The newly elected Labour Government promised a pensions review as part of its manifesto. While the current system works reasonably well, there are areas that need attention.
I trust that Rachel Reeves will not only focus on increasing tax revenue, although I understand that this will be part of the overall study. There are urgent and fundamental faults within the system that need immediate attention.
These faults have been greatly exacerbated following Brexit. Expats seem to have been forgotten altogether when new rules were introduced; the withdrawal agreement didn’t address the many cross-border changes that previously worked so well.
Whilst I’m sure most of the pensions review will focus on domestic issues, including the possible return of the Lifetime Allowance, the tax treatment of benefits (both pre-and post-death), and funding levels of workplace schemes, several simple changes could be introduced that will help the whole industry run more smoothly. Pensions have become far too complicated over the years and are in dire need of rationalisation.
Some issues apply just as much to local pension holders as expats. A couple of good examples are scams and the true cost of advice.
Pensions review on scams and cost of advice
We can stop scams altogether, both domestically and internationally. Most seem to emanate from transfers from one scheme to another. Promises of spectacular returns from an endless list of inappropriate pension investment vehicles litter our social media pages. They are promoted by people who don’t have our best interests at heart. The first step is to ban unregulated investments entirely. There is no good reason for someone saving for their retirement to risk the lot on some offshore off-plan property development, storage pods, car parking spaces, eucalyptus plantations or any other esoteric and alternative ‘opportunities’.
Ms. Reeves should engage in discussions with social media providers and urge them to take more responsibility in this area. If a properly regulated advice company were to advertise annual returns of 14%, they would rightly face consequences. Unregulated providers, however, seem to be able to make any claim without facing any repercussions. It’s crucial that we all play a part in regulating these platforms to protect pension holders from misleading information.
The cost of advice is also a hot topic. The UK has made significant progress in this area; all advisers should now declare all costs before anyone puts pen to paper. This is welcome and should stay.
Expats are particularly vulnerable to overcharging. Although the quality of advice internationally has improved substantially in recent years, there are still companies that hide charges and don’t declare additional commissions they earn by recommending a particular fund.
QROPS and the flag system
Pension transfers can be complicated, particularly concerning QROPS, where the fund is moving to another country.
New rules have been applied to protect expats from poor advice, including full disclosure of fees before a transfer is approved. The main EU QROPS providers are in Malta, and I recommend that the new government contact the regulator there. The Malta regulator has taken a much more hands-on approach recently; QROPS providers have become fastidious when dealing with transfers and investment portfolio construction.
There are rules regarding the maximum fees a fund can charge, but work still needs to be done in this area. The best QROPS providers adhere to the rules and will reject fund purchases that are either too expensive or inappropriate.
The biggest problem expats face when attempting to transfer their pension to a QROPS is the new rules introduced in 2019. The flag system contains a number of anomalies that still need to be addressed.
Expats can find themselves in a catch-22 position whereby they can’t transfer their pension without advice from an FCA-regulated adviser, but UK advisers can’t deal with ex-pats due to the removal of passporting rights into the EU following Brexit.
The new government should discuss this with their EU neighbours. This situation would cease to exist if there was mutual recognition of qualifications and professional experience. Currently, UK pension providers can reject transfers due to the lack of UK-regulated advice but can’t offer the pension holder an alternative.
The regulations regarding Defined Benefit transfers are valuable and should remain in place. They do need looking at, though, as some people hold old pension plans with a Guaranteed Minimum Pension and a transfer value of under £30,000. The ceding scheme can refuse these transfer requests despite the plan being of little worth to the holder and the existence of better alternatives.
The flag system was introduced with policyholder protection at its heart. This is welcome; however, the three flags that cause issues still haven’t been amended. The ceding schemes can refuse a transfer or make it difficult for reasons that aren’t helpful to the plan owner, making it more difficult to manage their money how they want to.
First, Red Flag number 3 needs revision. It does state that overseas advisers can provide advice to non-UK residents and that it is probably the best way forward in any case, as local tax knowledge will be required. We have found that some ceding schemes can be awkward in this respect, whereas pre-Brexit they weren’t. Although employing an FCA-regulated company in the case of Defined Benefit scheme transfers is rightly mandatory, other pensions don’t need the additional input and costs if the individual takes advice from a fully MiFID-regulated company outside of the UK.
Next, Amber Flags 1 and 2 mention the ‘residency link’. Some ceding schemes take this to mean a QROPS transfer should be refused or delayed if the person doesn’t live in the same country where the QROPS is based or doesn’t work for a company in that country.
This also wasn’t an issue pre-Brexit as long as the individual was tax resident in an EU/EEA country. The main issue being the Overseas Tax Charge (OTC). No OTC would apply as long as the person didn’t move to a non-EU/EEA country within five full tax years. If it’s ain’t broke, don’t try to fix it! This Flag isn’t needed as long as the OTC rules aren’t going to be breached.
Last, Amber Flag 6 states that if a scheme allows overseas investments, this may be the reason for concern. The commentary does say that the intention isn’t to flag straightforward Global Equity funds, for example, but it does conflate the investment platform with funds. This is unclear for policyholders; the flag must be changed or abandoned altogether. Platform fees are covered elsewhere, so that part needs to be removed, and ceding schemes need to be made aware that the reason for this flag is to protect individuals ‘where there is a lax, or non-existent, regulatory environment or in jurisdictions which allow opaque corporate structures’.
Surely EU fund providers don’t fall into this category. So, if a fund is located in Ireland or Luxembourg, where investor protection regulations are at least as stringent as the UK, there should be no cause for concern.
Again, Ms Reeves and her team should discuss these issues with the EU to provide more clarity and a wider range of advice for pension holders. If a Catch-22 situation exists, the legislation enabling it must be flawed and should be adjusted or removed.
We know you have a lot on your plate at the moment, but please spare a thought for expats who have been dealt a rough hand by Brexit and the changes made to overseas transfers.
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