What does a pension transfer cost?
Are you considering transferring your UK pension? Do you have a UK pension and now live abroad? Do you need to transfer your pension in order to gain access to your monies? Within this article, we will assess all the costs associated with a UK pension.
There are numerous layers to any pension so when wanting to know what does a pension transfer cost, we can break it down into the following:
Exiting Scheme Costs
The existing scheme that you are in may or may not have exiting costs. If the pension scheme is a personal pension then these are likely to be zero. The same applies if a company defined contribution scheme. If however, you have already consolidated previous pensions into one scheme whether it be a SIPP or a QROPS then there will be exit costs and these can be high.
Financial adviser fees will make up the key component when computing what pension transfer costs. The defining factor is whether the adviser is fee-based or commission-based.
Fee-based Advice – A fee-based adviser will charge you a pre-stated fee for providing a service. This can be a flat percentage or an hourly rate for the initial advice as well as an ongoing fee for the management of your assets. Fee – based advice has a fiduciary duty to their clients over any obligation to the broker, product provider or other institution. Essentially this means they have to look after the clients best interest and cannot “sell” an investment product that conflicts their needs, requirements or level of risk. The adviser must assess all products and solutions on the market before recommending the best solution for the client’s objectives. Any conflicts of interest must be disclosed.
Commission-based – advisers earn their money solely on the products and solutions they “sell” to the client via remunerations from the product providers themselves. The more solutions they sell / the higher the value of investments made into the product the more money they make. Regulations state that the products they sell must be suitable for the client regarding their objectives however the benchmark is somewhat subjective. Unlike a fee-based adviser they do not have a regulatory requirement to their clients but rather a duty to the providers who are paying them the commissions. There is no requirement to disclose any conflict of interest.
Trustee costs again vary from provider to provider as well as the structure i.e whether a SIPP or a QROPS. It is important to also assess the ongoing costs as well as drawdown costs as they can soon add up.
The pension, whether it be an International SIPP or a QROPS is the tax wrapper. You will still need to utilise an investment vehicle that allows you to invest your pension monies into the leanmarkets. An offshore investment platform is the superior product offering access to an extensive range of funds, at a low cost, in a regulated efficient structure.
Commission-based advisers are likely to recommend an offshore Bond as the product will pay out large commissions of up to 12%. Importantly however the Bond offers no advantage whatsoever and also allows the adviser to utilise commission paying funds. Often Bonds are sold on tax efficiency however a pension is already a tax wrapper and as such negates any so-called benefit.
There are 2 types of fund cost to consider within a pension transfer.
Clean Funds – subject to utlising a fee based adviser they will be recommending a range of funds for your portfolio. All funds will be “clean” meaning there is no cost of entry or exit when disinvesting. If they choose to utlise passive funds then ongoing costs will be very low such as 0.2% per annum. For a mutual fund these costs can rise up to 2%.
Commission Paying Funds – Commission paying funds will pay out a proportion of your monies invested to the adviser . i.e 4% on entry. They can also make ongoing trail payments to the adviser usually around 0.75%. Commission paying funds can only be used within offshore bonds. Any fund manager paying out commission needs to ensure they get their money back. As a result there will be an exit penalty / surrender charge for exiting the fund and the ongoing charges are high. i.e 2 – 4%.
Case Study – Fee-Based Financial Advice
If we take the case of an Expat based in France with a £240,000 (GBP) pension and an International SIPP being the most suitable solution.
International SIPP – £0
Offshore Investment Platform – £0
Funds – £0
Adviser Transfer and Advice Fee – 3%
Total cost of transfer – £7200
Case Study – Commission Based Financial Advice
International SIPP – £400
Offshore Investment Bond – 8% Commission = £19,200
Funds – 4% commission = £9600
Adviser Transfer and Advice Fee – 0%
Total cost of transfer – £29,200