QROPS Transfer Process
Last updated: 6 April 2016
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"The adviser’s investment recommendations should be matched against your risk profile to ensure that your investment has the best chance of achieving your objectives."
QROPS (qualifying recognised overseas pension schemes) were introduced back in 2006 to allow UK non-residents to transfer any UK pension funds overseas.
Since then, they have risen in popularity due to some of the more publicised benefits but with increased popularity, controversy has developed. Transfers have been made into QROPS, even when it may not be in the best interest of the pension holder.
Before we start, we have to stress QROPS are not a bad thing but how they are implemented can significantly alter their suitability for each individual.
However, often how they actually work and the charging structures involved are not fully explained upfront. Finally, one other critical, and often controversial, factor is ignored - how the adviser gets paid. This could be through two different ways: fee based system or through commission based on a percentage of the funds transferred.
When it comes to making a decision about a QROPS, while the benefits are there for all to see, the charges and commissions can often negate the significant benefits when the adviser involved is not acting independently.
The information in this article is not intended to give advice about whether or not you should consider a QROPS. We have written the article with the help of a number of independent financial advisers who feel that all too often larger firms with sales targets will sell first, without presenting the full facts.
What is a QROPS?
A QROPS is actually a pension managed by Trustees. Investments are made on your behalf by the Trustees into investments of your choice. Different types of QROPS which we will come onto later will explain the limitations and usually used investment structures.
When a person has invested in UK pension schemes (whether a British citizen or not) and they decide to leave the UK, a QROPS allows them to take their investments away from the UK, offering benefits such as no or reduced withholding tax at source, removal of death penalties and increased flexibility on their investment options (such as jurisdiction and currency).
However, no QROPS transfer can be conducted without an adviser managing the process as part of the rules, even though the QROPS transfer process itself is relatively simple.
The QROPS transfer process
The QROPS transfer process begins with the person with the UK pensions writing a letter of authority allowing the adviser to review any pension schemes held in their name. At this stage many advisers/firms will also request QROPS transfer paperwork at the same time.
The adviser will review the pension and often provide a report. The detail within this report will vary depending on the company you are dealing with. Receiving personalised report should also include things like your risk profile as well as your objectives and therefore should detail everything they have found, the options available (including reasons why and past performance), detail all charges which apply.
Once the report has been presented, the adviser will walk you through the options and charges, as well as growth potential to ensure that you full understand all the options available. They’ll then make their recommendation to you about your best course of action, which you should never be pressured into taking.
If you decide to proceed with the QROPS transfer, you should have a choice about how you would like to pay for their service. Fee based, which is a charge you pay separately or is taken from the money transferred which tends to be a percentage of the pension pot or in many cases people pay by commissions which again is a percentage of the pension but tends to be a higher percentage and, in turn, will increase annual charges.
As with any pension or investment, a QROPS then incurs annual charges, which again are simply taken from the pension itself but on many occasions are often excluded from the reports as the advice is considered to be given to the Trustees and not yourself and therefore they already know the annual QROPS charge. Remember to always ask about the costs.
Types of QROPS available
There are three types of QROPS. Different companies have different names so we are going to call them QROPS 1, 2 & 3.
Not all companies offer all three types of QROPS.
They are often based in three main locations, Malta, Isle of Man or Gibraltar, there are many more but these tend to be the most used currently due to good double tax agreements (DTA) and reduced withholding tax.
The wrong jurisdiction can have a knock on affect in regards to withholding tax.
If you have a Maltese QROPS and live in Spain then due to the DTA income taken from the QROPS is paid gross and just needs declaring in Spain where you will pay the tax. If on the other hand you hold a Maltese QROPS and you live in a country without a DTA a withholding tax may apply.
Firstly there is the QROPS for smaller pensions valued up to £100,000.
With this QROPS there are significant restrictions on the investment options available, and the QROPS fees can be lower due to the size of the pension but again is not always the case if the adviser is restricted to using a limited number or only one provider. The fees charged here are a fixed annual fee, rather than percentage based.
This is for QROPS in excess of £100,000.
A fixed fee approach again which can be great for larger sums of money. If the provider does offer QROPS 1 the fees here tend to be higher.
Finally, QROPS 3 is charged as a percentage of the pension pot and is designed to ensure that a group of Trustees has final approval on each purchase with the pension funds held. The QROPS charges begin at 0.5% of the total pension value.
