The UK government introduced new pension transfer regulation in November 2021 to combat pension scams. A traffic light flag system was created to help Trustees and administrators of pension schemes identify and reject transfers that might result in the policy owner being scammed. Individuals and the pension industry welcomed this. Not before time, some would say!
The traffic light flag system
The new system works as follows:
- Green flag transfers where the ceding and receiving schemes were considered as zero risk could go through without disruption.
- Amber flag transfers needed further action.
- In most cases, red flags were to be refused. However, there is room for red flag transfers to be approved where further information is provided, and everything looks fine.
Almost immediately, questions were raised about how the new pension transfer regulation would be implemented as anomalies and inconsistencies were identified. Strangely, the government employed lawyers and civil servants to create the legislation and didn’t consult the industry. Had they done this, the anomalies would have been highlighted before the legislation became law, and subsequent pension transfer confusion could have been avoided!
The main problem areas concern amber and red flags. The checklists for both contain obvious areas of concern which fully justify either a request for further information or an outright refusal to transfer. This is despite the plan holder’s Statutory Right to control their pension. Transfers that involve esoteric, unregulated investments emanating from a cold call or where significant inducements are offered are ‘no-brainers’; it could be argued that this type of transfer should never have required legislation in the first place. Pension providers have always been on the hook for unsuitable transactions and must conduct Due Diligence (DD) before approving a transfer.
Indeed, in my everyday work, I regularly encounter the most bizarre and extraordinary transfers that were waived prior to the legislation. Chickens do come home to roost, however, and many insurance companies and SIPP providers have been sanctioned for heritage transfers which have subsequently gone wrong. The financial services industry pays for this by levying higher fees to the FCA to compensate plan-holders via the Financial Services Compensation Scheme. Higher levies mean higher fees for advice, so scams do cause real harm to us all.
Pension transfer regulation specific to expats
Before outlining solutions, I’d like to highlight another couple of problems with the pension transfer regulation specific to expats:
- First, one of the main causes of red and amber flags is the existence of overseas investments in the proposed receiving scheme. This issue causes 90% of red and amber flags. But what is an overseas investment? There is a world of difference between a fund in Ireland or Luxembourg and one based in an obscure Caribbean Island. The legislation requires pension trustees and administrators to treat both in the same way. Similarly, a fund which invests in South American Junk Bonds is a very different animal to an International managed fund provided by one of the most respected global investment fund companies.
- Another issue relates to who advises on the transfer. Some insurance companies automatically reject transfers if a UK IFA isn’t involved in the advice process. At the same time, the FCA say that it is always important to seek local advice. So, if a fully regulated French adviser provides advice to an expat in France, the transfer could be red-flagged. The problem is that UK IFAs aren’t allowed to ‘passport’ services now that the UK has left the EU. The result is a Catch-22 situation whereby expats can’t access UK-regulated advice and insurance companies won’t accept advice from a French company.
- Last, there needs to be more clarity about the residence question regarding QROPS transfers. This has always been a grey area due to the wording of the legislation. Some ceding schemes think the expat must live in the country where the QROPS is based. So, theoretically, the only expats in the EU who can transfer are those who live in Malta! This was never the intention of the pension transfer regulation; we have covered this issue in depth in our blog on pension scams. Thankfully, most ceding schemes are willing to approve transfers for expats who don’t live in Malta but are resident elsewhere in the EU.
Overcoming transfer hurdles
So, how do we square the circle and ensure expats in the EU can still legally transfer their pensions to a QROPS or International (non-resident) SIPP?
First, when starting the process, it’s worth discussing your intentions with your pension provider. Brief details of the pension plan you wish to transfer to can be sent to the administrators for pre-approval. It may be necessary to be insistent here, but we have found that responses vary considerably from one company to another and one employee to another. If you think you are being fobbed off and the ‘computer says no’, you may need to talk with another, more experienced employee. Better still, put a Letter of Authority in place which allows your local adviser to speak to the company on your behalf. Experienced advisers know how to deal with insurance company employees and should be able to educate them where necessary.
If your transfer elicits an amber flag (and most QROPS will), you can arrange an appointment with ‘Moneyhelper’, who will provide information regarding scams and the transfer process. After the call, you will be provided with a unique reference number which proves you have taken advice and will satisfy the ceding scheme’s administrators’ DD requirements. Assuming everything is in order, there is no reason why your transfer can’t go through.
I appreciate that this all sounds very involved and a little complex. After all, the pension transfer regulation was solely designed to stop scams, which should be relatively easy to spot. Six months ago, the government promised to review the legislation. However, they seem to be a little preoccupied, so I’m not holding my breath. I can only hope common sense will prevail; fortunately, some scheme trustees are taking a more pragmatic view of transfers and applying that rare commodity to their decision-making.
In the meantime, I can’t stress more strongly the importance of using a qualified, regulated and experienced local cross-border IFA to help get things moving.
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