Monday, 16 November 2015

Overcoming Suspended Funds In Your Investment Portfolio

Overcoming Suspended Funds in your investment portfolio

I regularly take on the management of investment portfolios for clients, either where they have been disappointed by returns or let down by their existing advisers. Surprisingly often in the offshore market, an expats investment portfolio will contain a portion of their money tied up in suspended funds – usually sold by advisers for the commissions they generate. These funds have redemptions suspended, meaning that the money invested into them cannot be recovered at the current time and in most cases there are serious issues with the underlying assets within the fund meaning the money may never be returned or only a very small percentage of your initial investment will be returned.

In total over £4bn of savers’ money is tied up in funds that currently have a “closed” sign since 2009. The most common “suspended” funds I have found investors to hold are: Four Elements Apollo, Axiom Legal Financing fund, Centurion Defined Return , Life Settlements fund and Argent Fund, CF Arch Cru Investment and Diversified Funds, Connaught Series 1 Income, EEA Life Settlements Fund, Harlequin Property, LM Investment Management, Managing Partners Limited Traded Polices Fund, Mansion Student Accommodation, Strategic Growth, The Glanmore Property, and Quadris Fixed Rate Distribution. All of these funds currently prevent investors withdrawing their money.
Most of the funds above invest in specialist or obscure types of asset, such as “traded life insurance policies”, loans or in various types of property. The specialist assets in investment funds like this are often difficult to sell and difficult to value, however, they were all open ended funds meaning, in theory, investors had access as and when required. This causes problems if many investors want their money back at the same time as assets need to be sold off quickly, usually below value or withdrawals must be restricted.

Several funds above, including Managing Partners Traded Policies, Centurion Defined Return, Life Settlements and Argent and EEA Life Settlements ran into difficulty after investing in second-hand life insurance policies where the buyer receives the insurance payout when they original policyholder dies. Often sold as “low risk”, a combination of policyholders living longer than expected and an inability to sell the policies when investors in the funds wanted to cash in their holdings created major difficulties. Alternative assets held in the suspended funds above  range from student property (Mansion Student Accommodation) to forestry (Quadris Fixed Rate Distribution), and in Arch Cru’s case, a Greek shipping company. Often allegations or investigations concerning fraud led to the suspension. This is the case for Axiom Legal Financing Fund, LM Investments and Harlequin Property. Axiom Legal Financing fund lent money to law firms, while Connaught Income Fund Series 1 invested in firms making bridging loans.

Will clients ever get their money back from the investment?

One of the biggest difficulties with these funds is getting any information on the status of the funds and the assets underneath after the closure. Investors who have money tied up in these funds face wait to find out if they will have their money returned. Out of the funds above, just one has currently given investors an indication of when they will reopen the fund for redemptions. For investors in the Quadris Fixed Rate Distribution fund it looks even worse. The fund, which invests in “forestry growth cells”, could remain suspended until a rather ridiculous 2026 “or at the very latest 2032”.
Where there is no current repayment date, there is still a chance investors could see some money back from the investments at some point in the future, once the hard to sell assets have been liquidated, however, rarely will investors not surfer some form of cash loss on the redemption compared to their initial investments, purely due to the costs associated with liquidating these funds. For funds subject to criminal investigation like Axiom Legal Financing, LM Investments and Harlequin Property its unlikely investors will receive much, if anything, back at all.

These funds have things in common that you should look out for when making investment decisions in the future. They often promise consistent returns (often with an almost straight line on the performance graphs) and usually offer returns in excess of 10% per annum. The funds are often issued by “unknown” investment companies that run only one or two funds. These funds often hold very niche assets or very specialist assets.  All the funds above paid the advisers a commission on the sale of the fund into your portfolio. Ask your adviser if they are receiving a commission or speak with the fund directly .When a fund needs to pay an adviser to place business with them, there is often a reason why they cannot attract funds under management in the normal way. When a potential investment ticks all these boxes you should be extra careful.

How to deal with suspended funds in your portfolio.

There are instances where compensation has been paid to clients invested in suspended funds, in particular investors in the Strategic Growth Fund and Arch Cru Investment funds where mis-selling has been proven and compensation received but this is often difficult.

In the meantime, I would suggest that you instead focus on trying to generate real returns within the remaining liquid money in the portfolio – both to try and claw back some of the value tied up in your suspended funds but also to enable your investment account to begin growing again as it is supposed to do.

