QROPS Case Study: Mr Green – expat in Italy with a Guernsey QROPS

Mr Green approached us early this year concerned about the fact that in the 8 years since transferring four UK pensions to a Guernsey-based QROPS he has achieved zero growth and has concern over repaying a loan that was taken out.

In 2011 four schemes worth almost £600,000 were transferred to a QROPS. Mr Green was told by his advisor that he can access some of his pension immediately by taking a loan of 25% from the pension. Mr Green wasn’t told that he would be paying fees based on the entire amount and NOT net of the loan.

The trustees – Concept Group – charge £1,250 per annum (on the high side but not unreasonable) while the insurance bond provided by RL360 in the Isle of Man used to hold custody of the investments and provide administration charge 1.075% per annum, not for a fixed term but for the entire existence of the policy. After taking the loan this effectively increased the fee to 1.43%.

The finger of blame for such high annual fees does not point at the provider but rather the original advisor who took high commissions. The fees paid by the client spread over time to the provider are largely to rebate this commission with a surrender penalty in place that ensures that the provider will recoup the commission paid out at the start of the contract regardless of whether the policy is held for the long term or not.

RL360 provide the same policies at different levels of commission including one that pays zero commission. This is the solution favoured by transparent fee-based advisors as it places the prosperity of the client first.

Furthermore an ‘investment advisor fee’ of 1% was put in place as well as commission paying investments that have failed to perform.

What we did

Mr Green had moved his investments to cash after experiencing disappointing performance and at the time of our first conversation he was so disillusioned that he wanted to surrender the policy entirely and move the money elsewhere. From a tax and financial planning perspective this would not make good sense.

Firstly, we clarified the situation regarding the loan with both the trustees and through an independent tax advisor to ensure that it will be repaid without an unwanted tax burden for the client. Secondly, we proposed a balanced investment portfolio made up of 20 different assets with an average cost of 0.5% compared to the 2-3% being paid on previous funds held.

On examining the structure, we evaluated the merit in surrendering the RL360 bond and moving to a more cost-effective structure. In total, we examined five different options from different providers based on either surrendering now or waiting two years for the surrender penalty period to expire.

We involved Mr Green in every step of the process and explained things clearly and transparently. We arrived at the conclusion that we should wait two years for the surrender penalty to disappear entirely and then move to an alternative policy that will dramatically reduce the fees.

If Mr Green had not sought our advice he would still be committed to paying fees of £87,500 over the next ten years (for the trust and bond – not including investments). We have reduced this to £18,000 demonstrating that by working with us he will save almost £70,000 over the next 10 years.

QROPS case study: Mr Rossi, Italian back in Italy after working in UK, Malta QROPS

Mr Rossi is an Italian citizen who worked in London for several years before returning home. He was approached by a large international financial advisory based in Milan and strongly persuaded that he would be better off if he transferred his UK pension to a Malta QROPS. The benefits explained to him were that he would have more control over his pension and it could be at risk in the UK after Brexit (see our QROPS Myths articles for more on this subject)

Mr Rossi’s pension – worth £300,000 – was transferred to a QROPS in Malta with STM Malta as its trustees. The money was then sent to an insurance bond in Gibraltar provided by STM Life. Mr Rossi simply understood that his money was with STM in Malta and was perplexed to hear that it was being held in Gibraltar.

10% of Mr Rossi’s pension was withheld in a cash account with the remaining 90% available to be allocated to investments. This money – now £270,000 and not £300,000 – was invested into multi-asset funds provided by GAM Asset Management and VAM Driehas and some structured notes. An up front fee of 5% was charged for entering the multi-asset funds and 4% for the structured notes. From the £300,000 transferred, the client now had £257,850 invested.

Mr Rossi was informed that the bond would cost him 1% a year for 10 years which would be deducted from the cash account. While it might appear on statements, the money held in cash is not really the client’s anymore as it has been put aside to pay fees. If the fees were presented properly then it would be more accurate to say that the real cost is 10% UP FRONT.

Further costs for the trust are £750, another £400 for administration of the bond, expense ratios of 2.87% for the multi-asset funds and 1% per annum for service and management from the advisory in Milan.

We determined that the total running cost of the QROPS was more than 5% – 1.31% for the trust and bond, 1% to the advisory and 2.87% for the investments. This is AFTER £42,150 was deducted in fees at the point of transfer.

What we did

Unfortunately in these circumstances there is little that can be done to recoup what has already been paid out.

