How can you make sure you avoid high priced and unsuitable offshore investments?

Category: Personal Finances

There have always been unscrupulous financial salespeople looking to profit from individuals’ inexperience in pension and investment structures. Sadly, many people are hoodwinked into committing their savings to unsuitable offshore investments.

Just to be clear, we are not talking about illegal financial scams like Ponzi schemes or fraudulent investment vehicles of the kind sold by Bernie Madoff. These types of products are perfectly legal and can be appropriate for some sophisticated investors. The problems arise when the salesperson is more focused on their commission than your actual requirements.

Expats with UK based pension holdings can be a particular target. This is because of the different regulatory regimes applying to many offshore investments.

Offshore regulation can be far less stringent than in the UK or in Australia – especially around key issues such as charges and investment choice. So, less scrupulous individuals may well encourage you to transfer your existing UK based pension funds into what could well be unsuitable holdings.

One of the most common products that many people are persuaded to transfer some, or even all, of their pension into are called Unregulated Collective Investment Scheme (UCIS).

How UCISs work

A UCIS is a pooled investment that will invest client money in various assets. Many of them will promise high investment returns. Typically, they will involve overseas investment opportunities such as property development, storage pods, or renewable energy.

These schemes are not subject to the same regulatory controls as standard investments and, as such, are riskier. They are also often difficult to cash in because the underlying investments are in assets that are not easy to sell at short notice.

The structure of many UCIS is frequently opaque and can result in clients paying extremely high initial charges plus ongoing additional investment and administration costs – far higher than you would usually incur in the UK or in Australia.

We have heard of schemes with initial charges of as much as 7% – which means your fund would have to grow by more than that amount in a year just to break even.

Unless you are experienced in the financial sector, it’s easy to get taken in and sold one of these products without realising exactly what you’re signing up for. Details of the charges are often hidden, buried in jargon, or simply not disclosed at all.

The FCA express concern

The Financial Conduct Authority, who regulate all pension and investment arrangements in the UK, have become increasingly concerned about such arrangements. They have recently issued a statement to consumers regarding the sale of ‘international SIPPs.’

They do specifically reference expats who salespeople from overseas advisory firms target and encourage to transfer their UK pension into an offshore arrangement.

Their concerns are specifically about the high charges imposed on such schemes but, separately, we are aware of unsuitable investments also being a big issue.

Quoting the FCA directly: “Overseas advisory firms often invest consumers’ pension funds through an offshore investment bond within an international SIPP. We are concerned that consumers who invest in this way may be exposed to high and/or unnecessary charges.

They also raise the issue of clients transferring out of UK schemes with built-in tax benefits and potentially losing these benefits on transfer.

Defined Benefit schemes

Another red flag raised by the FCA is for members of a Defined Benefit (DB) pension scheme, sometimes referred to as a Final Salary scheme.

Due to the cost of running them, many sponsoring employers have wound up their DB schemes. The transfer values quoted by scheme trustees can be substantial and, on the face of it, being able to access such a lump sum could be an attractive option.

However, giving up the guaranteed benefits, including an inflation linked income for life and a tax-free lump sum, is rarely the best thing to do. Putting the lump sum into an ‘international SIPP’ or any other offshore arrangement is typically even less advisable.

The FCA have reiterated their position on DB transfers: “We believe transferring out of a DB pension scheme is unlikely to be in the best interests of most consumers.”

Steps to take

If an overseas adviser approaches you suggesting you transfer your UK pension plan into an ‘international SIPP,’ or any other product, you should consider whether these arrangements are in your best interests.

You should certainly make sure that you understand all charges that you will incur, as well as any exit penalty charges that may apply.

As well as being aware of any future approaches, it is also well worth taking the time to review all your existing investment and pension holdings, paying particular attention to the type of product and details of the charging structures in place.

Get in touch

Get in touch with us if you think you have been sold one of the types of plan we have referred to in this article. We can run a financial health-check on all your arrangements, check that they are fit for purpose, and that they are appropriate for you.