U.K pension transferred flags if you have already transferred or you are looking to transfer your pension abroad, this should be a must-read for expats.
I have written this to ensure expats know how to spot if you are being or have been led purely by commission-driven sales to transfer your pension(s) or to are being properly advised as I get emailed daily on pension(s) that have been poorly invested or they say they are paying too much.
In this article, I will go over some of the red flags to watch out for if you are in the process of transferring or if you have transferred your pension(s) if you are paying too many fees. Including the platform(s) to watch out for and some of the ways advisors get paid more via funds or structured notes for your policy.
Expats Moving Offshore
For those that have moved abroad, you have the option of transferring your pension to SIPPs and if in certain locations a QROPs.
If this is feasible you will have many factors to consider and unfortunately many have transferred pension(s) based on tax benefits which often leads to commissions for an advisor.
Here is a link to the cost of QROPs and SIPPs on the differences before going on so you can get the basis of what you are looking at-
https://investmentsforexpats.com/qrops-vs-sipps-the-costs/
Both of these can offer a range of advantages, which are mainly taunted for commission sales, for higher amounts in pension(s) but the link above explains the fees and some of the rationale why and why not you may want to move into a QROPs and/or SIPPs.
Note, as of typing in 2023 moving to QROPs for amounts under 250,000 GBP for most people may not be in their best interest. Although, for larger amounts, it can potentially reduce tax liabilities and access large lump sums.
Please note that this is not personal financial advice and if you need personal financial advice, please contact me or speak to a qualified and competent advisor. If you would like to contact me, please email me at info@investmentsforexpats.com
Ongoing Scheme Costs For Pensions and Transfers
One expat I have met said that he transferred his pension for free. I then told him that he paid around 10,000 GBP in fees for this pension transfer. The advisor never mentioned this when they transferred their pension. If you have been told it’s free this should be warning sign number 1. No IFA like any other professional works for free. They will have bills to pay. Make sure the fees are clear and how understand how they get paid.
Offshore bonds are another red flag.
If you are in one of these platforms, the trust fees and platform fees can add up, not to mention if you are put in offshore bond structures like RL360, PIMMs, FPI, or OMI and then wrapped in a trust.
The initial cost with funds can be up to 8% and cost up to 3% a year of hidden commission that you didn’t know you were paying, This also gets worse as, if you withdraw or take your PCLS on most of the platforms charge a set amount on what was transferred. Which gets many enquires about people not knowing.
For example, you transfer 100,000 GBP and you take your 25% PCLS at 55. You have 75,000, but the bond is still charging you 1% of 100,000.
This can add up as you are being charged the amount you transferred!
Adviser Costs on Pension Transfers
The fees on pension transfers differ depending on what option you have chosen.
Fee-based advice – This can be a flat fee, an hourly rate, or a percentage. Fee-based advisors act as fiduciaries for their clients. They have an obligation to work in the client’s best interests. This restrains them from a conflict of interest in selling products that are not deemed fit for the client.
The client must be given a variety of options regarding the portfolios deemed feasible for their level of risk and the advisor must assess all levels of risk prior to any recommendation.
Commission-Based – Advisors earn money solely on the products they sell to clients (mainly offshore bonds and funds). This is done from remunerations from the companies, funds, and platforms. In the offshore world, these are normally in a bond-like structure from the companies described above.
The regulation of the products is getting significantly better and the commission on pensions has been capped as of 2020. The regulation is still subjective.
Trustee Costs
These do vary depending on the Trustee, I have written a number of articles on the cost of Trusts in my SIPPs articles. Some of the better ones in my option as of witting in 2023 Novia works out to be 180 GBP a year.
https://investmentsforexpats.com/offshore-pension-plans-for-expats-2/
https://investmentsforexpats.com/best-sipp-providers-and-platforms-for-uk-expats/
Platform and Bond Costs
The platform is another layer of cost, this is where the costs can add up. The platforms if the investment is based in a SIPP or a QROPs act as a tax wrapper.
The platform has the potential to help utilise the growth of your pension. As I have stated in a number of articles about investment platforms, the fees are cheaper, you have greater options, and they are superior in many ways to bonds. Most advisors who are after the commission would sell bond platforms as the fees can be as high as 11%.