The key things when building a new portfolio will be to ensure all assets not currently suspended are invested into funds and assets that are run by large, well-funded institutions (the Fidelities and JPMorgans of the world) and that the funds hold real assets underneath (for example some funds and etf’s (exchange traded funds) track their index by buying option and futures rather than buying the actual underlying shares within that index). By buying funds underpinned by real assets you will participate in the movements of the prices, while retaining 100% liquidity at all times so that should you need to make any changes, you can.

A good mix of funds and assets should be added to the portfolio. ETF’s can be a good option to add a low cost layer to your portfolio. The key to a successful investment strategy is simple – buy high quality assets that produce income, diversify the assets you buy and take a long term view. If you do that you will not go too far wrong.

If you want to discuss your current suspended funds to pursue compensation or discuss your portfolio allocations you can contact me on

Wednesday, 11 November 2015

QROPS – The Definitive Guide

QROPS – The Definitive Guide (6th April 2016)

If you have a UK pension and plan to move abroad shortly or already live outside the UK then there is a good chance you have heard about or been approached about exploring a QROPS (Qualifying Recognised Overseas Pension Scheme). There is a lot of misinformation and outdated guidance on QROPS (especially since the significant recent changes to UK pension rules in April 2015), their comparisons to UK pensions and the benefits available under a QROPS.

The aim of this guide is to give you a full, clear and concise understanding of what QROPS is and how it compares to other options from an unbiased, independent viewpoint. It is vital that people do their own due diligence. Pensions are complex investments and in the offshore market in particular there are many advisers offering a QROPS to clients without having taken any UK pensions qualifications or understanding the suitability of an arrangement for a client’s circumstances. In many cases, especially since the changes in April 2015, people may now be better off with a UK or International SIPP rather than a QROPS.

What is a QROPS and what is a SIPP?

Qualifying Recognised Overseas Pension Scheme (QROPS)
This is an overseas pension scheme that HM Revenue & Customs (HMRC) recognizes as being eligible to receive transfers from registered UK pension schemes. This allows anyone with a UK pension who is living outside the UK or is intending to leave the UK to transfer their UK approved pension to an offshore jurisdiction without the deduction of UK tax. It cannot be used to transfer UK state pension benefits.

Self-Invested Personal Pension (SIPP)
This is the name given to a type of UK government-approved, UK based personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

QROPS benefits

What are the benefits of moving a pension from the UK into a Qualifying Recognised Overseas Pension Scheme?

1.       Up to 30% tax free lump sum instead of 25% in the UK.

In the UK, when you begin to draw your pension you can take up to 25% of the value of your pension fund as a tax free lump sum payment. (Assuming the lifetime allowance, currently 1m, has not been exceeded). With a QROPS you can take up to 30% of the value of your pension as a tax free lump sum once you have been a non UK resident for 10 years (5 years if your pension was transferred to a QROPS before April 6th 2013).

2.       Pay tax in the country of your residency of choice

Pay less tax on your pension income. Most UK pensions are set up to pay pension income under the UK PAYE system where tax is automatically deducted before being paid, while you can elect to have this paid gross with HMRC it can be complicated. By transferring to a QROPS you can choose how, where and when you pay any income tax due on your pension. You may elect to have it taxed in your country of residence or in the QROPS jurisdiction itself where appropriate tax agreements exist to take advantage of lower tax rates.  

3.       Advantages for those with final salary schemes

A final salary scheme (or defined benefit scheme) are often associated with being generous and secure. There are, however, circumstances where you may wish to consider a transfer to a QROPS or alternative UK scheme.  Importantly: Final Salary transfers must be advised upon by a qualified professional holding the necessary UK Pension Transfer Qualifications and by a UK regulated firm holding the relevant license. Final salary pension transfers CANNOT be completed without a UK regulated firm being involved.

Reasons for consideration to transfer a final salary scheme into a QROPS include the risks of underfunded schemes not being able to pay out, many schemes are now sitting in an underfunded position with benefits being reduced year by year. The protection scheme only covers that 90% of your benefit will be protected with a cap of £32,761 per annum. 

If you have a big pension pot you can use QROPS as a way of passing down that wealth to your beneficiaries while avoiding Inheritance Tax.

Where you or your family are reliant on the income from a final salary scheme you may want to consider a transfer to an alternative scheme (SIPP or QROPS) to protect the income level you are receiving and the value of the pension fund itself.

4.       If you return to the UK only 90% of the pension income from a QROPS is liable for tax

Income from a QROPS is classed as income from a Foreign Pension Scheme which is taxable in the UK on 90% of the amount paid thus reducing UK tax bills in the event you return home.

