Why do trustees charge QROPS exit penalties?

If you hold a UK pension and decide you want to retire abroad, then one option is that of a QROPS.

A QROPS (Qualifying Overseas Pension Scheme) is an overseas pension scheme that meets the requirements set by HM Revenue and Customs (HMRC) to transfer and consolidate UK pensions, including frozen ones.

This type of pension is managed by trustees,  all of which have a different setup, annual and exit fees as per the examples in the table below:

*Charges correct as of blog publishing date. QROPS fees may change and other fees may apply. Harrison Brook accepts no liability for any loss resulting from any action or inaction or omission as a result of reading this information.

High fees and high QROPS exit penalties

Many QROP trustees that we have encountered charge a high exit fee. On top of this, they can make it difficult for expats to receive the transfer out paperwork. It would enable the members to move to a different trustee or to a different solution altogether. Moreover, in the majority of cases, we have seen the underlying funds used are expensive. This is due to the commission they pay out to advisers which also causes long selling periods when looking to rebalance the client’s portfolio.

One common scenario we come across is when QROPS are being mis-sold. Clients would end up paying high fees and high QROPS exit penalties for a product which in the end, is not even suited to their needs. For instance, an example is someone who has a QROPS and they have never left the UK nor do they have the intention to.

When it comes to a QROPS being mis-sold the blame is quickly shifted only to the adviser. While this can hold true some of the time, it is also important to understand that one of the key roles of trustees is to act with the same diligence that a prudent businessman would act for, when managing his own affairs.  

The first question that would arise is that of suitability. This is often overlooked in these cases and results in aforementioned misselling and members get stuck in an overpriced product they do not require.  The due and enhanced diligence would be to assess whether a QROPS is suited to a client or not and some aspects of a QROP would require some further closer examination.

So why are the exit fees so high?

From our experience, there are usually two main reasons for this:

• A lot of offshore advisors still work on a commission basis and not a fee-based structure similar to that of the UK. The reason for high exit fees is the clawback of commission ( usually 7%-8% paid upfront )  to the adviser who recommended and implemented the QROP solution within usually, an offshore investment bond. Clients tend to become aware of this at a later stage when they look to transfer but are faced with an unjustified high exit penalty and of course with a dilemma; should they take the hit by paying the exit fee and move towards a more desirable and adequate solution or stay put?
• The high exit penalties and transfer fees can often be hidden in a small print as not all QROP providers tend to be transparent when it comes to stating their fees so clients have an unpleasant surprise when they are made aware. So what other solutions are out there?

What is a Non-Resident UK SIPP?

One of the more suited solutions could be a SIPP. A SIPP allows the holder to access their UK pension overseas, whilst remaining under UK regulation. It allows for both the transfer and consolidation of UK pensions to a single personal pension structure.

Other key features of an International SIPP include;

• Full flexi-access drawdown
• Tax efficient saving solution protected under UK regulations (highest level of protection)
• Lower annual costs

SIPP Costs

Some International SIPPs are sold with an expensive offshore bond as the investment wrapper which makes the overall price expensive and in some cases, it can be the same price as a QROP. The SIPP costs for set up and annual costs tend to be much lower if used with an (offshore, competitive) investment platform.

These offshore investment platforms are available to through a financial adviser only. As such it ensures you receive professional advice to match both your view to risk and investment requirements on any portfolio allocation. 

This is why taking financial advice is recommended before choosing the right SIPP provider. Make sure you only take advice from a transparent, regulated and fee-based firm of financial advisers and to make sure this product is the right one for you. Moreover, some pension providers are becoming more transparent with their fees and you can now easily compare their SIPP and QROPS costs directly on their website.  Furthermore, due to changes in regulations, QROPS products need to be closely examined if they are the best solution. 

The future for QROPS exit penalties and impact of the overseas transfer charge

The Finance Act 2017 saw the introduction of 25% tax charge for transfers to QROPS unless the member is resident in the same country in which the QROPS receiving the transfer is established.   Or, is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA.  Clients also faced an additional risk as if they move out of the EEA within five full tax years following a transfer, the post-transfer charge would still apply.  It comes with no surprise that members have started researching better solutions. We have started seeing a decrease from QROPS to SIPPS. Therefore, what you have to know is that some advisers will recommend the International SIPPs with the same offshore investment bond that will subsequently have the same high exit fees.

Moreover, in the right client circumstances, a QROPS might be the right solution. This is why having this discussion with your financial advisor is so important. They will know the current legislation and take a holistic approach to your financial situation.

Finding out more about QROPS

If you want to find out more about your pension position, options available to you and gain further QROPS advice or information on expat pensions or you already hold a QROPS but are disappointed with either the performance or high fees we can evaluate your situation and offer the best tailored made solution and advice. QROPS is a complex area sometimes. It is often a target for pension scams so getting the right advice in time could save you a hefty exit penalty fee!

The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.