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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.

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