Monthly Archives: August 2017

Product solutions being sold to those with UK pensions

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{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} 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{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} 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{3f122c2f069eda3d0860a1f81bf979c88e8fd4d59794181835181851b7558327} 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.