I get asked frequently about the costs of offshore bonds with expats in these products or have been proposed them. I will go over a question I get asked many times by clients that have been proposed or invested in offshore bonds. This article will point out when and how they are useful and how to spot any hidden fees.
Hidden fees are a surprise, you wouldn’t go to the supermarket, scan your item and then pay without knowing how much it’s going to cost you!
Firstly, I will point out that offshore bonds if used right can be a good tool. However, you need certain circumstances for these to be feasible –
- Over $500,000.
- Able to hold for 5-10 years without needing liquidity.
- Done without the commission.
- Currently in a low-tax location looking to relocate back to somewhere where the bonds come in use for tax efficiency (Australia/U.K).
If all of these are met only can they be useful!
These are not useful if –
- If living in a low-tax location like the UAE and no plan to move.
- Put inside a U.K. pension as the tax is already tax-free.
Cost and hidden fees
To touch on the cost they can be quite cost-effective on larger amounts, see an example of RL360 a popular bond option –
At its base cost its around 0.067% a year (on a 10-year charging structure) and 400 GBP after 10 years the 0.067% drops off and just the 400 GBP which if held for 15-20 years and with an amount over $500,000 (the higher the better) it can equate to sub 0.2% which is pretty reasonable if you are going to use the tax advantages right.
However, if used with commission (max 7% upfront to the company/IFA) the cost of the bond on the same structure equates to 1% per year for 10 years plus 400 GBP.
Also, note that on a bond with a 10-year establishment period. The value is calculated on the original policy value plus any gains. Therefore, if you were to (hypothetically) put $100,000 in 10 year period and withdraw $50,000 after year 2 and were on the full commission rate of 1% a year on the bond example above. It would be charging a $1000 fee a year for the next 8 years and a 400 GBP a year admin fee. Thus around 2.5% a year. Showing how illiquid offshore bonds are.
Also, if you are comparing to a platform – The trading fees and funds are a significant part.
- Trading fees on offshore bonds are usually 40 GBP a trade
- While Saxo bank platform is $1
If you are making an average of 3 trades a year this is around $150 (based on the current exchange rate) Vs $3 on a platform.
Funds – On RL360 although having an okay fund range does not use ETFs such as Vanguard which is surprising when most inflow is going into passive funds over the last 5 years. Platforms have a larger range of funds.
The hidden fees on funds
The regulation of offshore bonds on fee-only based funds (due to being unit-linked) is quite a lax so advisors use this to their personal advantage by going into funds that give them a kickback. An example I have seen is 5% entry fees and 2% annual fees.
Regulated platforms only allow fee-based funds.
See below some funds with different charges (this is commonly used)-
As you can see platforms are more flexible lower cost and have a wider range of funds. For 99% of expats, a platform would be a lot more efficient than offshore bonds, as most can’t lock up the cash for the amount of time required and/or live in areas where it’s not needed.
Conclusion
It was a relatively common procedure to put investments into offshore bonds and potentially not be crystal clear on the fees because they were quite high! However, with changing laws and transparency coming through, investors and expats are more aware, however, the question is, if you are currently invested what can you do?
There might be a few options depending on the circumstances. However, if offshore bonds have been proposed, please fully understand why because it might not be for your best interest!
If you have any questions, please contact me using the button below, however, some more resources on this are:
