To QROPS or not to QROPS…is that a question?

If you are an expat in France (or elsewhere) there is a good chance that you have heard of QROPS (pronounced Kew-rops). The letters stand for Qualifying Recognised Overseas Pension Scheme and it is a way for ex-UK residents (or soon to be ex-UK residents)  to transfer their pension fund outside the UK tax system.

Some financial advisors will explain to you that these are the best think since sliced bread, but endowment policies in the 1980′s have made me rather cynical about claims made by financial advisors…

Of course, anything below is supposed to be generally informative and get you thinking about the options available, but is in no way to be seen as financial advice either for or against investing in a QROPS.

The general idea is that you transfer your UK pension fund to a QROPS, a pension fund typically held offshore,  and as a result get various benefits, mostly relating to tax. Your financial advisor will be quick to point out the benefits to you, such as:

- you can choose how much to take from your fund each year (subject to official maximums, which are a percentage of the fund and based on your age)

- you (or rather those who inherit your assets when you die) avoid the 55% death duty on the remaining value of the fund at that time

- the pension can be paid gross of UK tax (but of course might well be taxable in France) and in euros, reducing your exposure to currency rate movements

- if you current pension doesnt allow you to take a pension until you are, say, 65 years old, you will find that your QROPS allows you access earlier. Likewise you might be able to take more as a lump sum, and are not tied in to buying an annuity

- you can convert your pension to one in which your partner (or even your children) continue to receive payments after your death

I’m sure your advisor will tell you of any other QROPS benefits when you meet them. But things that sound too good to be true are usually, well, too good to be true, so this is the point where you need to be careful. We would all be very happy to take a pension 10 years earlier, receive more every month, and leave more to our family…but things are rarely so clear cut.

The most important thing you need to be careful of is the charges involved, and remarkably despite years of mis-selling scandals with other financial products these charges are still not always made clear. There will almost almost be:

- an initial set up charge / legal cost (perhaps 1.5-2%)

- an annual charge by the financial advisor’s company plus an annual charge by the company actually managing the money in the fund (perhaps 3-5% total)

If your financial advisors tell you they receive no fee (as some will) then what they likely mean is that the fund they put your money into charges more than most and then gives them some of it back. I am yet to find a financial advisor who genuinely works for nothing (and I don’t expect them to!) but I do like to be clear about who is paid what.

If an advisor is to receive 1% of your £100000 pension fund for the next 20 years they will get paid a total of £20,000, so don’t worry about wasting their time with a few questions, but worry more about whether the advice they offer is influenced by that £20000…

As an example, I got excited a while ago because it turned out my pension fund with a company I worked at for only three years in the early 1990s was now worth 65,000 pounds (more than I earned by working there!) Financial advisors will tell you that QROPS are suitable for funds over 50000 pounds so we got a couple of quotes…

Typical charges for the QROPS were around 1.5% – 2% setup costs and 4% annual costs. Bear in mind that in the UK they are currently talking about legislation to stop pension funds charging more than 0.75% a year…)

 
 

So broadly speaking, if inflation is about 2.5% a year on average and annual costs for managing the fund are around 4% the pension fund needs to grow at 6.5% a year just to stay at ‘break-even’ with a pension that is index-linked. You may know about funds that can reliably grow at more than 6% a year and will continue to do so, but I don’t…

Remember that UK Government advice is to assume growth of 3% – 5% per year when looking at investments – which is less than the charges on many of these these QROPS funds, so you should assume that these funds will slowly decrease in value between now and your retirement age!

Existing pensions that offer protection against inflation and are based on your final salary are usually like gold dust and rarely worth transferring to a QROPS unless you really believe the company will go bust before you reach retirement age and has an underfunded pension fund.

Anyway, as I said the goal of the above is neither to discourage or encourage you to invest in a QROPS, but to make you aware that they exist and might be suitable for your needs, or might not be. It might well be that for you the benefits on tax-savings at the time of your death are more important than the amount of pension you will receive, for example.

There are lots of financial advisors who will leap to help you with your investments in France – but I haven’t yet found one where the advisors are paid a salary rather than commissions and where the upfront and ongoing fees (and possible exit fees if you change yor mind) are clearly disclosed. Until these two things happen advisors are always going to be influenced in part by the commissions they can earn, which might just conflict with your own best interests…

I know that being an (ex)accountant I am rather cynical about financial claims, and I’m sure that quality financial advisors exist of course.

Meanwhile I came across one good piece of advice: always ask any potential financial advisor what qualifications they have, and which official regulatory body controls their organisation. And ask for evidence and check it out before handing across hundreds of thousands of pounds – you certainly wouldn’t buy a house without thorough checks and evidence and your pension is at least as important!

One last thought: we were missold endowments in the 1980′s with claims about how they would pay off our mortgage and give us plenty of money left over, but when we went to make a ‘mis-selling’ claim 20 years later we were asked ‘Do you have proof of what they said?’ Well, remarkably, we didn’t (oh to be young and gullible again). So why not ask your financial advisor if he minds you recording any conversation you have with them – it should at least keep their answers more or less accurate and in line with the regulations!