Portfolio bonds: the tip of the "priceberg"


If you are an expatriate expecting to return to your home country in the future, 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 advisers specialising in the expatriate market, but never 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 with individual savings accounts.

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 your home country 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 your home country, which can be handy if you have 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.

Moreover, 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 products. In addition to charges on the underlying investments, you will need to pay for the wrapper itself - this can be more than 1% per year.

There will also be advisers' charges to pay. Unlike Europe and the UK, financial advisers in many international jurisdictions are still allowed to charge sales commissions when setting up products - if you are approached by an adviser pushing offshore bonds, they will almost certainly charge in this way. The result is an additional layer of set-up costs and ongoing 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. Look for a performance fee-based adviser with specialist experience of your jurisdiction, and steer clear of commission chasers.

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 savings vehicle in your home country.

A simply terrible investment - don't go near them

The charges associated with offshore portfolio bonds are staggering. Expatriates who end up taking one out are usually unaware of how bad a deal they're getting, partly because these products are aggressively pushed by salespeople who gloss over the disadvantages, and partly because the financial knowledge of the typical buyer is limited. These salespeople are fond of preying on expatriates who have no experience of managing their investments.

Let's take a product offered by an insurer in Isle of Man as an example of how the charges work (these bonds are typically issued by the offshore subsidiaries of major insurance firms). You take out this plan for a "premium payment term" of at least five years, and make regular contributions. The plan pays a "loyalty bonus" to encourage investors to sign up for longer terms.

The product has a long list of fees. There's an "administration fee" of 2.75% per year for the first five years and 2% per year thereafter for plans lasting less than ten years, or 2% per year for ten years and 0.3% per year thereafter for plans of ten years and more (the fee is based on premiums paid rather than the value of your funds). There's also an "investment administration charge" (1.5% per year on the value of your funds), management fees on the underlying funds and more.

The charges are horrendously high, but the real catch is that if you want to surrender your plan within the "initial period" (which varies depending on your premium payment term), the surrender value will be zero. After the initial period is over, the surrender value will remain much lower than what you've paid in for much of the term of the plan. That's because all your premiums during the initial period are allocated to "initial units" that are set aside to pay the administration fee over the duration of the plan.

You don't get this back if you surrender early, partly because it funds big up-front commissions for intermediaries. Expensive, inflexible, complicated plans such as these are a terrible investment: no expatriate should go near them.

If your financial adviser works on a transparent performance fee-only basis, so taking no commission from their recommendations, then the portfolio bond could be considered by those requiring a bond wrapper.

However, in all of cases, the portfolio bond ends up being an expensive option when you compare it with a pure investment platform.

Furthermore, the potential tax benefits are often not only outweighed by charges, but not even applicable in many cases.

If you have or are considering purchasing a portfolio bond, make sure you understand your personal tax position today and what it could be in the future, and weigh up any benefits you believe you are getting against the bond's lack of flexibility, and high charges - which all too often are not explained fully, and can last up to 10 years (or for the lifetime of the bond).

The portfolio bonds don't offer you access to a full range of discounted funds, direct equities or passive funds to invest in - unless you seek outside funds or use a stockbroker ... which can in turn incur more costs.

If you want to know more, discuss your options, position or portfolio, contact us for a no obligation consultation - info@expatwealthatwork.com - and we will do everything we can to help you.