A new consultation unveiled by the UK’s Department for Work & Pensions on Friday – which is aimed at determining whether a new requirement that non-UK-resident holders of UK pension schemes get advice from an FCA-authorised adviser before transferring their pensions overseas is in pension scheme members’ best interests – has sparked concern among some industry practitioners.
These practitioners say that any change to the existing rules by the government, which were to have the effect of weakening them, would be potentially disastrous for many of the individual pension scheme members concerned.
The rule which requires the approval of an FCA-authorised adviser before a UK pension worth £30,000 or more may be transferred abroad was brought in in April 2015, to coincide with the introduction of a range of new “pension freedoms” that enabled individuals to have greater access to their pension schemes.
Prior to the introduction of the advice requirement, pension scheme members typically “would seek out a non-UK-based financial adviser, because they were able to advise on local tax rules and/or the suitability of overseas pension schemes,” the DWP notes in the 16-page consultation document.
“Alternatively, local advice would be sought because it was a requirement of the receiving scheme, or overseas financial jurisdiction.
“By contrast, UK financial advisers may not wish, or be able, to offer this form of specialised transfer service covering the tax and pension rules of the member’s country of residence.
“The result is that members resident overseas with safeguarded pension benefits may be financially disadvantaged by having to seek two separate sets of advice, one to meet the conditions of the new advice safeguard requirement, and another from a local overseas adviser to advise on issues relating to the transfer overseas, such as tax implications or timing of the transfer to minimise the impact of currency fluctuations.”
The DWP goes on to point out that members of UK pension schemes who live outside of the UK “may also be exposed to unnecessary risk, because advice is taken in two different jurisdictions, with the result that it is not clear how the member should seek recompense in event of a poor outcome as a result of the advice”.
Finally, “being resident outside the UK may also mean that the member is further disadvantaged as they may be unable to secure an FCA-authorised financial adviser willing, or sufficiently qualified, to provide financial advice for an overseas transfer,” the DWP consultation document notes.
“Feedback received from members living overseas has revealed reluctance from advisers to take on pension transfers to overseas schemes.
“The reasons given include a lack of suitable expertise, and a concern that taking on such business will be unprofitable because it increases the cost of their personal indemnity insurance.”
Concerns over ‘more freedom’
Among those who expressed concern over the DWP consultation was Geraint Davies, managing director of Montfort International, a Guildford, Surrey-based firm which specialises in helping Britons and others with UK pensions to transfer them to such countries as Australia and New Zealand in particular.
He says that even though the consultation is aimed at the pensions transfer industry, pension transaction victims could “be writing [to the DWP] in their thousands demanding to know why anyone would suggest that the scammers and commission-hiding cowboys and con artists [who lost them their pensions] be given even more freedom to flog useless pension solutions”.
And if they don’t write in, another generation of investors could find themselves out-of-pocket, Davies adds.
“Financial institutions concerned only about hitting targets will dream up the need for less controls. They will argue let the consumer do as they wish when what they are really saying is help us build more funds under management.”
Davies says he concurs with the Government that “the systems and processes for international financial planning need overhauling”, but says that what is needed is greater education for those who deliver financial adviser to consumers, and for consumers themselves, not a relaxing of rules.
“Ask the international tax experts or international tax lawyers whether cross border advice is straightforward – and the answers will be never, ever, ever. This is complex stuff, and this will be borne out by the responses received.
“The consumer has to be protected, and less controls means trouble.”
Davies adds that he believes the Financial Conduct Authority may soon begin taking an interest in the fact that some UK advisers are processing as many as 40 pension transfer letters a week., for which, he notes, they are able to charge significant fees.
Chris Lean, a Czech Republic-based adviser with the UK-based Aisa International advisory business, says he too is concerned that the consultation could result in a dangerous weakening of the rules.
“While UK advisers may not understand all of the local taxation issues for expats, they do understand UK final salary schemes,” he says.
“The current system is not perfect, but to go back to the time before April 2015 would leave expats exposed to the unqualified advisers who work on the assumption that a ROPS is the default option, without given regard to what could be lost.
“I cannot see how a UK-ceding provider would be able to validate whether an expat client has taken suitable advice from an non-UK adviser, whether the non-UK adviser has the correct local permissions, PI cover and whether the transfer of a UK pension to a third country is regulated at all, and whether the expat has any recourse to anyone if the advice is poor.
“I have already seen unregulated ‘introducers’ welcoming the announcement of the review on Twitter, which should be a warning in itself”.
‘Negative unintended consequences’
Among those who argue against keeping the current regulations calling for an FCA-authorised adviser to sign off on pension transfers is deVere Group chief executive Nigel Green.
Green, founder and chief executive of deVere Group, said to be the largest independent financial advisory company, argues that the current system involving FCA-authorised advisers to approve pension transfers “has many negative unintended consequences”, and says deVere will be among those “urging the government to adapt the transfer process, and allow local advice to be given for QROPS.”
“There are three key concerns about the existing requirement.” Green says.
“First, a member often has to seek out two separate advisers – one who is FCA-authorised, and another, local one – to advise on tax rules, timings and the appropriateness of the overseas pension transfer.
“Clearly, this dual approach is both more expensive and time consuming for the member.
“Second, with advice being given in two different jurisdictions, there is a grey area over which [advice] takes precedence, and where the ultimate responsibility lies should something go wrong. This puts the member at more risk than is necessary.
“Third, members who reside overseas might find it difficult to find an FCA-authorised adviser who is willing and able to provide the advice that is needed.
“The government should implement an alternative rule that a member wishing to transfer their pension out of their UK [must] seek advice from a local adviser who is authorised in the member’s country of residence.
“The local adviser would be typically better placed to advise on the regulatory conditions, tax implications and the available investment opportunities.
“In addition, under this system, only one financial adviser would be required, which would be less costly and less time consuming for the member.”
The consultation, which may be read and downloaded by clicking here, is due to run until Friday, 23 December. Those wishing to respond are invited to send their responses to James Calverley at [email protected], or by post, to him c/o Decumulation and Transfers Team (Overseas), Department for Work and Pensions, 1st Floor, Caxton House, Tothill Street, London, SW1H 9NA, England, UK.
Adam Benskin, one of the founders of London-based wealth manager Strabens Hall, also has reservations about the possibility that the existing regulations governing UK pension transfers overseas might be weakened. To see his concerns, click here.