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- What are the tax implications I need to think about?
Contact your local financial advisor to discuss what steps you can take today to get you on a path toward success in the future.
A British client based in Europe was approached by a local financial adviser, he told him he would be better off if he transferred out of his 3 UK pensions and put them into a QROPS scheme based in Europe.
He was recommended to put all of his pensions that amounted to £270,000 into an investment bond of a well-known insurance company based in the Isle of Man.
He was told the plan would provide a better pension when he retired and he would be able to take 30% tax-free cash when he reached pensionable age.
The adviser selected a custodian to take out an investment bond that had an 8-year charging structure coupled with QROPS trustee fee of 3%, split 1% to the trustee and 2% to the adviser. 3 years into the plan, the client wanted to retire, he took his 30% tax-free cash and thereafter took a modest income of £1,000 per month.
HIGH FEE CHARGES
6 years after he took out the bond he discovered his investment was now worth £110,000 and aged only 68 he was very concerned he was going to run out of money during his retirement. We confirmed this to him because the investment bond was still charging fees as though he had £270,000 invested. EME calculated (like so many times before) that the client had to obtain a return of 16% per annum to achieve a fund that would not decrease.
You could have possibly used a QROPS for the 30% tax-free cash. We would not have used an investment bond. We would invest directly into funds with charges linked to values with no access or surrender charges. EME would have reduced initial charges by 50% or more.
In this case EME connected advisers would transfer the remaining fund away from the bond and invest in regulated funds and advise the client to reduce their income expectation. By doing this at the clients risk level, we can achieve the goal of the fund not running out, returns reduced from 16% per annum to 7% per annum and a client who can rely on his pension for the rest of his life.
A well known financial adviser firm approached a British client based in USA through Linked In saying that he was going to lose his death benefits in the UK unless he took action. The client, Joe, also told him he would be better off if he transferred out of his “Defined Benefit” (final salary scheme) pension and invest into a QROPS scheme based in Malta.
The adviser suggested the client should transfer the full amount of $740,000 into a “trustee” investment with a custodian known as Royal London 360 (RL360).
There was no mention that RL360 was an investment bond based in the Isle of Man, nor any charges. In fact he was told the charges were 1% per annum plus a trustee fee. A TVAS calculation also indicated no charges.
He was told the plan would provide a better pension when he retired, improved tax free death benefits and he would be able to invest in funds of his choice. The client was told there would be no charge to do the transfer, which is typical for internal pension transfers in the USA, so it was not a surprise, but the adviser said he would be paid a marketing fee from the insurance company.
The client went ahead and signed the contract for the transfer and the business was processed, when he received the contract he discovered he could not invest into the funds of his choice and he was concerned by the charging structure, his US adviser did some research on the internet and found our website and asked us to help him.
Our advisers examined the case and discovered that the adviser had taken a commission of $58,000 from the transferred amount without the knowledge of the client, furthermore his pension was now in a high charging investment bond that would inhibit the performance of his investment and he could not freely invest into his preferred funds. The adviser selected a custodian in Malta to take out an investment bond that had an 8-year “locked in” charging structure coupled with QROPS trustee fee of 3%, split 1% to the trustee and 2% to the adviser. Any access to the pension in the first 8 years would lead to some “access” charges (we call them surrender penalties). Considering the client intended to take his entitlement to tax free cash in 18 months this was unacceptable to him.
HIDDEN COMMISSIONS & EXIT CHARGES
The QROPS in Malta presented the biggest problem, as an enquiry into the Internal Revenue Service (IRS) indicated that under ordinary circumstances, that transfers between states (UK and Malta in this case) would not come under Article 18(1) of the 2001 United Kingdom-United States income tax double Tax Treaty, and the distribution would be viewed as income unless it was rolled-over, timely from a qualified plan into another qualified plan. It said as an explanation that plans outside of The U.S. are generally not recognized as qualified plans. Whilst this is not law, it is a clear indication that firms advising that a QROPS is recognized by the US are not necessarily correct, and this places a risk on taking the action of using a QROPS as if the transfer is not a tax-deferred rollover distribution it may incur a 50% tax penalty if not declared. Additionally the IRS (US tax authorities) can see a QROPS as a form of a trust which therefore necessitates “annual foreign trust” reporting. Failure to comply with this reporting requirement alone can also result in the 50% tax charge for the account value. The client also did not have any “tax credits” and therefore the transfer would be regarded as a “taxable event”.
EME connected advisers took the urgent following steps to correct the situation. The client cancelled the contract with his adviser; he could do this as he was still within the 30-day “cooling off” period that is a legal condition in the US.
EME connected advisers then set up a SIPP in the UK as this has a low charging structure and it means the client would not incur the 50% tax charge as the pension was not transferred out of the UK and therefore was not a “taxable event”. EME also removed the commission charge and agreed a fee with the client before the work was carried out thus greatly improving the clients’ position and protecting his pension fund for him and his family for many years to come.
With the new rules coming in 6 April 2015, then the original advantages cited to the client where now all available through the UK pension anyway up to the age of 75. After 2 years of investment, the client has paid $37,000 less in charges, and the fund has no “access” penalties.
We do not recommend due to the uncertain nature of QROPS that anyone based in the US should take them out, especially with the new UK pensions rules in 2015.
For help and friendly advice for your future, please feel free to contact us and we will be happy to provide your ‘EME personal solution’ for a secure future.
A British client based in Dubai wanted to save $2,700 per month as part of his future financial planning; he had heard he could obtain good returns from a savings scheme based in the Isle of Man.
He was recommended a 25-year savings plan and was told he could expect returns of 9% per annum.
He was told the plan was flexible and he would always have access to his savings, as long as he kept it running for 2 years.
Two years into the plan after he had invested $66,591.00 plus his valuation was showing a “bonus” with current growth, which gave a total valuation of $84,133.00.
HIDDEN COMMISSIONS & EXIT CHARGES
His circumstances changed and he wanted his money back 2 years after commencement, the actual amount he received was Zero. It transpired his offshore savings plan included an “initial period”. The adviser had received a commission from the insurance company of $34,020.00, which he would have had to repay if the client had not completed the initial period. It was only after the deduction of all contributions in the first 2 years that the client had any entitlement; hence he received zero from the insurance company.
In this case EME would have recommended a savings plan that would have returned $67,392.00 after 2 years and would have been accessible with no penalties or early surrender charges. If the fund were left to grow at 7% per annum gross the fund would be worth $78,015.00 after 5 years.
EME provide savings plans that do not have an initial period or high policy charges, we even rebate back up to 50% of fund charges and there are no dealing charges, so given the same scenario as above our client would have received all of his money back plus growth on his investment.
All case studies are based on actual clients. Evidence is held on file and available for further review for a charge. Clients’ names, providers and advisers’ names are withheld. EME does not give advice.