Now that the dust has settled after the recent UK budget changes to QROPS, the next question is how to make the most of your scheme.
EU/EEA QROPS transfers used to be free of the Overseas Transfer Charge but are now subject to a 25% tax unless the individual is tax resident in either Malta or Gibraltar.
This limits options for those moving to or retiring in an EU country; however, for those who are already EU residents and hold a QROPS, it’s still important to review your arrangements and see if improvements can be found.
It’s rarely worthwhile accepting the OTC; however, there are some circumstances where it might be better to take the hit now if higher tax liabilities arise later. UK situs assets will still potentially be liable for Inheritance Tax at 40%; if the main reason for passing wealth through generations is part of a wider IHT plan, there may be a benefit. Not ideal, but sometimes the rock is slightly softer than the hard place.
So, what should QROPS holders be aware of, and how can improvements be made to an existing plan?
Service
Are you getting what you pay for? Are you in regular contact with your adviser and advice provider?
Adviser turnover in the international arena is relatively high, and many customers are passed from one financial consultant to another. Newly appointed advisers have little motivation to provide the same level of service as they may not be paid at all for taking on a new client. Unless there’s a chance of new business, it’s unlikely that you will receive the same level of attention.
Dealing with ‘Head Office’ isn’t ideal as service could be limited to information only. QROPS and investment platforms can only advise on their element and certainly won’t help with tax advice.
If this is an issue, it might be time to contact other companies and discuss their advice and service proposition.
Fund selections
Investment portfolios require regular attention; what might appear appropriate at the time of purchase may become less so as time goes by. If an individual has plenty of time to go before accessing funds held in a QROPS, it makes sense to take a higher risk approach than one who is nearing retirement.
Appetite for risk changes over time as priorities turn from creating wealth to protecting it. This means your portfolio may need to be derisked as you approach retirement.
It’s also common for investment portfolios to underperform compared with expectations. Discretionary Fund Management services (DFMs) are usually risk-rated, and everyone is placed into a portfolio which matches their profile.
This one-size-fits-all approach works when markets perform normally, but this is rarely the case. Inflation and interest rate rises can turn low-risk sectors into high-risk overnight. Government Bonds are used in portfolios to balance risk against Equity holdings. The idea being that if/when Equities fall, Bonds remain steady and limit losses.
The combination of low interest rates, which meant Bond coupons were low and consequently unattractive, followed by rapidly increasing interest rates, which adversely affected Capital values, has cast doubt on whether Bonds are the only answer to including non-correlated assets in a portfolio. There are other options available, such as physical gold.
The issue with DFMs is that it is not possible to sell individual funds within the portfolio. If you’re a medium-risk investor, you must have a certain percentage in Bonds due to regulatory requirements. Perhaps it’s better to unbundle the DFM and have the flexibility to sell individual funds quickly and efficiently if circumstances dictate.
Charges
This is the most important element of a QROPS to most people and should be regularly reviewed.
Charges are inherently complex and can be difficult to unravel; it is essential to seek clarity. Professional MiFID-regulated advisers are mandated to declare all charges and fees applied to their clients’ QROPS.
You need to know the exact figures for all the following:
• Set up fees. This fee should be expressed as a percentage and by monetary value. QROPS providers’ fees are transparent and easy to find on the company website.
• Annual service fees to your adviser. Usually, it is a percentage of the value of the investment, although in some circumstances, it can be a fixed amount.
• Investment platform fees and ancillary charges such as dealing and custodian fees.
• Fund fees. Investment fund fees vary considerably. Exchange Traded and Index Funds are the lowest, ranging between 0.07% and 0.25% p.a. It’s important to ensure you are quoted the Overall Charges Figure (OCF) for a fund. The Annual Management Charge (AMC) doesn’t tell the whole story. I have seen examples of funds which quote AMCs of 2.50% p.a., which is high enough, then after digging into the Key Investor Information Document, the OCF turned out to be 4.15% p.a. Eye-watering!
• Exit fees. If you want to move your QROPS or investment platform to another provider, make sure you are fully aware of the consequences. Exit fees can be high, depending on how your QROPS was set up in the first place.
• Regulatory requirements. MiFID regulated advice companies and QROPS providers are required to declare all fees annually. Again, fees should be expressed in monetary and percentage values.
• Hidden fees. It’s a sad fact that many advice companies seek to hide additional fees paid by fund providers. Always ask about this and get something in writing detailing any additional commissions an adviser will receive by placing your investment into particular funds.
If I were to pick the most overlooked fee, it would be fund charges. The OCF above of 4.15% is a real case. Add in a 1% p.a. ‘service charge’ and a 1% p.a. platform fee, and it becomes clear that your investment has to achieve a minimum of 6.15% p.a. to stand still. With 2-3% inflation, this increases to almost 10% p.a. before you make any money.
It doesn’t have to be this way. Ethical advisers won’t shoehorn their clients into funds that are more to their benefit than the clients'. Similarly, service and platform fees can be significantly lower.
Time to review your QROPS? Yes, even if only to give you the peace of mind that you are maximising investment returns and minimising charges. If not, contact your advice company and/or look for another who will give you a better overall deal.
Please get in touch with us if you would like some advice on the recent changes to QROPS.
https://axis-finance.com/contact
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