UK and international advisers must join forces to deal with the complexity of defined benefit pension transfers, according to Geraint Davies, managing director, of international advisory business Montfort International.
The UK financial watchdog, The Financial Conduct Authority is consulting on plans to change the rules surrounding pension transfers, as reported, following the publication of this week’s Consultation Paper CP17/16 ‘Advising on Pension Transfers’.
Davies, said that he welcomes the moves towards greater client protection by the FCA calling the moves “excellent news”.
“The FCA may have appeared to have shifted from a principles based to outcome based, but with this weeks Consultation Paper [they are] certainly are looking at advisers being principled,” said Davies.
“And it is principled that is evident in some sentences. Principled being of course synonymous with terms such as honest, responsible, scrupulous, true, just, conscionable.
“So when they [the FCA] say “individuals may need to consult an adviser in both UK and the destination country for the transfer”, that I see as regulatory speak to advisors you must discuss with advisors in both the country of scheme residence, jurisdiction of the scheme and understand the language, as terms mean different things in different land(s).”
Pension Commencement Lump Sum for example, should not be referred to as a tax free lump sum any longer because in certain countries it’s not tax free, Davies pointed.
The recent Spring Budget announcement on the taxation of transfers to overseas pension schemes makes these types of transfers generally less attractive, but there will be people for whom transferring will still be beneficial, said Davies, (pictured left).
“[This] is FCA speak for your arguments one way or the other must be carefully considered, i.e. don’t do this work unless you know what you are talking about, because you are being watched,” he said.
“The proposals set out in this paper will have specific effects on the process of transferring safeguarded benefits to an overseas pension. The proposed requirement for all advice to be a personal recommendation may mean that the UK advisor involved in the transfer takes on greater responsibility than they currently do.
“This is complex advice and it needs quality oversight. Our proposed requirements for an APTA (appropriate pension transfer analysis) are likely to result in a more complex analysis having to be undertaken for an overseas transfer than for a transfer to a UK DC (defined contributions) arrangement.
Where a transfer overseas is being considered, firms must ensure that the APTA contains sufficient information in order to be able to compare financial and tax regimes in two countries.
For example, a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS) may incur the QROPS transfer tax charge of 25% or there may be complex tax planning depending on the nature of tax treaties between the UK and the overseas territory where the client is resident, Davies added.
“While all APTAs will need to take account of the ultimate destination for the funds, for transfers to non-UK schemes where there might be higher nominal projection rates, advisers must consider that this may be accompanied by higher inflation or that there may be offsetting movements in exchange rates,” said Davies.
“Clearly how else would you deal with such a matter, unless you factor in such. So this is nothing really new to Montfort as it’s our standard practice. It appears that others have not put in place suitable procedures.
“In practice, this is likely to require a UK-based adviser to work in conjunction with an overseas adviser to understand where the funds are likely to be transferred.” …continues on page 2
In conclusion, Davies said that Montfort’s supervisory work indicates that firms will need to take particular care to consider appropriate real rates of return, multiple layers of fees which are not always loaded into product charges and taxation considerations.
“This is our standard practice it is heartening that this is seen as the way ahead, but surely it’s what should have been happening all along. I think the FCA will need to look at firms who have foots in two jurisdictions to see whether there is evidence of systematic selling.
“We are particularly interested in gaining further insight into the current practices for advice on transferring safeguarded benefits overseas, the impact of our proposal to these types of transfers and any thoughts on how these transfers can be facilitated where it is the right thing for the individual while providing sufficient protection for consumers.”