We focused on evaluating the costs of the investment portfolio and switched to a more diversified portfolio with an average cost of 0.5%. This cut the clients fees in half. We looked at the cost of surrendering the structure to move to a cheaper to alternative but arrived at the conclusion that this could not be justified from a cost perspective for at least another few years. We also removed the 1% advisory fee being paid for a service that involved little more than the occasional statement sent to the client.

Structured notes are not suitable investments for an average retail client with a pension – we wrote an entire article on the subject here. The same article also examines the cost of multi-asset ‘actively’ managed funds such as those provided by the likes of GAM Asset Management which have layers of costs to pay ‘marketing and distribution’ costs – i.e. commissions to advisors.

Anyone with GAM investments in their portfolios should also be aware of their current problems as an organisation. A simple Google search for ‘GAM Asset Management’ will shed light on this matter.

We therefore reduced the fees from more than 5% to less than 2% and improved Mr Rossi’s ongoing management and continuity of advice.

QROPS Case Study: Mrs White, British expat in Italy, STM Malta QROPS

Mrs White is a professional from the UK. She is in her mid-40s and has been living in Milan for several years.

She was approached by a large offshore financial advisory group with offices in Milan. They convinced her that her UK pension would be better if it was transferred to a Malta-based QROPS.

After a few years of low growth rates (despite rising markets) she came to us to see if we could help.

At our first meeting we questioned Mrs White on the advice that she was given that prompted her to transfer to a QROPS. She recited what the original advisors had told her:

• her pension would be more ‘tax efficient’ in Malta,
• it would be easier to pass on to children on her death
• she would have access to better investments.

Firstly, to dispel these myths:

• as her pension amounted to around £100,000 there is no tax advantage to a Malta QROPS as she would only be subject to income tax according to her country of residence regardless of whether her pension is in the UK or Malta.
• In the event of her death a UK pension could be passed on 100% without any tax deduction if she passes away before the age of 75 – so this need not be a concern for at least the next 25 years.
• ‘Better investments’ is a subjective expression to use. What the advisor meant is that by using a Malta QROPS he would be able to use structured notes and multi-asset funds that pay high commissions of 4%. These investments are not compliant with the UK’s Financial Conduct Authority (FCA) who banned the practice of taking commissions from investments many years ago. Furthermore, a UK SIPP provides a diverse range of investment options for individuals – those who wish to self-manage their pension can even include unorthodox investments like commercial property if the client wishes.

Mrs White’s fees for an STM Malta Trust and an STM Life bond (based in Gibraltar) can be summarised as follows:

Trust: £600 per annum

Bond: 1% for 10 years and £400 annual admin fee

Advisor Management Fee: 1%

Investments:

GAM Star Balanced C GBP

Julius Baer Multipartner WM Multi-Asset Moderate

VAM Close Brothers Balanced GBP

Each of these investments had an entry fee of 5% and an ongoing total expense ratio of between 2.03 and 2.11%.

For the structure alone, the client is paying 1.89% per annum plus another 1% to the advisor.

This 2.89% plus the 2.06% average cost of the investments brings the total annual charges to almost 5%

Upon transferring her UK pension to STM Malta, 90% was allocated to investments while 10% was placed in cash to cover the annual charges. The investments then cost another 5% meaning the net amount invested from the original £100,000 is just £85,500. While it might appear on statements, the money held in cash is not really the client’s anymore as it has been put aside to pay fees. If the fees were presented properly then it would be more accurate to say that the real cost was 10% UP FRONT.

The fees are applied to the entire sum while only 90% of the money is invested. We determined that the client would need to achieve annual growth of almost 6% just to pay the charges and maintain the value of the original capital invested.

What we did

After a deep analysis of the structure and the investments which highlighted the costs above we considered the alternatives to terminate the relationship with STM and move to a provider with lower fees as well as more security and greater transparency.

Unfortunately, due to the high commissions paid out to the original advisor on day 1 (7% for the structure and a further 4% on the investments – around £11,000 in total) there would be a surrender penalty of around £8,000 to pay to exit the structure entirely from £101,000 total value of the pension at that time.

In order to make an informed decision we compared the costs of the current structure with the costs of an alternative and made projections based on a ‘balanced’ portfolio with average annual growth of 6.5% on invested monies. The total fees of the current structure over the next 10 years will be around £66,000 while an alternative would cost around £29,000 over the same period. The alternative would cost just £180 per annum for the pension trustees, 0.30% for the investment vehicle, 0.4% for the investments and a 1% annual management and advice fee – a total of 1.70% plus £180. This brings the cost down from 5% to less than 2% per annum.

Our projections determined that despite having to pay a surrender penalty, Mrs White will be better off with a new provider. Based on our projections at 6.5% her pension will grow to around £145,600 in 10 years versus £107,900 if she leaves it as it is.