th, only UK IFA firms with these qualifications will be able to give pension transfer advice on final salary schemes valued at more that 30,000GBP. For investment, I would expect to see relevant investment papers.

Q: Many advisers claim to have UK experience, can this be checked?

A: It can be checked online here at the FCA

Unfortunately, this only covers the period from 2001 even though many will have been regulated in the UK before this date. It does show if the adviser was registered and the history shows previous employers and so an expat could make contact for a reference.

Q: Surely regulation is important?

A: Of course, this is important, but this is no guarantee of quality, experience or value for money. In practice, the regulators provide very little when things go wrong. In other words, expats have to do their own additional due diligence and not just rely on the fact the adviser is regulated.

QROPS

Q: A lot of the cold-callers recommend we move our pensions to QROPS. What are they?

A: They are overseas pensions that can receive transfers from UK pensions.

Q: Should expats consider moving their pensions to QROPS?

A: The adviser should consider them as part of a financial review with an expat, but it is a very niche market and the vast majority should probably leave their pensions in the UK.

Q: The vast majority? This is not what all the advisers say or what is stated on offshore advice websites.

A: It is a niche market and far too complicated to generalise, but I will try. There may be certain countries where people have permanent visas for retirement, where QROPS may be appropriate such as for New Zealand or Australian residents.

Substantial funds that will get close to the 1 million pound new cap on UK pensions may want to look at QROPS.

Residents of disparate places where there is no Double Tax Treaty with the UK, assuming they will retire there, may want to avoid being taxed twice in retirement.

Those close to their 75^th birthday that want the whole fund paid out at once to beneficiaries without tax being deducted at source may also want to consider QROPS.

The professional investor that really wants use investments that UK funds will not allow ( although in most cases, very few use a fraction of the investment options available in the UK and so transfer to a QROPS for more investment options would be pointless).

There will always be other cases that require individual advice, but I maintain that most expats should not take out a QROPS.

Q: What are the downsides then?

A: For modest funds, the fees make QROPS expensive (anything less than about 150,000 GBP). The commission and charges taken actually will end up reducing pensions. Often, in places like the Middle East, people return to the UK to retire thus making the transfer to QROPS both pointless and expensive.

Be wary of “lite” QROPS. These appear to offer low fees but the investor must use an insurance bond. I have shown just how much this could end up costing. They are far from “lite”.

This graph gives an example of the costs of QROPS with insurance bonds and platforms compared to SIPPs

Q: QROPS offer a bigger tax free lump sum at 30% at retirement as UK pensions only offer 25%

A: Some UK schemes that were set up before 2006 may allow significantly more as a lump sum than 30% – I am referring to company pensions (money purchase) and this could be reduced on a transfer to a QROPS.

In some places, like Spain, the lump sum is not tax free and should be declared to the local tax authorities – care should be taken where those advisers state it is tax free.

Also, with the higher charges on a QROPS, many will find their fund is smaller than it would have been if left in the UK. So 30% of a smaller fund will be less than 25% of a bigger fund. I am afraid this will affect thousands who should not have been advised to move to QROPS.

Q: Can QROPS be moved back to a UK pension?

A: In theory yes, but most UK SIPP firms will not accept them and those that do would insist this is arranged by a UK regulated pensions adviser. There may be SIPPs that do not enforce such high standards.

Q: If you die, then 55% of your UK pension fund is lost in tax?

A: Not after April 6^th. There is no tax deducted if someone dies before 75. From 75, for one year, if the fund was distributed, there would be a 45% tax charge. From 2016, the tax will be paid by at the beneficiaries personal tax rates. So, grandchildren could obtain about 11,000 GBP each a year tax free from the fund

Q: QROPS offer more flexibility?

A: Not from April 6^th. From that date, the over 55s that have a UK pension have total flexibility in the way that they access their funds. Only EU based QROPS that have local legislation that allows this will offer the same flexibility – this is a backtrack by HMRC in the UK who are reviewing this at the moment. Only one QROPS jurisdiction to date has this in place and it must wait for its own financial regulator to approve it.

Q: QROPS allow earlier access to pensions

A: From April, the earliest access will be the same as the UK- Age 55. Any website that offers access to the under 55s or access to all of the funds immediately on transfer ( for under 55s ) is acting outside the rules and leaving clients open to a 55% tax charge from HMRC who will pursue this outside of the UK.

Q: Are QROPS approved as is often stated?

A: There is no approval status, HMRC do not approve QROPS they merely recognise them. There is a big difference and expats should avoid websites and advisers that misuse the term approved.

Q: Are there any other claims on QROPS websites that should be questioned?

A: Given the new pension freedoms offered in the UK, it is surprising that some websites fail to mention them. Others provide a clear bias against UK pensions to make QROPS look more attractive without providing a balanced view for expats to make an objective comparison.

Some of the claims to justify QROPS are-

Save UK Inheritance Tax – Funds in UK pensions are not subject to Inheritance Tax either.

Save UK Income Tax- Depending on the terms of the Double Tax Treaty, income tax can be paid in the state of residence and not the UK (Double Tax Treaty needs careful checking)

UK Income Tax up to 45% on UK Pensions- Only if income in the UK tops 150,000, again check the Double Tax Treaty

UK Pensions will charge 45% on death- This is only applicable for one year for those who die over the age of 75. Then the new rules apply, which could mean no tax at all with proper planning

QROPS allow funds in different currencies- So do some UK SIPPs

QROPS do not require the purchase of an annuity- UK pensions also do not require the purchase of an annuity.

QROPS allow consolidation of pensions- UK pensions allow consolidation of pensions.

QROPS provide a higher income- totally spurious statement

QROPS can be moved from country to country- Not always the case, ask an Australian for example.

QROPS free up frozen UK pensions- UK pensions are not frozen.

Q: To recap, are there genuine reasons for using QROPS?

A: Yes, there certainly are when the circumstances dictate. A proper comprehensive analysis of the existing UK pension, charges, investments, residency now, residency in retirement, visas, domicile, family, succession planning, Double Tax Treaties, UK pension regimes of existing pensions, annuities and other personal circumstances may result in a QROPS recommendation.

Unfortunately, I have seen recommendations for QROPS that miss many of the key issues and are often 2 to 3 pages long- totally inadequate.

Q: You mentioned pension qualifications, why are they important?

A: QROPS advice is extremely complicated and transfer advice from UK pension is also complicated and requires a high level of pensions knowledge and experience. The only way an expat can be sure the adviser is competent is to check the qualifications and experience in this field. But, from April 6^th, only UK IFAs can provide advice on transfers from final salary schemes where the transfer value is over 30,000 GBP- so this may stop some unwise transfers from taking place.

Q: If someone is worried that they have been given poor pensions advice, what can they do?

A: In the first instance, contact the adviser and make a complaint. If that is not dealt with satisfactorily, then the regulator should be contacted. If that is not successful, it may be worth getting an appropriately qualified adviser to look at the advice given to see if there are any legal avenues open for recompense.

Christopher Lean

Christopher Lean is an Associate of the Personal Finance Society and an ex CII examiner. He also provides technical support to a pensions victims support group http://www.pension-life.com/