Furthermore, the bonds offer no significant protection and offer the same tax efficiency. As it’s wrapped in a trust and many of the investment platforms are domiciled now in places such as the Isle of Man or other financial hubs these bonds have been sold on.
Fortuitously, for investors, the regulators have stopped these bond sales.
* Note IFA advising on moving or moved your pension into an offshore bond and not explaining the logic will likely be doing this purely on commission.
Some of the popular bond options for commission lead IFAs is RL360 please see the base fees here: https://investmentsforexpats.com/rl360-pimms-review/
As seen below are the commission-based price (1% over 10 years) and base price (0.067% over 10 years) that is usually not disclosed to investors regarding commission-based advisors.
With the commission usually around 5-7%, this rate goes up to 1% over 10 years which 5% of the initial sum is paid to the advisor on the transfer.
Make sure if you are using an offshore bond you understand the rationale why and ensure it is being used at its base cost.
Personally, for 99% of people with pension transfers, it would make more sense to go into an FCA-regulated platform that is fee-based, some of these are Novia global or Praemium.
These cost 0.34% and have trust costs of 180 GBP to give you a baseline of the cost. However, more importantly, all these platforms are fee-based. So, some of the tricks that IFAs use such as using heavy front-ended funds and funds with a high AUM charge to give them a kickback are not used.
https://investmentsforexpats.com/novia-global-review-2022/The amount it could save is 1000’s a year based on the salesman bonds here is an example of a 100,000 GBP pension
- RL360 on full commission over a 10-year period.
- It’s not flexible and will charge 1% of the initial investment value of your portfolio.
- You will also be paying £400 for the establishment charge,
- Trust cost would be £400-500 GBP A YEAR
So, without fund cost, trading cost, and IFA cost you are paying nearly 2% a year with an offshore bond that is not flexible and can have hidden fees with structured notes and funds.
While the same 100,000 GBP on a platform would cost 0.34% and trust cost totaling – 0.52% in Novia Global and is only fee based so no other hidden fees or high paying funds due to the FCA regulation,
Fund Costs
There are two types of fund costs to consider within a pension transfer which are, clean funds and commission-paying funds.
Clean funds – This means that you have no entry or exit fees. The fund’s fees vary on whether the fund is passive or active. Passive funds such as Vanguard and Ishares cost from 0.2%-0.3%. Active funds can cost 0.6%-2% for ongoing costs.
Commission paying funds – Will pay an entry fee of 1% -5% for going into the funds, also you can add a trail of 0.75%. These funds also come with exit fees or surrender charges of around 4%. If you are seeing a commission advisor check the ISIN number and go see the fund on an independent rating agency such as Morningstar and check the rating of the fund performance and the ongoing and initial charge.
These funds are usually Tilney, Harmony, and Emirates.
A good way to check this is to type the ISIN number on Google and see the charges. Normally, an ETF would cost around 0.1%-0.5% of anything over this, and with any entry, the cost would question why? Not that this can’t be a bad option as some popular UK funds such as Fundsmith have a 0.95% charge but have regularly outperformed the market (not that it is guaranteed to do so in the future).
An example of these funds charges can be found on FT or Morningstar to name a few.
As seen below the Harmony Balanced fund has a charge of 3.14% and an annual charge of 1.5%
https://markets.ft.com/data/funds/tearsheet/summary?s=lu0651985508:gbp
What to do if you have transferred?
If it was an advisor that put you in this predicament and didn’t disclose how the fees were charged then I would be very wary and look to seek other qualified advice as the motives of your advisor may not be in your best interests.
Would move to FCA regulated fee based only platform these are not only cheaper but better in most ways.
The FEE-based advisor platforms are Novia and Preamium any others would not feel comfortable going into personally due to the high cost and hidden fees and non-FCA regulation.
Also, make sure your advisor is qualified making sure your advisor is level 4 qualified should be of utmost importance.
Summary
I have written this article to disclose some of the unethical practices that get used by offshore IFAs to aid investors pay less and get IFAs acting in the best interest I hope that it is somewhat useful to you and at least makes you understand the options that you have.
If you have any questions please feel free to contact me on info@investmentsforexpats.com
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