The financial industry welcomed the Pensions Regulator’s guidance notes on QROPS transfers. New rules designed to prevent scams were sorely needed as we have seen so many people’s pension pots decimated by criminal behaviour and poor adviser practises.
However, pension providers often interpret the recently introduced red flag system incorrectly. This is unsurprising as insurance companies, particularly, are renowned for taking a cautious stance. Unfortunately, this careful approach has created unnecessary delays and stopped perfectly justifiable QROPS transfers. Slowly but surely, change is on the way.
Several questions were raised regarding the intention of some of the new rules for QROPS transfers. Pension providers have been struggling to interpret the rules that apply to non-UK residents ever since.
Three main areas require further clarification:
- Adviser suitability
- Overseas investments
- The residence link
Adviser suitability
A recent alteration to the guidance refers to the requirements for regulated financial advice. First, it has to be stated that no one is legally mandated to use the services of a financial adviser unless the transfer emanates from a Defined Benefit (final salary) pension scheme or others that provide safeguarded or guaranteed benefits. The Financial Conduct Authority, Pensions Regulator and Money Helper strongly recommend taking advice, and I agree. A pension pot is many people’s main source of retirement income, and care must be taken when considering transferring to a QROPS.
When seeking advice, expats and non-UK residents have been caught in a Catch-22 situation. Previously, the guidance only stated that advice should be sought from a UK adviser. Post-Brexit, this is almost impossible as UK-based advice companies are now not allowed to provide passport services into EU countries. This means many EU residents have had to change their adviser to one based in their country of residence. I’m sure UK advisers hope that the financial services element of the withdrawal agreement resolves this issue, but progress in this area could be faster. It’s doubtful that any new agreement will filter down to the person in the street any time soon.
Thankfully, the guidance has been amended to recommend properly qualified local advice for people who want to transfer to a QROPS. This squares the circle and means that UK pension providers can’t use this as a reason not to transfer to a QROPS. Whether this subtle change has been communicated to the provider companies and filtered down to the ‘shop floor’ is unclear. No official revised guidance has been sent to the pension companies, but we hope they have technical experts who are aware of the addendum to the red flag rules.
Overseas investments
Overseas investments and the residence link are included in the ‘Amber flag’ guidance notes. If an Amber flag is raised, further information is required from the customer and in most cases, an appointment has to be arranged with Pension Wise. Once additional guidance has been received from Pension Wise, a unique reference number is generated, and the transfer can proceed as long as no further concerns exist.
There is talk within the industry to remove the overseas investment question altogether. This point was included to prevent individuals from being persuaded to invest in toxic, unregulated investment funds. However, this is dealt with as a completely separate Amber flag condition. There is no similarity between a perfectly well-managed and regulated fund based in Dublin and a dodgy, unregulated, off-plan scheme in a faraway Caribbean Island.
Furthermore, Malta QROPS investment regulations have been improved over the last few years so that even if a transfer was allowed, and the adviser tried to invest client money in such funds, it would be stopped straight away, thus preventing any damage from being done.
I suggest that UK pension regulators research this issue and talk to the Malta regulators to ensure they are fully up to date with the current situation. The Amber flag condition relating to high-risk or unregulated investments should stand, but confusing these investments with regulated funds that aren’t registered in the UK is misleading and incorrect. Pension providers should be informed of the change of approach as soon as the rules have been amended.
The residence link
Last is the ‘residency link’ Amber flag. This is probably the most misunderstood issue in the guidance notes, due to the ambiguous way the Amber flag condition is written. It could be interpreted that QROPS transfers won’t be allowed unless the individual is a resident of the country where the QROPS is based. This isn’t correct, as evidenced by other sections in the guidance.
Without going into the nitty gritty, it should be made clear to pension providers that as long as the individual is resident in an EU or EEA country and the QROPS is also based in one of those countries, there is no need for concern. The residency text should be changed to clarify what is meant by this condition.
In conclusion, if these three conditions for allowing QROPS pension transfers were altered, the system would be much clearer. All parties to the process would benefit. Pension providers would have more clarity, the transfer process would be more understandable for customers and advisers, and the Money Helper and Pension Wise backlog could be reduced without any danger of a possible scam being committed.
It is vitally important to use a qualified adviser with permission to operate in the country where you reside. A good adviser will deal with pension companies on your behalf and help interpret the rules correctly.
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