5.       Test the pension value against the falling Lifetime Allowance now

The lifetime allowance for UK pensions states the maximum value of a pension fund before additional taxes become due. This has been reduced year on year since 2011 from a high of 1.8m to only 1m now and 750,000 from April 2017. If the lifetime allowance is breeched any excess is taxed at 55% when taken as a lump sum or 25% when taken as income with additional income tax also applied.

When transferring a UK Pension to a QROPS its value is tested against the lifetime allowance at the point of transfer.  Any future growth is then ireelevent for testing against the lifetime allowance and the pension can grow to any amount without incurring punitive UK taxes.  In particular it should be noted that as the LTA keeps on dropping each tax year, anyone with a pension close to the LTA or who think they may exceed the amount of 1m before retirement should take the opportunity to review their postion immediately.  If a transfer to a QROPS today is already above the LTA and there is no protection already applied to the pension any amount above 1m (for the 2016/2017 tax yr) will be subject to tax at 25% immediately.

6.       Tax Free Growth

Once your pension funds have been transferred into the QROPS scheme they will continue to benefit from tax free growth on any capital gains and income received within the pension.

7.        No 45% Income Tax charge on death

When a pension does not exceed the lifetime allowance and the pension holder is under 75 the value of any pension funds can be passed to beneficiaries without tax.

After age 75 pension benefits are subject to a 45% tax charge if paid as a lump sum to a beneficiary with this value likely to be amended to the marginal rate of tax payable by the nominated beneficiary from April 6th 2016. If paid as an income then benefits are free from tax other than income tax due at the beneficiaries marginal rates.

With a QROPS there will be NO income tax charge imposed on the payment of a lump sum to the member’s beneficiaries on death as long as the QROPS pension holder has been non-resident for at least 5 complete tax years. The beneficiaries have any number of options to choose from including lump sum payments, taking income or remaining invested.

In the UK, the new pension rules from April 6th 2015 have changed the death benefits on UK pensions. In summary, they are now:

Benefit type
Payment made on or after 6 April 2015
Uncrystallised, member dies before age 75
The beneficiary can take a lump sum up to the limit of the deceased’s remaining lifetime allowance, paid tax free, or take tax free income from flexi-access drawdown, or buy an annuity with payments paid tax-free.
Uncrystallised, member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%
Crystallised (drawdown), member dies before age 75
The beneficiary can take income from flexi-access drawdown tax free, or buy an annuity, which will be paid tax free, or take a tax-free lump sum.
Crystallised (drawdown), member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%

8.       Exchange rate risk

One of the big factors when living abroad can be the effect currency fluctuations can have on the value of your savings, investments and income and pensions are no different. UK pensions will be based in British Pounds – moving to a QROPS can allow you to hold alternative currencies within your pension to help reduce the effect of currency swings impacting your standards of living. Take the GBP / EURO rate over the last 10 years. If you had a pension paying 1,000 per month you would have seen your spending power reduced from 2005 to 2009 by 40% before rebounding back to where it started 10 years ago. By using a QROPS you can help alleviate currency risk by holding a mixture of currencies and using EURO denominated assets to produce the income in your country of residence.

9.        Portability & flexibility

Expats often find themselves requiring the flexibility to adapt to changes in their lives more often than someone who is based in the UK. UK pensions are structured for those people living and working in the UK – which is a very sensible approach!

This does mean that our needs as expats are often overlooked. QROPS are specifically designed for those with UK pensions that live abroad. They allow you to take your pension anywhere in the world while still providing the flexibility to manage the pension assets you have built up in a way that suits you. Most QROPS providers can also offer ransfers between different jurisdiction and often between SIPPS and QROPS themselves ensuring you can adapt to changes in your life and changes made by the UK government in the future.

10.    Benefit from Worldwide investment options

A QROPS can hold a huge range of investment assets. As well as including traditional assets such as stocks, shares and bonds they can also hold alternative assets such as hedge funds, cash, structured products, life insurance, physical commercial property, art, wine and classic cars should you so wish. Investments can also be made in multiple currencies without restrictions.

11.   Consolidation

Many clients have worked at more than one company during their working life and as such have often accumulated multiple pensions. Transferring into a QROPS can be a good way to consolidate all your existing pensions into one place to ease administration in the future. You will normally have online access to your pensions allowing you to clearly see the current status.

12.   Securing a spouses pensions

Where you have a final salary scheme or a scheme with a tied annuity rate you may find a QROPS can offer much better protection to you spouses income levels. A spouse’s pension will often only be 50% of the income received while the main pension holder is alive. By transferring to a QROPS that income can remain at the 100% rate for the spouse after the scheme member’s death. 

