When it comes to QROPS there are a few ways of administering the investments – although most people are only ever presented with one option. As the QROPS trustees are not set up to provide this service (they merely provide the legal structure and fulfil normal trustee duties) you will need some kind of investment vehicle.
One option is to appoint a direct Discretionary Fund Manager (DFM) that can take complete care of custody and management.
The alternative is to use either an investment platform or an insurance bond. Both provide what you would expect in terms of robust custody so that the investments are secure and both should provide a good level of service in terms of offering open architecture investment choice, different base currency options (such as GBP, USD or EUR) and online service so that you can view your portfolio at any time.
So, what are the differences?
An insurance bond is usually referred to as a ‘tax wrapper’ and can be an effective tool in financial planning outside of pension products as a way of achieving a gross roll-up of gains and deferring capital gains tax (CGT). This is not necessary within a pension however as CGT does not apply. Popular providers in the QROPS market include: Old Mutual International, RL360, Friends Provident, Generali Worldwide, Providence Life and STM Life.
Bonds are often favoured by advisors because they are able to pay out generous commissions as high as 8% up front (a practice that would not be allowed in the UK). This up front commission is paid to the advisor on day one and paid back by the client over a fixed term (e.g. 10 years). The charges are linked to the initial premium so if you withdraw money at any point in that term then you will still have to pay the same fees which are now higher as a percentage.
There are additional costs to consider also such as an annual administration fee of between £400-£500, custody fees and trading fees.
The alternative to a bond is to use an investment platform which does not pay any commission to advisors. Platforms will typically charge an annual fee linked to the size of the portfolio, there will be no administration fee and custody/trading fees are generally lower than bonds also. Importantly, as no commissions are paid you will not be penalised for making any withdrawals.
It’s not always a simple case that platforms beat bonds in a game of QROPS Top Trumps. Depending on the age of the client and the size of the pension, bonds can provide a more cost-effective investment vehicle but only if they are used without commissions being paid. In this instance, the bond provider would charge a small up-front fee, there would be no ongoing percentage fee with just an annual admin fee and custody/trading fees to consider.
A good financial advisor will present you with both options and explain how both work in terms of the security of the assets and usability. It is then imperative that they break down the fees and make comparative forecasts to demonstrate the most cost-effective over the long-term. Cost is not always the overring issue however and other matters should be taken into account. By following this process, the advisor is demonstrating transparency.
As fee-based advisors (meaning that we DO NOT TAKE COMMISSIONS FROM PRODUCTS), it makes no difference to us which structure or providers we recommend as we are not rewarded or incentivised in this way. Our only interest is to recommend the most suitable product that meets the client’s needs.