We are often asked whether a pension transfer is best to a QROPS or SIPP.
The answer is ‘it depends’. We understand that everyone’s circumstances are unique, and no ‘one size fits all’ solution exists. However, some indicators help you make the correct choice.
The basic product structures are very similar, although non-resident SIPP plans are UK-based, and QROPS for EU expats are issued in Malta. Due to historic links between the UK and Malta, pension systems are largely identical. In the case of Malta QROPS, these similarities are deliberate as this means they appear on the HMRC-approved list and are thus suitable for UK pension transfers.
So, let’s examine the main issues for anyone considering transferring out of their UK pension.
First, as a consequence of the UK leaving the EU, the availability of advice has changed. UK advisers and pension providers can no longer advise clients unless they have a fully operational company in the country where the individual lives. Very few companies comply with this requirement.
Pension providers can still send information to their clients but cannot advise on investment funds or the tax implications of holding that plan for anyone who doesn’t live in the UK. They can advise on UK legislation, but that’s often of limited value as the person’s tax position will be driven by their EU residency.
This means that anyone considering a QROPS or SIPP transfer should make sure they are dealing with a company that can advise them in their country of residence in conjunction with qualified local tax advice. The adviser should be MifID regulated and have the necessary experience to create the correct investment portfolio for the individual’s appetite for risk and overall financial situation.
QROPS and SIPP plans contain the following similarities and differences:
Flexible Access Drawdown (FAD).
Essentially, this means the policyholder is able to access their money in the way that best suits their financial situation. Theoretically, the whole fund can be taken in one go, but this is rarely a good option as the tax implications would be prohibitive. It’s usually better to draw down as much additional income as is required year by year.
One of the differences between QROPS and SIPP plans is that QROPS providers will pay gross of Malta tax in most circumstances, whereas non-resident SIPP pay net of any potential UK tax. This isn’t necessarily an issue as the UK pension will pay up to 25% free of UK tax and up to the annual allowance without the deduction of tax. It’s also possible to apply for an NT Code from HMRC, which enables the pension provider to pay gross of UK tax. Any overpayment can also be reclaimed from HMRC if an NT Code isn’t in place. It should be noted that the tax-free element of a UK pension is only free from UK tax. It doesn’t mean it’s tax-free in the country where the individual is tax resident.
Investment platforms
QROPS or SIPP plans can hold various investment platforms and structures. Most providers have strict investment guidelines which should protect investors from overly costly funds, unregulated funds and scams.
When dealing with an adviser, it’s essential to be certain about the level of fees before starting the transfer process. The adviser should fully disclose all costs and fees, and both parties should sign the Terms of Business.
Fees tend to fall into the following categories:
- QROPS or SIPP annual fees: QROPS tend to be more expensive than non-resident SIPP plans. It’s important to assess whether it’s worth the additional cost to, for example, escape a possible reintroduction of the Lifetime Allowance in the UK.
- Investment platform fee. This fee is easy to find; the adviser should provide an official illustration that includes it. Avoid complicated charging options, and make sure your adviser uses a ‘clean structure’.
- Adviser fees. These can be expressed as a percentage or fixed fee. This fee is often hidden by complex charging structures that lock in the client for lengthy periods. It’s always possible to surrender an investment, but the costs could be prohibitive. Any adviser who won’t tell you the percentage commission the investment provider pays the company should be avoided!
- Annual adviser fees. This charge should be expressed as a percentage or fixed fee and is designed to cover the adviser’s annual cost of providing service, investment management, and plan administration. Again, this fee should be explicit and agreed upon before investing. It’s important to ensure no additional fees are embedded in fund recommendations.
- Fund fees. The only annual fund fee that matters is the ‘Overall Charges Figure’ (OCF). Don’t be fobbed off with Annual Management Charges (AMC) as these are often lower than the real cost of investing. I have seen examples whereby the AMC is quoted at 2.50%, which is eye-wateringly high, but the OCF comes in at a whopping 4.15%. This is outrageous and should be avoided.
Flag system
The Pensions Regulator introduced a flag system for transfers in 2021. The intention was to prevent fraudulent transfers. Although this is welcome and an important part of the war against scams, the law of unintended consequences means that many UK pension providers misinterpret the rules and impose additional requirements on top of the usual due diligence any transfer attracts. This has become a particular difficulty for QROPS providers as, although they have strict regulations regarding acceptable investments, there appears to be a lack of communication between the Malta and UK regulators. As such, some UK pension providers view QROPS transfers with suspicion for no good reason.
Malta's investment regulations could be considered tighter than UK rules nowadays, as unregulated investments and esoteric funds are now all but banned. This isn’t the case in the UK yet, but I expect this to improve.
This confusion has meant most QROPS transfers are only approved if the client has completed a ‘Money Helper’ appointment. This isn’t a problem, but it adds to the time to complete the transfer. A good adviser can help guide you through the process, although it’s important to note that the adviser shouldn’t sway the individual.
The flag system is constantly monitored and updated; however, work still needs to be done.
Our view
When QROPS were first introduced, a minimum transfer amount of at least £80,000 was thought appropriate. In most cases, this minimum should now be higher. Non-resident SIPP plans have developed over time and can now compete with QROPS in terms of the sophistication of online investment platforms and are generally lower cost.
Some people still prefer the QROPS option; lower cost versions are available for ‘lite’ plans. Generally, unless the individual has a potential Lifetime Allowance issue, a non-resident SIPP will usually provide everything needed.
The most important issue for everyone is full disclosure of fees and charges. Any slight advantage one route has over the other can be dwarfed by excessive charges if advisers won’t or can’t tell you exactly how much each element of the pension structure costs. In particular, real fund fees are often hidden and subject to obfuscation.
There are advantages to both routes. What matters most is how they apply to each individual.
If you would like to know more about whether to choose a QROPS or SIPP, please use the form below to contact us.
