Offshore bonds have been marketed to expats for years, with thousands being lured by promises of tax-free investing in offshore locations such as the Isle of Man, Jersey and Guernsey, with very mixed results.
Old Mutual International, Friends Provident International, RL 360 and Utmost (Generali) are among the most common offshore bond providers which used correctly, can be effective tax wrappers. However, the charges can facilitate the payment of large upfront commissions to advisors, often reducing motivation to manage portfolios prudently in the future.
These fixed charges can be removed completely and instead, a fee-based advisor can agree a flexible structure with you, leaving only minimal costs to pay for the bond and the advisor's fees which can be revoked if you are not satisfied with the service they provide.
British expats in particular can benefit from bonds when repatriating. Before returning, you'll be required to 'endorse' your bond with the provider and thereafter, you'll be entitled to an annual 5% tax-deferred income in addition to a lump sum equal to 5% for every year the bond has been open.
The 5% income is taken from the 'initial invested capital' until it is exhausted over 20 years - ie. 5% x 20 years = 100%. Thereafter you'll be deemed to withdrawing gains and taxed at your marginal rate. Withdrawals greater than 5% of the initial investment will also be taxed.
Offshore Bond Commissions
How advisors are paid to sell bonds is a contentious issue. Typically, three charging options are available ranging from 5 to 10 years with only marginal differences between each provider:
- 5 years - 1.9% per annum (total 9.5%) plus quarterly administration charges
8 years - 1.25% per annum (total 10%) plus quarterly administration charges
10 years - 1% per annum (total 10%) plus quarterly administration charges
The total charges range between 9.5% and 10%. However, the actual cost of bonds can be as low as 0.25% per annum equating to between just 1.25% and 2.5% over the same term. The remaining 7% to 8% is paid upfront to the advisory firm, so for each $100,000 invested, you could be paying up to $8,000 to your advisor on day one.
These payments are possible as investors contract to pay the charges of the complete term, regardless of how long they remain invested. Not completing the term means unpaid charges become payable as an exit fee, so closure after 5 years of the 10 year option results in a 5% penalty (5 years x 1%).
Large advisor payments at the start of the contract can have a detrimental effect on investments longer term. Advisors can take little interest in future results and the investor also can't be sure if the product purchased was in their best interests. In 2012, this method of advisor remuneration was banned in the UK, and while some jurisdictions are implementing commission limits, much of the world is still far behind.
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