OffShore Bond Portfolio Review

Offshore bonds are regularly used by wealth managers and financial advisers. For a variety of reasons, many expats and UK non-residents have invested in offshore bonds, some have gone in to them understanding the implications and some haven’t. I will aim to detail more below. 

Offshore bonds are regarded as a complex investment due to the structure of the investment and tax implications.

Offshore bonds are usually sold by a life insurance company and the bond is just a wrapper. Within that wrapper, you can hold investments that typically are held for a set period of time in agreement for a set return of the capital invested. The bonds are usually held in tax-free jurisdictions, such as the Isle of Man and other places. 

Most of the time many advisors might put a bond inside of a pension wrapper, rather than having a straight investment into a bond. It can also form part of your portfolio.

Different Type of Bonds

You can get different types of bonds, the main two that I know of are personalised and collective. The main difference is that one is designed for you and the others are already designed and you invest in them.

You can only really design your bonds if you have significant wealth, which is why many will be placed into the collective bonds which have already been set up by the companies. With collective bonds, you need to make sure that you know what is inside them. You can check this information on independent websites like Morningstar.

Tax Advantages of Bonds

As life insurance products, the investments held within are naturally shielded from tax in the traditional means with gains not attracting capital gains tax and any income drawn from the investment taxed only as income tax in the country of residence of the investor.

Other tax benefits, such as being able to draw 5% of the investment amount per year for up to 20 years (known as a tax-deferred income), without attracting any tax. Investors can also opt to not withdraw every year and take a larger sum before being subject to tax.

These are the main reasons why people go into bonds and it can be effective if you are living in a high tax environment. 

Fees on Offshore Bonds

Fees can be hidden inside of these bonds, especially if you are based offshore. If you are within the UK and dealing with an FCA approved advisor, they should clearly label the fees for you.

With bonds you can expect these sorts of fees:

• Establishment fees
• Admin fees
• Advisor fees

Don’t forget that there is likely to be a commission to the advisor for the sale of these. If there is a big weighting in bonds, it might be for this reason. I don’t have a problem with people making a living and doing an honest job, however, the reason why these have such a terrible reputation is because of the commissions that were being paid out to salesman.

Red Flags in Offshore Bonds

My most common flags I see:

• Not understanding what is in the investment
• Advisors do not understand what is in the investments or how they impact the investor
• Future plans not discussed. E.g. if you are going back to the UK. They need to be set up appropriately
• Big weighting of portfolios in offshore bonds.

How we help expats?

• Offer a fee-based approach
• Make them aware of the bonds they are invested in
• Help them understand the fees associated with what they are currently paying and what they might pay if they buy any offshore bonds
• Look at ways for them to withdraw money with the least amount of penalties.

If you want me to review whether offshore bonds are right for you or to review your current bond portfolio then please email me using the form below and I can arrange a time to call you.

We are currently offering a cheaper alternative that is presently available in the offshore market using low-cost platforms that cost 0.45%-0.1% mixed with using low-cost ETF at around 0.2%* and management charges of 0.5%-0.2% in a transparent fee-based model. 

This has reduced thousands on fees that have been put in expensive and illiquid offshore bonds or are in funds such as Tilney with 1.7% OGC and 4% Initial and have by Trustnets own research failed to beat MSCI World Index over a 5 year period. This means you could have just gone into Vanguard life strategy costing 0.2% and you would be better off on the tax basis because in real terms the bonds cost 2.5%-4% a year and are very illiquid, some of the companies are RL360, Generali (changed to Utmost), FPI, OMI (Quilter).

If you have one of these we are offering a free comparison to help understand better your options.

We are aiming to redefine the way offshore advice is given by cutting out commission and expensive funds, platform and broker fees.