QROPS Myth #6: You need to keep a large proportion in cash

Any investment portfolio should always contain a small proportion of cash but by small we mean around 2-3%. If your pension has a cash account of somewhere around 10% then you might want to question whether this money really exists.

Consider it this way, pensions are seen as ‘captive money’ until you reach the age at which you can take benefits (from 55) and most people rarely take 100% out on their 55^th birthday.

The true cost of your investment is not whatever your advisor has told you are the fees (e.g. 1% for 10 years) but it’s the amount that is not working for you. This is clearly a smoke and mirrors exercise. If your advisor has told you that 1% a year will be deducted from the cash account for 10 years it sounds a lot more palatable than saying “we’re going to take 10% out of the pension now”. However the truth is the latter. As you will never see that 10% cash in your own hands and it is not invested to grow so that it creates a future income for you then you should consider it an up-front charge.

Here’s an example to illustrate the point. This is a snapshot from a client who transferred their UK pensions to a Malta-based QROPS in 2016:

The client is 49 years old and knows that he can’t touch any of the pension until he is 55. So, 3 years ago £303,545.98 was transferred. His advisor is telling him that he now has £319,081.05 which represents growth of 5.3% in 3 years or compounded growth of 1.7% per annum.

That growth alone is quite disappointing. The reality is even worse. The client will never see any of that cash balance meaning that the true value of his pension is £290,004.96, 4% less than what he started with.

So, where is the ‘cash balance’? It’s there on paper but you’ll never see it in your hands. In truth this money has already been paid out in commission to that advisor who was so passionate in his conviction that the best thing for your pension would be to transfer it from the UK to Malta.