Beware bad pension advice

Beware bad pension advice
18 January 2012

SINCE various pension scandals in the late 80s, financial advice in the UK has been heavily regulated. Unfortunately, non-UK based advisers giving advice to expats are not regulated in the same way.

Many of these advisers still operate on large upfront commissions, often as high as 7% – sometimes higher – without the need to disclose this commission to the client.

Spurred on by the opportunity to earn a very large chunk of money on a single transaction, they often dish out inappropriate advice on qualifying recognised overseas pension schemes (QROPS) and offshore bonds, as these tend to be the largest single payment investments.

Let’s take a look at how regulation differs, and what you can do to try to protect yourself from rogue advisers...

Tougher UK controls ahead

A string of scandals has dented the reputation of financial advice. Many of these have centred on final salary pension scheme members being wrongly advised to transfer out, influenced by the high commissions payable by pension providers to financial advisers.

Britain’s Financial Services Authority has taken steps to tighten up regulation and from 2013 a raft of measures will further regulate the industry in a bid to improve the quality of advice for consumers.

The proposed changes, known as the retail distribution review, include a ban on upfront commission from the sale of an investment product, replaced by fee-based client agreed remuneration. Operating on a fixed fee basis will remove the commission bias that often leads to inappropriate advice. Advisers must also satisfy a higher minimum qualification requirement.

It is likely the proposed changes will lead to fewer advisers operating in the UK, but it is hoped they will improve consumer confidence in the industry.

Mis-selling still rife

Mis-selling remains rife in other parts of the world. I recently spoke to a British ex-pat living in Dubai who had decided to remain there in retirement.

He had a very generous UK-based final salary pension which offered a tax-free lump sum and guaranteed pension that would keep pace with inflation and provide for his wife in the event of his death. It was even possible to have his pension paid gross, free from UK income tax, and taxed accordingly in the country of residence.

However, a non-UK based financial adviser had advised this expat to transfer to a QROPS.

While this type of scheme can hold a number of advantages for non-UK residents, alarm bells started ringing when I saw that there was a huge exit penalty of 9% on the Skandia International QROPS product being recommended.

No commission or fee was ever disclosed, but it was obvious what the 9% exit penalty was designed to cover.

Look before you leap

Not all overseas advisers operate like this, of course, but remember that not all advice is good advice: it pays to do your homework before taking advice.

You can hunt down a UK-based independent financial adviser on the Unbiased website. If you’d prefer to deal with a UAE-based adviser ask for personal recommendations and always check experience and qualifications. There are other things you can do, too: read cashy's tips on finding a good wealth manager.

Pic credit: Idea go/

Have you received dodgy advice? Share your stories with us by commenting below...


  • RichardTaylor

    I agree with everything in this article, however as a highly qualified financial advisor both in the UK (where I was fully Retail Distribution Review compliant) and more recently in the unregulated world of the UAE (where mis-selling really is rife) I have come to the conclusion that regulation, banning of commissions and higher qualification levels can only go so far. Ultimately, it all comes down to one thing, regardless of the regulatory environment/payment structure - the INTEGRITY of the individual adviser. If your adviser has it, you will get good advice (regardless of how much they get paid for it), if they don't you won't.

    Qualifications and experience cannot guarantee integrity, but they are a sign of someone who takes their job seriously and is willing to work hard to improve their knowledge and skills, which I would suggest are good indicators of integrity. Ask questions - there is no excuse not to and the repercussions of failing to can be dire.

    And finally and perhaps I am somewhat biased, do seek quality advice (i.e. don't let the possibility of poor advice deter you). It can make a huge difference to your future prosperity and security.

    Incidentally, I don't think the banning of commission is a positive step in some cases as it provides us with no incentive to advise people to accumulate savings. We all know from experience that the vast majority of people don't save enough and don't invest what they save. For people in their 20s and 30s this is a ticking timebomb; one that will go off in the UK in years to come when you have a generation growing up with vastly inadequate retirement savings.

  • nima

    Hi Richard, doesn't all this smack of 'it's legal, so I can do it' - meaning, that some people follow the letter of the law, or of regulation, but don't bother with the ethical and moral side of things. When it comes to personal financial issues, I personally find this to be a sin. After all, we're talking about people's lives here.... What do you think about these two options:

    1. have commission spread out over the lifetime of the product. This way there's no front-loading/ huge exit penalties. Surely it would reflect the relationship that IFA's should be building with their clients, and whether the product was in fact the right thing for their client.

    2. I know of an outfit that charges an annual fee instead of taking commission in full. The 'commission' on any product that clients would opt to buy into would then be split 50-50 between the IFA and the client and credited to the client. Of course it does boil down to 'keeping it in the family' as any credit is essentially put towards the next year's fee.

    To me this means there's more faith wrt what's being recommended - no vested interest etc. What do you think?

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Financial planner and pension specialist
Acumen Financial Planning
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