The start of SIPPs in the 1990s and the pension freedom act of 2015, has led to many people wanting to take control of their U.K. pensions. Although, many in the expat space that has transferred their pensions might have been hit with high charges and funds that might not be feasible for personal circumstances.
This article, will go over some of the reasons that was the problem for U.K pensions transfers offshore and how it has led to some of the challenges in 2022 for some U.K. pension holders.
Offshore Pensions
In the offshore space, you have options such as QROPs. This was essentially where you could transfer your pension out of HMRC and the U.K. into a qualifying scheme offshore to another country which was recognised by HMRC. So many were enticed with larger PCLS in places like Malta and lower taxes made it at first glance seem a feasible option.
However, it had a lot of hidden motivates behind it as advisors would go into high charges and illiquid offshore bond plans and these again were “sold” on the basis of the tax advantages, ironically these were mostly sold in the middle east countries wherein a lot of locations are already tax-free.
Platforms, such RL360, OMI, FPI, Generali, (some of these have been rebranded) have been charging 1-2% with an establishment period normally for 5-10 years on the original premium plus any growth so if you take any money out in the establishment period it is still being charged on the original value per year through this period.
On top of that add admin charges of 300-600 GBP, advisor fees of 0.5%-1%, trust fees of 350-600 GBP and fund fees. Altogether, the charges equate to 3%-5% depending on the commission, funds and advisors charges.
Usually, the bonds took up 7% (then got capped at 5%) for a pension that was paid upfront to the intermediary part of the total value. For example the intermediary would take 7% and would have a higher charging structure of 1.6% over the next 10 years or this could get dropped to the base rate, which would lead to 0.5% platform fees.
The problem was that non of the fees were explained in numerous cases. As I have had many come to me on the site saying they knew nothing about these lock-in periods and fees, or as they are quite complex they just don’t understand the investments and trust the intermediary to do the right thing.
If I was to say to you, transfer your pension and it will cost you 7% upfront and 2-3% ongoing (a standard fee) would you take it? Definitely doesn’t look as appealing that’s for sure. As most were based on the commission they had their own personal interest.
On top of this, they would go into funds or products that were highly geared towards commission. That being expensive funds such DFMs like Tilney, GAM, etc or structured notes that had 4% upfront and 2% management fee and worst was that this was some times the best options as others would get invested in Mango farms and car parking spaces which would go bust and leave peoples pension pots with them.
Now, fortuitously most of this has gone. Although, I would still be careful if offshore bond options are proposed to you, be sure to read the fees and conditions in terms of liquidity before signing anything. Finally, ask why they are being proposed over a platform option that usually costs less for you.
What to be Aware of Today
What you should be aware of today, is that most pension transfers are fee-based. Most look at this as being a high expense and yes it can be even more so if you have a defined benefit (DB) pension (the FCA ruling is that you shouldn’t take it out) with report fees that can cost 4000 GBP upfront. While transfers in the offshore space are costing 1% upfront and 1% ongoing and you are looking at TER of 1.2%-2% depending on funds and investing mainly in ETFs which is a cost effective option for the investor.
The problem in 2022 can be quite the opposite and the red tape can make it quite inefficient for transfers and this is made worse by pension companies being uncooperative in the process.
I want to go over some of the options if you are looking to transfer your pension in 2022. This is not advice and if you are thinking about transferring please make sure you speak to a qualified advisor. Is to make sure you are speaking to a fee-based planner where the charge is disclosed upfront.
Also, if a QROPs has been proposed, firstly ask why and note that these can only take place in certain locations so it depends on where you are presently residing. However, for me (again not advice) it would only make sense if near the current Life Time Allowance (LTA) and you are positive you are not going to go back to the U.K. or else a SIPPs would most likely be most suitable and adaptable to your needs.
While you are outside, you might find it hard to get a SIPPs back in the UK and will need an international SIPPs, which basically means offshore. However, there are advatagaes and disadvantages to having an international SIPP over a SIPPs.
Some of the options that are most cost-effective for pensions transfers are:
- Novia base cost 0.45% going to 0.1% based on the amount
- Arden 0.4%
- CIG 0.45%
Trusts that are the most cost-effective:
- Novia 180 GBP
Funds I personally look at when transferring pensions:
- ETFs such as Vangaurd, Ishares
- Active funds, such as Baillie Gifford
Stay away from any high charging funds and make sure your portfolio is in line with U.K. financial planning guidelines.
If in doubt ask for the ISIN and check on websites like Morningstar for the rating and TER. Morningstar is an independent rating website and this will show you all the details of the investment and will give you the information to analyse what you are being put in to.
Advisor Fees should be 1%-2% upfront and 0.5%-1% ongoing.
If you are looking for a second option or a pension review please email me at info@investmentsforexpats.com. Also, if you have any questions, please let me know.