13.   Pension Income Tax Advantages

In the UK, the income received form a pension is taxable at the recipient’s highest marginal rate (up to 45%). For an expat or internationally mobile client, using a QROPS can allow you to combine the use of low tax rates in other countries and / or jurisdictions to pay significantly less tax on their pension income. By taking advantage of the new flexibility rules this gives clients the greatest possible chance of receiving their pensions free of tax that at any other time previously.

14.   Specialist advice on your pension assets

Someone’s pension can often be one of their largest financial assets. It makes natural sense to move the assets into a scheme where you can continue to receive sound advice on changes to legislation and understand how, when and why your pension is growing. Transferring into a QROPS or SIPP can help consolidate all your advice and focus on creating the pension scheme that works the way you want it to.

15.   Clean Break from the UK (particularly for IHT purposes).

By using a QROPS you move your UK based pension assets outside of the UK thus creating more of a clean break when it comes to working out domicile for Inheritance tax purposes.

16.   Taking retirement early from a final salary scheme.

Usually a final salary scheme will have quite severe reductions in the benefits paid to a scheme member when they wish to take benefits before the normal scheme retirement date.
Using a QROPS can help you crystalize a transfer value from the scheme now which can allow you to take your retirement early without being detrimental to your income levels or the tax free cash you expect to receive.

17.   Getting away from UK legislation

The UK government claims it is not looking at pensions as a way of raising tax; however, many of the moves made so far have been contrary to that fact. We have seen the lifetime allowance almost halved from 1.8m to 1m and the amount of money that can be added into pensions without being taxable reduced from over 250k to less than 50k over the last 6 years. Moving to a QROPS ensures that further pension changes will not have a negative impact on your pensions and allow you peace of mind to plan clearly for the future.  

18.   Good for a divorce

QROPS cannot have a pension sharing order attached to them in the event of a divorce settlement. Therefore, should you get divorced at some point, your spouse will have no rights to any benefits occurring under the QROPS scheme and your pension benefits will be protected.

QROPS vs SIPP or other UK pension

There were huge changes made to the way pensions work in the UK that came into effect from the 6th April 2016. This introduced full flexibility to schemes to pay out income, removed the requiredment to buy an annuity and the removal of the 55% death tax. These changes have removed some of the appeal that QROPS enjoyed previously, however, as shown above there are still many reasons why QROPS can be a good choice over a SIPP.

A QROPS and a SIPP are now more similar than ever, although for those living abroad a QROPS can still offer distinct advantages over a SIPP.

The table below shows the key differences that now exist between a QROPS and a SIPP to help you work out which is best for your circumstances. 

QROPS vs SIPP: General

Full name
Qualifying Recognised Overseas Pension Scheme
Self-Invested Personal Pension
A tax advantageous non UK jurisdiction
UK based 
Year introduced
Country of residence for qualification
No requirement to buy an annuity
No requirement to buy an annuity
Depends on Trustee
Depends on Trustee – usually slightly cheaper than QROPS
What if you return to the UK?
Depends how long you have been out of UK. Will usually fall back under UK rules but retaining some tax advantages
No changes

QROPS vs SIPP: Income and Lump Sum options

Before retirement
Up to 30% tax free pension commencement lump sum from age 55 (and in some cases as early as 50). Tax may be due in the country of residence.
25% lump sum free from UK tax after age 55. Tax may be due in the country of residence.
Before age 75
Flexible Income drawdown
Flexible Income Drawdown
After age 75
Flexible Income draw-down continues
Some policies may still force annuity purchase otherwise drawdown
Income tax
Flexible. Can choose to be liable for tax in country of residence or UK or QROPS jurisdiction where double tax agreements are in place
Tax will either be due in UK or country of residence depending on tax agreements in place.

QROPS vs SIPP: What happens on death

Inheritance tax
Not subject to UK inheritance tax (IHT)
No penalty
45% tax charge if taken as lump sum after age 75.

Key considerations:

-          How long will you be staying out of the UK? If less than 5 years = SIPP

-          How big is the pension scheme? Generally the bigger it is the more valuable a QROPS becomes

-          Do you want to protect income or pension value benefits of the scheme for your spouse / family members? If so, usually a QROPS

-          Remember, not all advisers offshore are available to advise on a SIPP and not all advisers in the UK are able to advise on a QROPS! So make sure you speak to someone who is qualified to give advice on UK pensions. Final salary transfers MUST be dealt with by a UK regulated firm.

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