Whether you have left Great Britain and wish to take advantage of benefits offered by transferring your UK pension offshore, via HMRC approved QROPS, or are simply enquiring to get more information on the subject, a key concern for a lot of people are the costs involved.
There are many important considerations to assess before deciding whether QROPS, the UK equivalent SIPPS, or your existing arrangements are the best solution for you. This article focuses on the cost element to help you get the best value from your existing pensions to improve your retirement prospects.
Why low charges may not be in your interest
Surely low charges are beneficial? Not necessarily as we shall see. An important observation when discussing costs is to make a clear observation that minimum explicit charges are not always good. An ideal solution should be one combining low overall costs for a product that meets or exceeds all your requirements backed up by a high quality service. A cheap solution, by contrast, is paying a low cost for something that does not satisfy your expectations. You may be let down by many aspects including anything from poor customer service to a product that simply fails to give you everything you expected, thereby necessitating additional expense.
Don’t be duped by competitive pricing that is anything but
It is very easy to be drawn into apparent bargains. The lure of the headline rate can be highly influential and to your detriment if you fail to account for all the other costs. For example, the notoriously expensive payday loans have been shown by UK consumer group Which to be less expensive in certain circumstances than going overdrawn on a free bank account. This is not an advocation of payday loans, instead it is to highlight that it is important to assess the cost of a product according to your individual requirements rather than making sweeping generalisations.
It is critical that your pension is located in the correct jurisdiction. Failure to do so could result in substantially higher costs and may place restrictions on accessing funds.
At this point, ask yourself, is your pension as cheap as you think it is? Hazard a guess, note it, and then calculate the true cost.
Pensions have four main costs. The lure of a stellar rate in one area could be more than offset by uncompetitive pricing in the other sections.
If you hold a final salary (aka defined benefit) pension this doesn’t apply because all costs are borne by your employer and not yourself.
Increased competition works in your favour
New pension products, both in Great Britain and around the world, are continuously being introduced into the lucrative pensions market. With the advent of new pension freedom rules this can only be expected to continue, which is great news for prudent savers.
Due to this relentless progress it may be that new offerings could provide either one or more of the following advantages over your existing arrangement;
The march of progress means that a policy that is relatively new may have been superseded by a better option and it pays to periodically review your options.
When transferring to a cheaper deal leaves you worse off
So you’ve found a new pension option that is an improvement over your existing arrangements. There may still be valid reasons to keep the status quo including;
Calculating the true cost of your pension
Are you aware of the actual cost of your pension? If you don’t you are far from being alone due to the myriad of potential charges involved which can quickly become convoluted. For a case in point, every pension has four main charging areas;
In essence, the pension wrapper will define the rules that your investments will have to follow and, assuming these have been met, compensate by offering tax reductions.
A pension wrapper should always save you money. It is therefore generally a good thing to have. Caution: As mentioned, not all pension wrappers work on the same principles therefore the way to maximise your tax savings is by having the correct pension structure for your needs.
Types of wrappers include: SIPPS, QROPS (Non-UK option), Final Salary (defined benefit) schemes, Additional Voluntary Contributions (AVCs), and Personal Pension Schemes
Typical fees include: Set up fee, annual management fee, transfer fees, and income drawdown charges (both initial and ongoing)
Limitations: While it is unfeasible for a platform to offer access to every single security available a group, known as open architecture investments, will allow the purchase or sale of any freely tradable investment. Examples of investments not included in this group could be shares of a privately held firm or certain real estate investment trusts. In practice, open architecture provides ample choice for creating a personalised well diversified investment portfolio. Closed architecture investments, by contrast, will only allow a portfolio to be created from a very limited group of investments – possibly fewer than 100.
Typical fees include: Set up fees, annual management charges, and dealing fees
Limitations: Certain investments may be or become illiquid. This can prevent anyone selling an asset for a period of time, through a trading suspension. Not all suspensions are bad since they are typically a way of safe guarding existing clients’ interests.
Typical fees include: Bid/Offer or Entry/Exit fees, Annual Management Charges (AMC) + bonus charges, stamp duty. Please read an investment’s prospectus for a full breakdown of upfront, ongoing and exit charges
Important note: Always consider the anticipated net returns of an investment. An investment with high charges may be worthwhile if it has a proven track record of outperformance after costs. On the contrary, a very low cost tracker fund could be worth avoiding if it has an unacceptable tracking error i.e. how effective it actually is at performing as expected.
Advisors can ask for payment for their services in a variety of different ways;
Flat fee: A charge of a single amount based on the type of work done (e.g. a review cost £x, establishing the need for life insurance costs £y etc). This should include a recommendation, whether that is for a product(s) to cover any shortfall or, indeed, that no further action is required.
Hourly rate: Similar to a flat fee except the overall cost will be based on the number of hours worked rather than a fixed rate. It is therefore important to get an estimate for any work carried out to ensure that you are aware of the anticipated costs before proceeding. Should there be any unforeseen circumstances which means that the work will take longer than expected you should be notified, though it is always worth confirming this beforehand.
Limitations of flat fee and hourly rate: Depending on the nature of the advice it may prove prohibitively expensive based upon your circumstances. The cost is also due irrespective of whether or not you proceed with the recommendation, or are even happy with the advice. Finally, paying a flat fee may induce you to skimp on regularly reviewing your accounts and financial health.
Commission: There are two main methods of paying commission: direct and indirect. Both are based on a percentage of the underlying product, with the most common being investments. They can include one or a combination of charges: front-ended, back-ended, and/or ongoing. Direct fees are paid by you straight to the advisor whilst indirect charges are paid by the product provider.
Any direct fees should be explicit, with you being informed of how much you will be charged upfront and on an ongoing basis. Indirect fees, by the contrary, may be opaque and, instead, are part of the product that you are purchasing’s costs. You should, of course, be made fully aware of these charges. Advisers can then choose whether to rebate part or all of the commission that they receive from the product provider. It is therefore possible, via receiving commission rebates, to have reduced or zero entry or exit fees, or over 100% allocation i.e. a bonus.
Limitations: Whereas the benefit of paying commission over a flat fee is that, on an ongoing basis, your advisors interests should be aligned with yours and you should receive regular reviews/updates, unscrupulous advisors or salesmen may place your money in products that pay high commissions over what is in your best interest. Unfortunately, as with all industries, there are good and bad. It therefore pays to ask lots of questions and read all small print before proceeding.
Typical fees include: Upfront and annual management charges (AMC)
Establishing cost of pension
As mentioned, there are four main categories of charges. Therefore;
Pension cost = pension wrapper fees + platform fees + investment fees + advisory fees
In may transpire that one or more of the fees are combined which is important to confirm. As touched on before, an adviser may be paid indirectly from a provider. The cost of the pension wrapper, platform and advisory fees could therefore all be included in one charge, for example. In the same instance, if you don’t use a financial consultant, the fees that would normally be passed to the consultant may simply be kept by the provider.
Finding the best low cost QROPS for you
Paradoxically, you should not look at costs when considering QROPS at the outset. Instead, review their pros and cons, then compare them against their UK equivalent (SIPPs) and your existing scheme(s). If they are the best option then you still have to establish the best place to have the QROPS based. Only once this framework is established should you consider the costs involved. After all, the tax breaks should always far outweigh the costs of using a QROPS.
Next, focus on what is important to you and ensure that you are getting value for what you are paying for. For example, you may pay a premium for active investments, where the manager is entrusted to get higher returns, or you may prefer to use passive funds that track the market. In either case, are they performing to your expectations? If not, it could be time for a change. The same applies to the pension provider, platform and advisor.