All three QROPS charge an initial/set up fee and then continued annual charges. All companies will have their own fee structure and so for set up fees they can range from anything from £400 - £2000 depending on size but most of all the company you use.
Annual charges range from around £600 - £2000 based on the size and/or the company that has been selected for you.
If QROPS 3 is chosen these fees can be much higher as its a percentage and based on the funds under management.
The most commonly used QROPS are 1 & 2 and the following will explain the next steps used by the adviser.
How advisers can structure a QROPS
A QROPS is made up of three layers. The QROPS itself is a pension wrapper like the occupational pension, personal pension, final salary pension or Self Investment Pension Plan you are looking to move it from. The advisers then include within this for an offshore investment platform usually made up of offshore life bonds, and within this the investments you wish to make, such as ETF's, Mutual Funds, Stocks & Shares and more.
Once the type of QROPS (1 or 2) is selected, your adviser will then select the most suitable offshore investment platform to invest your pension.
For a QROPS, this will often take the guise of an offshore life bond which is managed by a number of investment companies. Some of these companies are household names, while others you may not have heard of. A true independent adviser will not be restricted on which provider to use and with small the differences between them should recommend the most suitable.
The adviser’s investment recommendations should be matched against your risk profile to ensure that your investment has the best chance of achieving your objectives. If you have not completed a risk profile or had a detailed discussion of the level of risk you wish to take then ask how they formulated your plan.
Once again, as with any investment platform there are charges which apply to each investment scheme and will range from 0.2% to 1.6% per year, could be based on the initial investment amount or the current value and could be for a set period of time or the life of the investment platform. The charges will differ from provider to provider and how you are paying for the services. *Take note, the higher the annual charge the more commission received.
The adviser, if charging by commission, will also receive a one-off commission payment based on the annual fee you pay often as high as 7% of the total value of the investment at this stage for placing your pension. You do not see this come from your pension but with a lock in period which can be for as long as 10 years, with penalty charges applied if you come out early if you decided you wish to transfer your pension away and annual charges you are paying them over time. Even with paying a fee, short lock in periods may still apply.
Other charges which may apply
Other charges at this stage can include dealing costs and admin charges.
Something to consider: Taking your pension commencement lump sum (PCLS) soon or currently in draw down, the annual charge you are paying maybe based on the initial investment and not the value at the time, therefore if you take 25% out the next day your annual charge as a percentage has increased by 25%.
The underlying investment
The final element to the QROPS transfer is the actual funds where the money is invested.
There are typically four types of options available: ETF (Exchange Traded Funds), Mutual Funds, Stocks/Shares and Fund of Funds. All these areas will have a different level of risk associated to them and any portfolio built should reflect your personal appetite.
With each of the ETF’s, Mutual Funds and Fund of funds they will incur annual charges (typically between 0.1% and 2%)
Warning! Some firms, use “in house” or affiliated funds from which the firm and the adviser also take a % commission but with this will also have a tie in period. These firms also incentives to their advisers to choose these funds, regardless of the client or the client profile due to the financial gain for the adviser and firm.
The types of advisers
There are two main types of advisers using UK FCA terminology, “Tied” or “Whole of market”.
“Tied” or “Restricted” advice is when products being advised upon are that of the company or from a restricted panel of affiliates.
“Whole of market” or commonly know as “Independent Financial Advisers” will not be under such obligations and are free to find the most suitable fund for you and your risk profile.
Warning: Some firms have used the term “independent” meaning they are not owned by any major financial firms but, based on FCA guidelines, would be considered “tied”. If you are in doubt, don’t be afraid to ask.
Request advice from one of our independent pensions advisers
When you submit your details using the form we will arrange for an independent financial adviser to contact you who will offer advice which is always tailored to your particular circumstances and typically includes:
- A full explanation of QROPS, how they are structured and how charges are applied
- Full analysis of your pensions, including current value and charges
- A review of your risk profile and explanation
- Identify opportunities on how to tax efficiently structure any potential retirement income
- Options and recommendations how to tax efficiently manage UK based pensions
- Opportunities to reduce the inheritance tax exposure on your estate
All advisers in our network are fully independent and are able to give experienced advice. Your initial no obligation consultation is free and will help you understand all of your options as an expat.