Maybe I am just missing something, but I can still see offshore advice firms suggesting New Zealand QROPS are really suitable for those not retiring in New Zealand and I am not sure why. The HMRC dropped a large number of New Zealand QROPS from its bimonthly list in May, Kiwisaver schemes disappeared. The primary reason appears to relate to the ability to access income under the age of 55. However , the New Zealand Superannuation Funds remained on the list as they are open to non- New Zealand residents and these are still being promoted to non-New Zealand residents. Why? Why would someone with a UK pension, not resident in New Zealand, want to transfer their pension to the other side of the world? Let’s look at some of the reasons people consider when moving a pension from April this year. Pension Flexibility People may like the idea of total flexibility to take as much capital and income from their fund as they want after the age of 55- Is that a reason to move to New Zealand? No- As at June 2015, the only schemes that offer this are UK pensions ( not all ) and EU QROPS that have changed their rules. Currency Risk It is possible to select different currencies, when investing in UK pensions and QROPS, to protect the investor from currency risk – Is that a reason to move to New Zealand? No- All the funds that I have seen are denominated in New Zealand Dollars or UK Sterling. By definition someone that does not live in the UK is not going to be using pounds to live on or, if not in New Zealand, New Zealand Dollars. Greater Investment Options An oft cited reason for transfer, rarely used, is the ability to select a very wide range of investment options- UK SIPPs and QROPS offer this- Is that a reason to move to New Zealand? No, the schemes on offer normally offer a limited choice of investment manager- certainly self investment is not on offer. The offer is one or two fund managers who then offer a specific strategy which is restricted. Tax Free Income Avoid tax by transferring to a QROPS. Really? Unless someone lives in a no tax jurisdiction, then a New Zealand QROPS, that is not taxed at source, will invariably need to be declared in most jurisdictions. And, in these cases, won’t the restricted investments and non-aligned currencies wipe out any perceived tax advantage and potentially prove to be the more costly option? Don’t let the perceived tax dog wag the tail of the pension! I fear that a quote from Sigmund Freud is going to ring true next year. We are all familiar with the phrase , “with freedom comes responsibility” but have the new UK pension rules offered too much freedom? Freud said “most people do not want freedom, because freedom assumes responsibility and most people are afraid of that responsibility’’. Well, the industry and the public have been clamouring, ever more vociferously, for much needed flexibility in the UK pensions’ market. Primary among the concerns were-
What is changing? April 2015 is the date it all changes and the over-55s will be able to draw down their pension pots in stages, each stage 25% tax-free, in a series of "uncrystallised funds pension lumps sums". In addition, the opportunity to encash the whole fund, 25% without tax, will be possible for the over 55s. Controls The government will insist that advice to switch from a final salary scheme over 30,000GBP must be given by a UK regulated pension specialist, before allowing the switch. Though there appears no compulsion to accept this advice. But, going forward after the initial transfer, the ability of pension fund members to treat their pension fund like a bank account that can be accessed at any time is now concerning professional pension practitioners. Until recently, a final salary pension scheme was held up as the “Gold Standard“ of pensions. So, why are there concerns that those lucky enough to be in such schemes are likely to want to leave in droves? Recently, a Glasgow based pension consultancy claimed that one in three people in final salary scheme would leave them as a result of the new pension freedoms to come into effect from April 2015. In other words, large numbers of people could be ditching certainty in retirement for flexibility that has an unknown long term cost. In fact, there are serious concerns about the lack of regulatory control after transfer and the potential lack of advice for accessing funds at retirement or earlier from the age of 55. Throwing the baby out with the bathwater Imagine filling a bath with a large open plughole. Unless the taps are really full on (very high investment returns- with all the risks attached ), the bath will empty. Compare this bath with the new flexible pensions and you get an idea of the challenges. Don’t forget, people are living longer and someone at 55 may live for 40 more years (longer than his/her working life to the age of 55). If that person dips into a pension on an unstructured way, without taking qualified, regulated and insured advice then there is a very large risk of having to rely on only state benefits for many many years. An oxymoronic theme As the picture at the top of the blog reminds us, ‘’ be careful what you wish for, you might get it”’. King Midas thought he had it all, until reality bit. As a self-confessed Donna Summer fan, the State of Independence is one of my favourite tracks.
