I have been in Dubai for a while and have observed that QROPS (Qualified Recognised Overseas Pension Scheme) is often marketed as a solution to SIPPs (self-invested personal pension). It is as if SIPPs was a disease and QROPS was the cure, especially when you see QROPS being so aggressively marketed.
However due to the change in the tax laws QROPS have lost some of the advantages vs SIPPs.
As such I will try and explain the difference.
1. SIPPs have the legal jurisdiction of the UK, QROPS are overseas.
2. SIPPs at the age of 55, can pay a tax free lump sum of 25% (may be subject to residence tax if overseas.
3. QROPS at the age of 55 (potential of 50) can pay 30% tax free lump sum of 30% (may be subject to residence tax if overseas.
4. A typical QROPS valued at gbp 150,000 could cost gbp 5,500 up front and gbp 7,950 p.a.
5. A typical SIPPs valued at gbp 150,000 could cost gbp 400 up front and gbp 3,000 p.a.
There is no IHT (inheritance tax) as such there is no need to have a Portfolio Bond or Insurance wrapper unless you want to pay huge commission to the advisor.
Always ask the following questions
1. What is the setup and annual charges for a QROPS or SIPPS
2. What are the Portfolio Bond or Insurance wrapper charges which should include admin fees, dealing costs, annual fees etc.
3. What is the cost of the underlying investment? Such as ETF fees, Mutual Fund fees, commission on the products etc.
4. What are the advisor fees and commissions?
5. Get a written statement that all fees and charges have been disclosed (typically advisors are encouraged to sell Portfolio Bonds or insurance wrappers where they get paid about 7% in fees and commissions by the provider, these fees and commissions are ultimately recouped by charging you as the investor).
6. Ask why they recommend a portfolio bond or Insurance wrapper when they most likely are not required,
7. Ask about any redemption fees if you need your money back.
8. Ask about PII (Personal Indemnity Insurance)
9. SIPPs have a lot of protection as they are more regulated, however QROPS can hold esoteric (also high commission) investments with less checks and balances, so what legal protection do I have.
Often your annual fees are based upon the initial investment, if you take out money later, the fees will still be based upon the original investment amount thus making it almost impossible to have any growth in your portfolio.
Once you count up all those fees, you now know what you need to make in returns just to stand still. In times of low returns this could end up giving you negative growth.
When talking to an advisor ask check these important points:
1. size of the company is not important; the question would be if the company is regulated.
2. what are the qualifications of the advisor.
3. check complaints/feedback against the advisor or company from websites such as www.pissedconsumer.com
4. is the advisor compensated with commission (potential conflict of interest when recommending a product) or with an annual fee (compensation drives behaviour and the wrong compensation drives the wrong behaviour). Fee based encourages the advisor to work in your best interest as he is only compensated if you stay with them.
1. Do I live in a country such as the UAE where there is currently no taxation?
2. When will tax be a consideration? (Why pay high fees with less consumer protection if it is not necessary)
3. Does the country where I live recognise a QROP structure for tax reasons. (US, France; Spain or Australia does not recognise this structure)
At InvestME Financial Services LLC, we believe in driving costs, commissions and fees down. These savings are passed back to the clients. We believe in full transparency in costs.
The author Gordon Robertson is not qualified to give tax advice. Any specific questions regarding tax should be referred to a tax advisor experienced in the relevant tax jurisdiction.
Gordon Robertson is a highly qualified advisor and both he and InvestMe are regulated by the Securities and Commodities Authority (SCA) in the UAE.
To know more or if you have any questions please contact me at firstname.lastname@example.org
6. Our notes have never lost money!
This may be true, but this does not reflect the entire structured note market, or the history of structured notes.
In the aftermath of the 2008 crisis, many financial institutions defaulted on the structured notes. Lehman alone defaulted on usd76 Billion.
7. You get access to a particular asset class normally onlz available to institutions.
This may have been a fact many years ago, however there are so many investment structures you can access via ETF’s (Exchange Traded Funds) and Mutual Funds with lower costs and lower risks.
The only benefit that makes sense is that structured notes can have customised pay-outs and exposures. Some notes advertise an investment return with little or no principal risk, some quote higher returns in range bound markets with or without this protection and yet other notes often sold as generating high yields in a currently low yield environment. Sounds complicated but it is not.
Whatever you choose, derivatives allow the structured note to replicate a particular market or forecast. It is synthetic (does not use the actual shares) and often uses leverage (borrows money) to generate returns higher or lower than the asset it is supposed to replicate.
7. If a client asks about liquidity
The advisor may tell you there is a secondary market.
Liquidity, what liquidity? –. Structured Notes do not tend to trade after being issued
In fact, the term is “Illiquid” You are expected to hold the note till maturity.
However, in life, changes happen, what happens if you require money due to losing a job, another investment opportunity that you should take, what happens if we have another financial crisis similar to 2008. The only possibility is to go for an early exit and take any price the issuer offers you, that is assuming they are willing to make an offer.
Daily Pricing is extremely questionable. – As most of those notes do not trade after being issued, then it is logical that the prices being quoted on your statement are not actual prices you can sell at.
They are instead calculated using algorithms which is completely different than a net asset value.
As such the valuation is merely a guess at the best. If it is not the market that gives the price, who do you think it is?
So what are the disadvantages of Structured Notes?
Credit Risk – I mentioned that they are an IOU (promise) from the issuer, as such you bear the risk that the financial intuition can make good of the guarantee. ARC Capital, Keydata, Bear Stearns and Lehman are just a few that defaulted on the guarantee, Lehman alone defaulted on USD 76 Billion of structured notes. As such it is possible that the market is down 50% but the note is still worthless. It could even have a positive return and also be worthless. You are basically adding credit risk on top of market risk. Notes mostly do not have a risk rating, unlike bonds. If the financial institution goes into insolvency, then these notes are worthless.
In fact, the UK financial watch dog Martin Wheatley referred to them as “spread betting on steroids”
Mutual funds, stocks, ETF’s etc. will be segregated assets in your account. They may be down, but they still belong to you and have a chance of recovery. If the financial institution holding your account goes into bankruptcy, your assets will be transferred to another institution. Structured notes will remain as a promise by the institution to pay you after all other creditors have been paid.
Fees – fees and commission can be very high. This is what makes them attractive for the issuer and the advisor selling them “The higher the fees the lower the returns”. It is however possible to create your own structured notes with higher returns.
Who cares about credit risk, liquidity or pricing? – Let me give you an actual recent case study:
1. RBC Phoenix A/Call Note Linked to 5 stocks
Cusip XS1978174411 issued July 18 2014 mature July 18 2019
Potential to return 12% p.a. with a defined level of risk and potential quarterly redemption.
Regular income and considered defensive.
What the client was not informed was that it was only meant “for professional investors only and not for Retail distribution”
The client was a low risk investor with issues about job security.
The position was valued on Jan 14 2016 with a loss of 59.28%
To know more or if you have questions please contact the author
Gordon Robertson: email@example.com