Australia

January 20, 2022

Investment bonds and offshore advice

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How to help your clients avoid offshore unregulated advice and high exit fees on their offshore pensions

Those of you who have been in the industry for some time, will know that UK / QROPS pension transfers used to be an everyday easy transaction for clients.

It was not until there were major legislation changes that it got harder to facilitate these transactions for clients. Due to the complexity of these transfers, many Australian advisers tend to leave those assets aside and advise clients on all other aspects of their financial planning needs.

What this means is clients will either try to find someone to help them or get their Australian adviser to find someone who can help.

Help your client find the most appropriate adviser

As with Australia, there are many countries where the financial services market is heavily regulated, such as the UK, Canada or the USA. All advisers in these countries will be regulated by the local regulator and subject to strict regulations to protect consumers, as we have here in Australia.

Although the advice being looked at may be in the UK / Australia, it does not prevent unregulated advisers, who are based offshore, contacting clients and offering advice despite not holding the regulated licence.

Should your client engage with these types of advisers, there will be no protection through indemnity insurance for compensation should anything go wrong.

You can help your client by finding an adviser who has the correct licence to advise on the products being looked at, or help them by finding out where to look at the financial adviser register in certain countries.

When looking into a specialist area such as this, it is also important to get recommendations from other advisers or clients who have used an adviser. This can be done by searching online or on specific websites such as XY where the adviser community is active in helping each other.

Help your clients avoid investment bonds within their offshore pensions

Not only do your clients need to be wary of unregulated advisers but also the products and fees being recommended.

Most offshore advisers will recommend clients open investment bonds within their pension wrappers. There is of course a place for investment bonds when advising clients, but within a UK / QROPS pension it is not the place, as these grow tax free already, so the bond offers no tax benefits.

The reason these are widely used is because of the high initial commission allowed by the bond provider, which gets paid on top of the initial advice and ongoing fees paid to the adviser by the client.

This high initial commission is usually called an establishment fee and is quoted over an 8 or 10 year period at an extra 1% per annum. Should a client want to access or transfer their funds away from the bond they will have to pay the remaining unpaid fee as an effective ‘exit penalty’.

For example, 5 years ago Mr ABC had £100,000 in a pension which was transferred into a new pension wrapper and into a 10 year bond. The establishment fee paid to the adviser by the bond provider was £10,000 at the time, and Mr ABC had been paying this via an additional fee of 1% per annum. After 5 years Mr ABC wanted to transfer the funds to Australia and access them for his retirement. He was informed the bond term was 10 years and before transferring or accessing he would need to pay the remaining 5 years fees, which equated to £5,000.

Many clients are unaware of these high commissions, and usually find out when they wish to access or transfer the funds. It is therefore very important that should your client take advice in this area, that the fees are checked and if an investment bond is advised, there are no fees such as this.

What you should do next

Clients living in the UK or Australia who are considering transferring their UK pensions, should ensure they are dealing with a locally regulated and licensed financial adviser.

They should be cautioned to avoid any advisers who wish to offer them an investment bond, within their pension, that carries additional charges and with no added benefits to their UK pension fund, if they are residing in the UK or Australia.

We’ll be looking at this subject in detail on our webinar on 23 February 2022.

To register please click on the link here.

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DISCLAIMER: The XY Adviser website and all content contained on the website is limited to general information. It does not constitute legal, financial or other professional advice. XY Adviser does not hold an AFS licence and does not provide any financial services. Nothing on this website should be interpreted as financial advice. Before making any investment decision, XY Adviser recommends obtaining financial advice from a qualified financial adviser.