But, in financial services, what does independence mean? Independent versus Restricted To try and understand the difference, it is worth consulting the FCA (Financial Conduct Authority) website. Independent The FCA state “The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer.” Restricted The FCA state “Advice that is not independent will need to be labelled as restricted advice; for example, advice on a limited range of products or providers ” and then go to say “It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable” Best Practice Ideally, in the offshore IFA market, advisers should look to do the best for their clients. If this means that their products or services are not able to properly match their clients’ needs then they should refer to other firms that can help. This gives a great opportunity to network and provides a better outcome. Why mention this now? UK pensions are a key area for advice to expats and will continue to be. However, from next April , it is becoming clear that those in funded final salary schemes will only be allowed to transfer if the transfer is checked and signed off by a UK FCA registered adviser. Any offshore firm that does not have a UK office with this transfer permission, or has not forged a professional relationship with a UK IFA firm, will not really be able to say “We are independent pension advisers” as they will clearly be restricted on the advice they can give. Any offshore firm that wishes to offer full independent consultancy advice has a great opportunity to network with UK firms for the benefit of everyone. Anyone that knows me will know that I have always been a fan of Siouxsie and the Banshees. I was listening to “Switch” in the car, on the way to work today , a song from their first album (and the first of their songs that I tried to learn on the guitar). It got me thinking about the new pension freedoms. Moving from a final salary scheme to a SIPP/QROPS or another employer money purchase scheme is often referred to as a switch. Pensions consultants, Towers Watson, recently conducted a survey about the public’s demand for switching away from final salary schemes and the results are starting to raise alarm bells. According to Towers Watsons‘ research 9% of employees approaching retirement with defined benefit (final salary) pensions think they would be interested in exchanging most or all of this pension for a DC pot (own fund) that they can dip into as they wish. A further 11% would be interested in exchanging half of their final salary pension and 24% in exchanging less than half of it. I wonder if those questioned know the risks that they could be taking and the results this could have upon retirement income. Changes heralded The popular press has heralded the changes as a victory for the public and well overdue. Liberal Democrat pensions minister Steve Webb said: ‘This is great news for a huge number of people. It treats people like grown-ups and has been made possible by the state pension reforms the Coalition Government has bought in.’ There is no doubt that reform was overdue but is this a bridge too far? The reforms really shift responsibility onto the consumer to manage his/her pension pot during retirement. A retirement that could last 40 years. Final salary schemes and annuities (although often unpopular and often misunderstood) gave certainty of income during retirement. A swtich throws away that uncertainty. We are all heading into unchartered territory and no one knows where this will all lead. Certainty vs Freedom Steve Webb recently addressed the Pension Schemes Bill committee and said: “We don’t know what models people will come up with. What we found out is that there are so many different permutations.We have set out our general approach and if something doesn’t seem appropriate we are reserving the right to say no“. As Siouxsie sang “Watch the muscles twitch, for a brand new switch’’ followed by “ With patient guinea-pigs ….With drastic side-effects’’ I refer to my previous blog about throwing out the baby with the bath water. Unless correct advice is taken, some people will watch their pension income disappear down the plug hole. http://christopherlean.weebly.com/blogs-from-bohemia/throwing-the-baby-out-with-the-bath-water The Switch And here is the song...... https://www.youtube.com/watch?v=WOH_VN5gAqE |
Lost In BohemiaI am an expat, based permanently in the Czech Republic, married with two children. As a Chartered Financial Planner I predominately deal in pension (fee based ) advice and trusts This is my first attempt at blogging, so please bear with me! Archives
July 2016
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