QROPS and the Advantages for UK Pension Holders Living Abroad
If you are planning to live permanently outside of the UK or if you have already taken the jump and you have accumulated UK pensions, then for the majority of people a Qualifying Recognised Overseas Pension Scheme or QROPS for short, can give real advantages when compared to leaving your UK pension where it is.
A pension is a wrapper that holds the investment funds such as insurance funds and unit trusts in which the value of your pension is invested. Read more here about that in relation to Singapore QROPS.
UK private pension and occupational pensions usually have a very limited choice of investment funds to choose from. Very often the pension holder would only have the choice of investing in funds managed by the insurance company that also provides the pension wrapper.
This restriction can have the effect drastically reducing investment performance. By being able to choose from the whole market via a QROPS you are giving yourself a much better chance to substantially improve your investment performance, the size of your pension pot, and in turn the income that you receive in retirement.
Here’s an example…
The top ten UK equity funds over a 3 year period to 7th November 2011 returned an average of 109%!
The bottom ten returned produced an average return of 17.87% over the same period.
Source: Investment Managers Association UK. All Companies from 156 funds.
Of course it is not possible to see into the future and know which investment fund will outperform. However certain fund management groups do excel in certain sectors i.e. XYZ may be consistently be in the top ten of US equity funds but it may have a poor long term performance record of in a number of other sectors such as UK Commercial property, UK Equities and Corporate bands.
Diversification reduces risk and helps to smooth out returns. It is advisable to invest your pension pot in a mix of different asset classes i.e. shares, bonds, commercial property, absolute return funds, and cash.
By being able to choose the fund managers, for the QROPS, who have a long term record of out performing in the sector that they operate in – e.g. using the example above UK Equities for example – you can not only substantially improve the investment returns over and above the mediocre fund in the same sector, you can also reduce risk. A genuine win win scenario!
Another often overlooked factor is that many consistently high performers are able to achieve consistently high positions in their peer group because they take less risk than those managers who under perform their peers within the same sector.
This is known as delivering superior risk adjusted returns; this is achieved by the skill and specialist expertise of the fund management team.
So one of the advantages of QROPS is greater investment freedom. This can lead to a bigger pension pot and more money in your pocket. I will cover some of the other benefits of QROPS in future articles.