Expats wanting to streamline their UK pensions could have a limited window of opportunity as financial watchdogs move to tighten up regulation in the sector.
The Financial Conduct Authority (FCA) has written to every international self-invested pension plan (SIPP) operator demanding a list of detailed information about their businesses.
The move follows a flood of complaints from retirement savers about charges attached to international SIPPs.
This guide looks at international SIPPs, how they work, and the FCA’s concerns about pensions.
Table of contents
- What Is An International SIPP?
- Managing An International SIPP
- Why Expats Like International SIPPS
- FCA readying international SIPP crackdown
- FCA letter lays down law for international SIPP operators
- Impact on the international SIPP market
- International SIPP FAQ’s
- Related Articles, Guides and Insights
- Questions or Comments?
What Is An International SIPP?
An international SIPP is a pension option for British expats who want to move their retirement savings but cannot or decide against transferring the money to the Qualifying Recognised Overseas Pension Scheme (QROPS).
Many advice firms market international SIPPS as the preferred pension option for expats living outside the European Economic Area (EEA).
The international SIPP is like an onshore SIPP pension. A SIPP offers retirement savers control of how their savings are invested over a wider range of funds, stocks, commodities and currencies than a standard personal pension.
Like other British pensions, an international SIPP provides early access to the fund from 55 years old without any obligation to buy an annuity.
The tax treatment of international SIPP contributions depends on where the retirement saver lives, as does any tax due paid on benefits from the fund.
Managing An International SIPP
Instead of relying on a fund manager, international SIPP savers have choices about investing their money.
The SIPP provider will offer different service levels, from full management to se3lf management – where the pension derives the tag ‘self-invested.
Remote web access to the investments and fund administrations comes through a mobile, laptop or tablet 24/7. The software lets retirement savers directly manage and view data about their investments.
Why Expats Like International SIPPS
International SIPPs are popular with expats outside the EEA because of the overseas transfer charge (OTC) that comes with some QROPS.
QROPS rules state that any expats living outside the EEA can transfer their UK pension to one of the offshore pensions providing they live in the same country as their QROPS is based.
So, an expat living in Australia can transfer a UK pension to an Australian QROPS.
But they cannot move their pension to a QROPS in New Zealand without paying the OTC. The charge is levied as 25% of the value of the funds transferred into the QROPS.
International SIPPs do not have the same restriction. The SIPP is based in the UK, so the funds do not move overseas and are not subject to the OTC.
FCA readying international SIPP crackdown
The FCA is not taking any action now but is collecting evidence to see if a case for tighter regulation is necessary.
Basically, the FCA believes some expats are ripped off when they swap their pensions into an international SIPP.
The main issue, says the FCA, is that some expats have their pension pots in international SIPPs invested in international bonds, triggering consumer complaints due to savers facing higher than expected or unnecessary charges.
Another concern is the tax benefits of investing in an offshore bond do not apply to someone investing in a UK pension.
The FCA advises expats considering transferring from a defined benefit (DB) pension to an international SIPP should take impartial advice from The Pensions Advisory Service before making a move.
Read more about FCA concerns about moving from a DB pension to an international SIPP
FCA letter lays down law for international SIPP operators
The FCA has sent a four-page letter to international SIPP operators explaining that retirement savers have complained about paying significant fees on the advice of their overseas financial advisers – particularly when the adviser also recommend investing in an offshore bond within the SIPP.
The concerns have resulted in a set of orders to SIPP providers from the FCA:
- Any business accepted must be in the client’s best interest
- Operators must robustly manage their products
- Fee disclosures must include all charges within the pension, including any relating to a bond and any other underlying investments
- Providers must carry out adequate due diligence on advisers introducing customers and investments held in their international SIPPS
- Operators should ‘appropriately manage’ any conflicts of interest
The letter also warns that scammers are still preying on retirement savers. International SIPP providers should decline a new customer or investment if any problems arise from carrying out due diligence.
Impact on the international SIPP market
The FCA is a slow-moving but far from the toothless regulator with a series of concerns about charges expat retirement savers face taking out investment bonds through an international SIPP.
The letter sent to SIPP operators is a shot across the bows hinting that they should clean up the marketplace or face tougher action.
The FCA also wants operators to take on the burden of checking out overseas advisers and the investments they recommend. This allows a UK regulator with no offshore powers to extend their reach and police standards of advice firms outside the UK.
The detail the FCA asks at short notice from advisers assumes they have in-depth data on tap, which many may not. So the data request is an attempt to quantify the market size and how SIPP advice is dispensed.
The result is likely to be a contraction in the market as advice firms and bond salespeople charging high fees are reined in by the implied threat of action against SIPP operators in the UK breaking pension rules.
International SIPP FAQ’s
International SIPPs are pensions for expats that can come with unexpectedly high transfer charges when moving money from a workplace pension.
These charges diminish the fund’s value on retirement and can stack up to losing a considerable amount of income in retirement.
Expats often ask about the benefits of an international SIPP, and here are answers to some of the most asked questions.
Yes. Some SIPPs are branded as ‘international’ when there is little or no difference between how they and a standard UK SIPP work.
Transfers to an international SIPP and the funds within them are subject to the lifetime allowance, annual contribution caps, pension age limits and other rules as any other UK pension.
Unlike a QROPS, international SIPP operators do not have to make reports to HM Revenue & Customs, and the overseas transfer charge does not apply.
They can. There are wafer-thin differences between the products, although international SIPPs are tailored with investment options that better suit expats than the UK version.
International SIPPs offer no tax relief on contributions paid in by expats resident outside the UK.
When withdrawing money, the tax treatment depends on the rules of the place where the expat is a tax resident.
For instance, expats in Dubai pay no income tax, while those in Australia would pay at a rate of 19% to 45%.
Like any other industry, financial advice has a fair share of sharks and scammers who operate in the shadows.
One real problem with financial advice for expats is the lack of consistent global market regulation that allows advisers on the dark side to prosper at the expense of others.
The FCA and overseas advisers have played a cat-and-mouse game for years, but the latest move could be a game-changer.
The FCA is extending its influence overseas by putting the burden on checking out advisers and investments on UK-based SIPP operators. Because they are in the UK, the FCA can make rules and enforce them against the operators – effectively making them do their job for them.
Nevertheless, many overseas advice firms are trustworthy and responsible, while the FCA hopes those who are less reliable will be forced out of business.
Defined benefit or DB pensions often come with guarantees that do not apply to other pensions, like a guaranteed income, cost-of-living increases, spouse benefits and guaranteed annuity rates.
Expats who move from a DB scheme to an international SIPP which is a defined contribution (DC) pension, sign away these valuable benefits and cannot replace them., a
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Hi
I enjoyed your article on international SIPPs. I have just been awarded a sum from FSCS due to being miss sold a QROPS pension and wondered if it would be possible to transfer from QROPS to an international SIPP? I have lost confidence in my so called IFA for many reasons and wonder if the SIPP is the way to go.
Also, is it possible to still contribute to a SIPP?