If you are a British resident in the UAE with no plans to return home, it may seem to make sense to transfer your old pension scheme out of the UK.
In a small number of cases, it will be the right thing to do. Usually, though, it won’t. If you do decide to transfer, beware, pension transfers can blow up in your face if you listen to the wrong type of adviser.
An offshore industry has grown encouraging expats to transfer out their pensions, not because it makes financial sense for them, but because it offers a juicy profit for the adviser.
Some expats have lost hundreds of thousands of dollars after falling victim to mis-selling from advisers who have targeted their hard-earned retirement pots.
“I’ve been inundated with UK expats looking to extract their tangled pensions out of the grasp of self-appointed pension specialists, who often place their plans under multiple layers of traps to maximise commission,” says Tuan Phan, a board member of SimplyFI.org, a non-profit community of UAE investment enthusiasts.
While some victims are too embarrassed to openly discuss their loss, others fear reprisals from advisers who employ aggressive legal teams to cover their tracks.
This is the case for Britons David and Lucy, who did not want to reveal their full names.
Barely two months after arriving in the UAE, they were cold called by "a friendly chap" with a northern English accent who said he was working for a financial services provider and asked if David had time to talk.
“My answer was 'no thank you', we were too busy, but I remember thinking afterwards, how did he get my number?” says David.
The same man called a couple of months later to ask how the couple were settling in, and eventually wore them down until they agreed to a meeting. “He drew us in by making it sound as if being expat was like joining an exclusive club, with the ability to invest offshore and pay zero tax on the gains,” says David, 51.
Once they met, the hard sell began. The couple were persuaded to transfer out of their UK-defined benefit, final salary workplace pension schemes and reinvest the money into an offshore fund.
David says it seemed to make sense, as moving their various pots into a single fund would make them easier to monitor.
What they did not realise was that the fund had punitive upfront charges that immediately swallowed 18 per cent of their money. They transferred £230,000 (Dh1.06m) in total, which immediately cost them £40,000.
High ongoing fees have chewed up most of the rest, while hefty penalties make exiting tortuous and expensive. “We were originally told our annual fees totalled 1.5 per cent and were industry-standard, but when I added them all up they equated to a massive 5.2 per cent a year, and there may be more I cannot see.”
After 18 months, the couple's funds had fallen in value despite the global stock market bull run, costing them as much as £100,000 in lost investment growth compared to a low-cost alternative.
When they tried to retrieve the remainder of their money, the advisory firm refused compensation.
"What is now apparent is that the advice was purely for the adviser’s benefit, and certainly not ours," says David. "I can't believe I took the cold caller into my trust. We feel naive and embarrassed.”
It is natural to blame yourself for being duped but Mr Phan says he sees it time and time again.
He has offered his services free of charge, chasing the advisers and moving the rest of their investments into low-cost exchange traded funds (ETFs), a job he has done for a depressing number of victims.
Mr Phan is clear about transfers: “If you have a defined benefit pension my answer is no, no and no.”
UK regulator the Financial Conduct Authority (FCA) has tightened rules on transfers out of defined benefit pension schemes to prevent this issue.
If a scheme has a transfer value of more than £30,000, members must take advice from a UK-regulated adviser with permission to advise on pension transfers and opt-outs.
However, these rules do not apply to defined-contribution workplace and private pensions, also known as money-purchase plans. These are now the most common type of workplace pension where funds are invested in the stock market.
Since April 2015, Britons have been free to cash in these pensions from the age 55, leaving them at the mercy of advisers that do not have their best interests at heart.
So should UAE-based expats transfer their pensions out? The FCA says that the vast majority with defined benefit pensions should stay put despite the high transfer values, because they offer priceless guarantees such as an inflation-linked income for life and spouse benefits if you die early.
Advisers often recommend transferring out by claiming you could lose your pension if your former employer goes bust.
What they do not tell you is that the UK-regulated Pension Protection Fund will pay up to 90 per cent of your pension’s value in this case, with an annual cap of £34,655.
Mr Phan adds: “Ignore these false fears. I have never come across any scenario where a transfer was clearly better.”
Many of the poorly performing plans Mr Phan encounters are not regulated in the UAE but in overseas jurisdictions, notably Malta.
An estimated 30,000 British expats overseas have moved their pots into Malta-based Qualifying Recognised Overseas Pension Schemes (QROPS).
From July 1, the Malta Financial Services Authority (MFSA) is tightening rules to insist financial advisers dealing with these schemes must hold an appropriate licence in the jurisdiction where their client is based, including to give investment advice.
Philip Rose, founder of Halwyn, a Dubai-based firm licensed by Securities and Commodities Authority (SCA), says the Maltese regulator is keen to ensure that clients are served by appropriately regulated advisers in the country where they actually live.
“Maltese pension trustees have been required to ensure that all clients’ financial advisers hold an appropriate license in the relevant jurisdiction. For UAE residents this would require their financial adviser to either hold a Category 4 investment licence if they be operate in the Dubai International financial Centre (DIFC) or alternatively an SCA licence for those operating onshore, outside of the DIFC freezone.”
Mr Rose says adviser firms that only hold a UAE Insurance Authority licence would not be allowed to continue servicing existing Maltese QROPS clients based on these new rules from July 1. "By now the Maltese trustees of their scheme will have written to them should they be affected by this to advise them of their options.”
In some instances, however, a transfer out of a defined benefit UK pension does make sense, for example, if you have no dependents or health problems and a reduced life expectancy, where it may benefit you to get your hands on a cash lump sum.
If you have a defined contribution workplace pension, then Mr Phan says the arguments in favour of transferring out may be greater, as this allows you to take control of your money. However, it will backfire if you put it into costly, restrictive offshore investments with high upfront charges.
Again, he advises shunning high-fee “advisers" in the UAE, and shifting the money into a low-cost self-invested personal pension plan (SIPP) offered by UK advisory firms such as AJ Bell or James Hay, which are authorised by the FCA and also accept business from expatriates. “Depending on account value, costs may be as low as £100 a year," says Mr Phan.
Another option is to buy one of the Vanguard LifeStrategy Funds. “This is a complete professional portfolio that automatically rebalances your portfolio over the years and has annual fees of just 0.22 per cent," says Mr Phan.
Mr Phan says this DIY-pension route provides superior returns compared to any active or managed portfolio. “It eliminates all unnecessary fees, is extremely easy to understand and minimises the tax and paperwork for your fees and heirs.”
As a rough guide, someone with a current pension fund of £100,000 looking to retire in 20 years, could be £150,000 better off as a result purely due to the charges difference, he adds.