Expatriates warned to avoid portfolio bonds
If you are an expatriate, there is 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 salesmen 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 savers.
Financial salesmen claim the main selling point of offshore bonds is their tax efficiency. There is 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 your home country and cash the bond in.
The gains and income on your bond are taxed as income in your home country, which can be handy if you have moved into a lower tax band by this stage - if you have retired, for example, and are no longer liable for higher-rate or additional-rate tax. Even if you are still paying these higher rates, you may be able to reduce your tax liability in the UK through a relief known as top-slicing, which effectively allows you to average out the gains you have 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 will need to pay for the wrapper itself - this can be more than 1.2% per year. Even if you do make a tax saving using offshore bonds, you will need to be sure it is sufficient to compensate you for the high charges of these! There will also be 'financial salesman' charges to pay. Unlike in Europe and the UK, financial salesmen in many international jurisdictions charge sales commissions when setting up products - if you are approached by a salesman 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. We are a fee-based adviser, with specialist experience in international markets and we have never taken commissions. Sometimes, expatriates will build up a portfolio of investments through a local financial salesman. Before you return to your home country, investigate whether it makes more sense to cash in those investments prior to departure, or to transfer the assets to a home country savings vehicle. You may be able to reinvest savings in tax-efficient pension schemes on your return. Bottom line, offshore portfolio bonds are expensive, inflexible, complicated plans that are a terrible investment; no expatriate should go near them.
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