Increased Investment Flexibility with QROPS
Some QROPS websites encourage people to move their pensions from the UK into a QROPS, referring to the fact that there is “Increased Investment Flexibility with QROPS” through access to funds and investments not available to UK investors. Every week we have been looking at the most popular reasons, often cited as “10 Reasons to use a QROPS” by overseas’ adviser websites for moving a UK pension to a QROPS, one by one. How many of these reasons for moving to QROPS are valid?
This is our final article, and today we focus on the advertised use of QROPS under the guise that there is “ Increased Investment Flexibility with QROPS ” – is it a fact or myth and why are QROPS preferred over UK pensions?
The benefit implication, by stating that there is Increased Investment Flexibility with QROPS, is an assumption that there are a limited choice of funds and currencies for UK pensions. Further, some websites claim that UK funds hide all the fees, are not transparent, and that the UK regulator does not discharge its duties to allow investment flexibility. Are these justifiable reasons for removing a pension from the UK to possibly less-regulated jurisdictions, with lower consumer protection?
UK pensions, especially with UK regulated investment platforms, have access to literally thousands of managed funds, ETFs, low-cost trackers and specialist funds covering worldwide markets. Furthermore, some firms now offer many currencies. The choice is actually staggering.
While many regulated offshore companies offer the same, it is also possible for QROPS and some SIPPs to invest in unregulated funds, thus leading to the limited claim that there is Increased Investment Flexibility with QROPS. So, why is that only a small number of UK SIPPs offer these unregulated funds in the UK?
The UK has tightened up regulations recently to protect UK residents from taking out unsuitable investments, but such protection is very limited outside of the UK. The very virtue being extolled overseas is conversely seen as high risk by the UK regulator. So, let us focus on 3 often advertised investment types that are sold by the same companies offering Increased Investment Flexibility with QROPS.
Unregulated funds, known in the UK as UCIS– the marketing of these to UK retail investors has been banned by the FCA since 2013. No such ban exists offshore and unregulated funds with no audited accounts are sold as “boutique” or “exclusive” investments . The UK regulator found that the majority of these funds had no official audit and, when questioned, the majority went bankrupt as they were not doing what they claimed. The reality is that most UCIS fail, and when they do they fail spectacularly often providing little back. However, they are successful in making the salesperson a lot of money through undeclared commissions.
Illiquid Funds– These include buy to let offshore properties, storage pods, parking spaces, life settlement funds, bio-fuel funds, land banking and forestry funds. These funds can also be known as UCIS, they have a high failure rate and investors find it next to impossible to sell the investments- leading to both no income in retirement and lack of access of much needed funds upon death to pass onto family/beneficiaries. However, they are successful in making the salesperson a lot of money through undeclared commissions.
Institutional Structured Notes– Derivative based products only for sale to professional investors as a partial hedge and not suitable for retail pensions such as QROPS. Widely sold to expats because, in good times, they produce good returns but in stagnant or poor markets these often fail to return what was expected. There is also a very limited secondary market, often leaving the client to sit and wait for the inevitable loss. Clients often never see the original documentation, hidden by the salesperson, confirming that the fund is only for the professional investor. However, the other common thing is they do make the salesperson a lot of money through undeclared commissions.
Who is advising who?
This may seem a daft question but this is a question that must be asked when dealing with an offshore advice firm BEFORE engaging. When an investment fails, what recourse is there for the victim? Based on our experience, repeated again and again, this is what happens-
1. Client complains to adviser when he/she finds out that they have been invested in something that has led to large losses. The client often finds out the funds were only for professional investors or that they are based in the Cayman islands (or similar).
2. The adviser claims the client is the QROPS trustee and dismisses the complaint- this is the first time the client hears this and it is a bit of a shock. The client always understood the advice was aimed at their retirement needs.
3. Client complains to the QROPS trustees who state that the Investment Bond company should be approached (RL360, Generali, OMI, Friends Provident and others) and the investments were either at the clients’ own risk, or that the advice was given by the adviser to the individual.
4. The bond company (RL360, Generali, OMI, Friends Provident) , that did not give the advice, refers the client back to the adviser or trustee.
5. Start at 1. and go around again in circles.
So, who is at fault?
No one will take responsibility when it goes wrong. It is therefore crucial that anyone dealing with a non-UK adviser understands that investing overseas for Increased Investment Flexibility with QROPS has risk. If someone is investing outside of normal regulated investments, with offers of larger returns, then the following must be obtained in writing (not on an email or back of an illustration!) within a proper letter of recommendation;
1. Confirmation of who is the investment client and who is responsible for the investment advice
2. Confirmation that the adviser is regulated to provide advice on all the investments recommended in the country where the advice is being provided(where the client is). For example, structured notes are derivative based, does the adviser have a licence to sell derivatives in the country where the client lives and does the adviser’s licence show up on the regulated website in that country, not a third party country (even the UK or USA)?
3. Confirmation that no UCIS or any unregulated funds will be recommended by the firm that is regulated in the country where the client is receiving advice. Structured products must be checked to confirm they are actually for retail investors (90% are not).
Having obtained all of the three above in the “So, who is at fault?” section, you will find that the type of investments left will be largely identical to those in the UK, and a UK pension can provide exactly the same access to a wide range of investments, at lower cost, with higher consumer protection .
Increased Investment Flexibility with QROPS is largely used as a method to get clients away from proper regulation, enabling the sale of unnecessarily expensive investment bonds, unregulated/illiquid funds or institutional structured notes (also known as structured products). Please note the common thing is that they all do is make the salesperson a lot of money through undeclared commissions.
In this instance the term Increased Investment Flexibility with QROPS used to suggest that an investor is somehow limited by staying in a UK pension fund is a myth, if the investor wants properly regulated funds, ETFs and trackers.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published 24th January 2017
James Caldwell and Christopher Lean
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