Watchdog warns on high cost life bonds that take chunks out of expats’ pensions

British expats abroad have been warned by the UK watchdog against buying certain bonds sold by life insurance companies on the advice of overseas advisers, because they face “high and unnecessary” charges.

The Financial Conduct Authority (FCA) placed the alert on its website this month (March) after being contacted by worried pension savers living outside of Britain.

At issue are some overseas firms that advise expats to transfer or switch their UK pensions into a self-invested personal pension (SIPP) – often marketed as an ‘international SIPP’ – in which they are then invested in offshore investment, or life, bonds.

The FCA gave a damning response to expat Brits with reservations about the level of charges being demanded for these arrangements.

“We are concerned that consumers who invest in this way may be exposed to high and/or unnecessary charges,” it said.

Tax benefits of investing through an offshore investment bond “are largely redundant to someone investing in a UK personal pension scheme”, the FCA added.

Those approached by an adviser selling SIPPs invested in offshore life bonds, were warned to consider if they are really in their best interests, and to be completely clear on all the charges that will or may apply, including exit penalties to leave the scheme.

Unfortunately this is often not easy.

Rules for financial advisers vary hugely from country to country. And while some are honest and upfront about how much their advice will cost you, others hide it in layers and undisclosed commissions.

Commission-based advice was banned in the UK in 2012 after the financial watchdog ruled it encouraged advisers to sell products or services a client may not want or need.

But it is still common practice in many countries where expats go for work or to retire, leaving them vulnerable to unscrupulous sales people, who often claim their advice is ‘free’. This is never true.

You still pay, but in a way that is less transparent. Many charges can be hidden by commissions, for example:

  • an adviser may take an undisclosed cut from your original investment, without telling you about the negative impact it will have
  • some also take kickbacks from fund managers, pension trustees and introducers, in exchange for selling you their products and services

Every extra pair of hands (or company) that touches your money takes a cut, and though it may not initially seem like it, you can end up with far less in retirement.

Members of a defined benefit, or ‘final salary’, pension who are considering transferring into Life Bonds received a special caution from the FCA.

In some circumstances moving a defined benefit pension may be the right decision for a retiree. But it is important to get clear, impartial professional advice from a pension transfer specialist first.

Defined benefit pensions include valuable benefits like a guaranteed income for life rising with inflation, which, once transferred, are lost forever, so retirees need to be aware of the different outcomes of any decision.

Anyone advised to make any changes to any type of pension needs to consider very carefully what advantage that offers, demand in explicit terms the cost overall, and if it is more than they are currently paying, ask for a detailed explanation of why.

Remember, you can’t control investment performance, but you can keep a tight grip on charges, and that will pay long term dividends.

Brite are 100% transparent on charges and do not use Life Bonds nor take commission from any other company. Contact us for more information.