For many people exploring their options in relation to their UK pensions, there are important issues to consider, ensuring that your hard-earned pensions are working effectively for you as you progress towards and throughout retirement.
The Importance of using a locally regulated and licensed Financial Adviser
If you are living in a country with a developed financial services market such as the UK, Australia, USA or Canada, the financial advisers operating in these markets will be licensed and regulated by the local regulator and will be subject to strict regulations designed to protect you, the client.
However, this does not prevent unregulated offshore financial advisers from contacting people who are residing in these countries and offering them advice despite not holding the necessary license.
If you were then to engage with an unlicensed offshore financial adviser, you will have no protection if anything goes wrong. It is important that you research that the financial adviser you are seeking advice from has professional indemnity insurance to ensure you are compensated if you suffer a loss as a result of an act, error or omission from the financial adviser that provides services to you.
Offshore Investment Bonds
It is not the only the lack of protection that you should be concerned with. Most offshore advisers will encourage you to use an investment bond within the pension product they recommend holding the funds in.
The original purpose of an investment bond was to create tax savings for a UK resident. When set up correctly and applied to relevant investments for UK residents they can be an appropriate product.
In terms of using an investment bond for a UK pension it is hardly ever suitable. As stated, the benefits of a bond are tax related, and currently UK pension rules already allow your UK pension fund to grow tax free, therefore the bond layer is unnecessary. The alternative is to then look at investing the funds through a platform or direct.
So why are investment bonds recommended to UK pensions holders as an investment vehicle?
Commission
The main reason these investment bonds are used by offshore financial advisers is that they pay the adviser a larger commission.
You as the customer can then find yourself facing extra fees such as:
Establishment charges: which are usually stated as 1% per annum for the first 10 years of the bond. This will typically fund the commission payment the offshore adviser will receive from the bond provider, as a result of choosing this investment product for your money. The bond provider will charge you the full 10 years of charges whether your funds stay within the bond for the full 10 years or if they are only held there for 5 years. If an early exit occurs prior to the 10-year period being served, the bond provider will charge you an exit fee of the remaining years of 1% due. I.e. if you invested a UK pension valued at £100,000 into an investment bond within a QROPS or SIPP you would be due to pay £10,000 over 10 years. If you withdrew your funds form that bond after 5 years having so far paid £5,000 in establishment charges, you would then have to pay the remaining £5,000 owed to the bond provider before your funds are released.
Investment fund charges: offshore advisers may invest your UK pension monies in investment funds that have their own charges, which are charged on entry into the fund and therefore another source of commission for the adviser to receive. These funds will also have ongoing charges more commonly known as an Ongoing Charges Figure (OCF).
On top of these charges you will face several charges similarly to if your UK pension was invested via a platform or direct (such as ongoing management charges or administration fees) without any added benefit to you and your pension. Combined, these fees will impact the overall net return of your funds and have significant impact on your retirement plans.
Next Steps
If you are going to consider transferring your UK pensions, and you live in the UK or Australia, make sure you are dealing with a locally regulated and licensed financial adviser to ensure you are protected in case you suffer any losses.
Avoid any advisers who wish to offer you an investment bond, within your pension, that carries additional charges and with no added benefits to your UK pension fund, if you are residing in the UK or Australia.
If you do wish to discuss any of these matters further, please contact bdhSterling online or by phone on +44 1372 724 249 (UK) or +61 1300 365 291 (AUS) and our dual licensed advisers can discuss your UK pension options with you.
