Recently, I joined a roundtable discussion at The National.
We discussed the changes that the financial services industry needs to make.
The insurers who provide the most commonly sold products (Zurich International, Generali Worldwide, Friends Provident International, RL360 and Hansard International) were invited to attend. But they declined.
Two layers of problems exist in the UAE. First, many of the financial firms sell expensive offshore pension products. The fees are so high that, after inflation, few investors make money, long-term.
Some of the roundtable’s attendees, however, were just as concerned about firms that aren’t licensed to operate in the UAE.
In some cases, such firms are finding their way into schools and businesses. Teachers’ Wealth might be such a firm. I asked its representative if the firm was legally registered to do business in the UAE.
He replied with a lengthy email. But he didn’t state that Teachers’ Wealth was legally regulated to do business in the region. Instead, he referred to the importance of his firm’s membership in COBIS (Council Of British International Schools).
The Teachers’ Wealth representative stated: Although we take government regulation extremely seriously and it is a vital part of doing business in 2017, COBIS are far more important as they have global reach and have the power to end our reputation as an approved supplier overnight – effectively, we would therefore be out of business.”
To my knowledge, COBIS doesn’t serve as a financial services regulatory firm.
I believed that a COBIS membership is earned through a form of payment, not through a regulatory screening process.
As a source of regulatory credibility, I figured that membership in COBIS had as much merit as a plastic Sheriff’s Badge found in a box of cereal.
To be certain, I reached out to Colin Bell, the CEO of COBIS. I asked if COBIS vetted financial firms for legal qualifications, pertaining to the jurisdictions that they operate.
He said, “COBIS Supporting Membership does not imply endorsement by COBIS for any service, programme or activity. He added that “an organisation may not use COBIS Supporting Membership as an endorsement of its services, products or activities.”
Mr. Bell’s statement, when coupled by the fact that Teachers’ Wealth hasn’t declared its legal regulation in the UAE, puts the firm on slippery ground.
I asked Sam Instone, CEO of AES International, why it’s important for a firm to be legally regulated to do business in a country that it operates in.
He said, “Just like practicing as a doctor, a dentist or a lawyer, it is illegal and hence a criminal offence in most countries to offer a restricted financial service without a license. Acting on the advice of an unlicensed doctor means you may get a wrong diagnosis and a wrong prescription. If things go wrong you are unlikely to be able to complain fairly and they certainly won’t hold professional indemnity insurance. Whilst not all licensed doctors or lawyers are good – the fact that they are qualified, subject to background checks, supervised and insured provides a minimum base level of protection and credibility. The phrase ‘charlatan’ exists for a reason and this is what you get if you deal with an unlicensed adviser”
Many financial services firms, both regulated and non-regulated, have transferred UK Defined Benefit Pensions into QROPS. Many of them used scare tactics and misinformation to convince clients to do this. This is particularly shocking when they transfer government pensions. Such is the case with teachers, nurses, the civil service or former military members. Fortunately, the UK government put an end to former government employees cashing in their defined benefit pensions in favor of QROPS (for future government funding reasons)
According to a HM Revenue and Customs Report, they will also levy a stiff tax on anyone who cashes in a UK defined benefit pension scheme in favour of a QROPS after March 9, 2017.
But why did so many teachers get convinced to cash in their pensions before they were stopped from doing so in 2015?
According to teachers I spoke to, expatriate financial salespeople told them they would lose 50 percent of their defined benefit pension assets if they kept the money in the UK pension. By taking the money early (and investing it in a QROPS) they would come out ahead.
At least, that’s what they were told. The reality is different.
In May 2013, The Daily Mail reported that government reforms would see teachers, doctors and nurses earning a 30 percent reduction in pensionable benefits. This would affect employees who are below the age of 50 on April 1, 2012. But anyone who says it constitutes a 50 percent reduction is tricking people with some pretty deceptive math.
Traditionally, with defined benefit pension schemes, workers earned a proportion of their final salary. As the Daily Mail’s Adam Uren says:
“Typically 1/60th, as income in retirement for every year they have worked with the organisation. So someone with 40 years service, who retired on a salary of £60,000, can expect a retirement income of £40,000.”
But with government money strained, the payout has been reduced to an average of pensionable earnings for each contribution year.
As the Daily Mail reports, that could reduce the payout by one-third. But Britons pay tax on a laddered structure. That means, one-third less pensionable income might constitute (depending on the individual’s tax bracket) a 20 percent after-tax reduction in pensionable earnings.
This is nothing close to the 50 percent deduction that so many expatriate financial salespeople scared their clients with.
I asked Simon Glazier what he thought of teachers cashing in their government pensions in favour of a QROPS scheme abroad. The Chartered Financial Planner works for A+B Wealth. He also won the UK’s financial advisor of the year award in 2015.
“A pension transfer of this type is effectively a transfer of risk, from the Government to the member. For many people such a transfer of risk is unacceptable, especially where they do not have significant financial resources in addition to their pension scheme. Moving money into a high charge, poorly regulated substitute pension, recommended by an ‘adviser’ who is incentivised to sell one to you, will almost always be a poor choice.”
Sam Instone says financial services representatives make large commissions quickly when they move a UK Defined Benefit Pension Scheme into a QROPs.
“Teachers are easy prey. Typically they aren’t sophisticated and don’t understand regulation or investments. They get exposed to the vultures who can make a disproportionately large amount of hidden commission for offering their services to this market for ‘free.’”
Teachers can no longer cash in their Defined Benefit Pension Schemes in favor of a QROPS. That’s a good thing, according to Sam Instone.
“Those [government] pensions schemes are guaranteed,” he says. “Benefits might not be as strong as they used to be. But they’re far more of a guarantee, and likely to be far more profitable, than most QROPS schemes. That’s why authorized pension transfer specialists like AES International didn’t transfer teacher pensions into QROPS plans. Doing so, in almost every single case, would not have been ethical.”
I reached out to many British international schools. Most of the teachers I spoke to had been convinced to cash in their UK teacher’s pension scheme.
Next, I contacted UK-based financial advisor, Ben Sherwood. He joined Hillier Hopkins in 1997 and became a partner in 2002. He’s a Certified Financial Planner and Chartered Financial Planner for high net-worth clients. He also holds investment and taxation qualifications and he’s a co-author of The 7 Secrets of Money: the insider’s guide to personal investment success.
Ben Sherwood was horrified to learn that many expats from the UK were convinced to cash in their teachers’ pensions in favour of QROPS schemes. Teachers’ Wealth suggests, on this site, that this has been an integral part of their business. They state:
“Teachers’ Wealth was established to fill a gap in the international schools market to provide both dedicated and trusted financial advisory services to international schools and their staff worldwide. Dealing only with the international education sector and their very specific needs, Teachers’ Wealth assist staff to transfer their frozen UK pensions to offshore HMRC recognised Qualifying Recognised Overseas Pensions Schemes (QROPS)”
Ben Sherwood argues that Teachers’ Wealth shouldn’t have done this:
“The idea that most teachers with rights under the UK Teachers Pension Scheme should transfer is simply scandalous.” He added that transferring to a QROPS rarely makes sense. “The right QROPS can be the right answer for the right client in the right circumstances. But in our experience the likelihood of these stars aligning is very rare.”
To clarify, he added that a low-cost QROPS might make sense for a very wealthy individual if they choose to retire outside of the UK.
Unfortunately, teachers don’t usually fit into such rare case examples.
Sadly, commission-hungry salespeople have convinced many British teachers to cash in their defined benefit pensions. To a hammer, everything is a nail.
Teachers shouldn’t invest with such advisors. That goes double if the firm isn’t regulated.