QROPS CASE STUDY #1 – Mr Green: expat in Italy with a Guernsey QROPS

Background

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.