Our Opinion: 2017
Expatriates warned to avoid portfolio bonds
If you’re an expatriate expecting to return to the UK in the future, there’s a good chance someone will already have tried to sell you an offshore portfolio bond as a vehicle for saving for old age. If not, expect to be approached sooner rather than later and be very wary – this multi-billion-pound industry generates lucrative commissions for financial advisers specialising in the expatriate market, but rarely offers a good deal.
The first big caveat is that the word “bond” is misleading – these products have nothing to do with the fixed-income securities issued by governments and corporations, which are often seen as less risky investments. Rather, portfolio bonds are wrappers within which you can hold a broad range of other assets, including most of the investments available to UK savers with individual savings accounts (ISA’s).
Advisers claim the main selling point of offshore bonds is their tax efficiency. There’s no tax to pay while your investments are growing, other than a small amount of withholding tax automatically deducted from certain international dividends and interest payments. Instead, you only pay tax when you return to the UK and cash the bond in (if you cash it in elsewhere, different local tax rules may apply).
The gains and income on your bond are taxed as income in the UK, which can be handy if you’ve moved into a lower tax band by this stage – if you’ve retired, for example, and are no longer liable for higher-rate or additional-rate tax. Even if you’re still paying these higher rates, you may be able to reduce your tax liability through a relief known as top-slicing, which effectively allows you to average out the gains you’ve made over the lifetime of the product.
Bear in mind, however, that even for higher-rate taxpayers, the capital-gains tax rate – the rate that applies to most savings and investment profits – is now 20% in the UK, the same as the basic rate of income tax. So anyone who has to pay any higher-rate income tax – charged at 40% in the UK – on all on their offshore bonds will be worse off.
In addition to charges on the underlying investments, you’ll need to pay for the wrapper itself – this can be more than 1% per year in some cases.
Even if you do make a tax saving using offshore bonds, you’ll need to be sure it is sufficient to compensate you for the high charges of these
There will also be advisers’ charges to pay. Unlike the UK, financial advisers in many international jurisdictions charge sales commissions when setting up products – if you’re approached by an adviser promoting offshore bonds, they will almost certainly charge in this way. The result is an additional layer of set-up costs and on-going fees. Indeed, if you surrender the fund after only a few years, your return is likely to be very poor, given the cost of initial sales commissions.
If not a portfolio bond, then, what are expatriates’ other options?
Well, given the complexities of the different tax and regulatory systems in countries around the world, as well as people’s individual circumstances, it makes a great deal of sense to take independent financial advice on pension planning. Knightsbridge Wealth is a fee-based adviser, with specialist experience in international markets and has never taken commissions. Sometimes, expatriates will build up a portfolio of investments through a local broker. Before you return to the UK, investigate whether it makes more sense to cash in those investments prior to departure, or to transfer the assets to a UK savings vehicle. You may be able to reinvest savings in tax-efficient pension schemes and Isas on your return.
Earlier this month, Moneyweek described offshore portfolio bonds as “expensive, inflexible, complicated plans that are a terrible investment; no expatriate should go near them. In most cases, we agree.
30th January 2017