Beware underlying fees on offshore bonds
Many investors are unaware of high charges that can eat into their wealth, according to finance experts
Expat investors using offshore bonds as a way to boost their wealth could be paying nearly £89,000 in fees on a £100,000 investment over 20 years, it has been claimed. This would leave them with an annual investment return equivalent to less than 0.1 of a percentage point.
Analysis by financial services firm AES International has found that many offshore bonds being sold to expats are potentially inappropriate, and “will struggle to make money for clients because they are weighed down by heavy and undisclosed underlying fees paid to advisers, product providers and investment managers”, according to chief executive Sam Instone.
He added: “Unfortunately there is a lack of transparency within the offshore investment bond market, and many clients are therefore unaware that these plans can be opaquely loaded with high charges. This makes it very unlikely they will see any real returns.”
The figures calculated by AES International sugggest that on an offshore bond, an investor can expect to pay between 0.5pc and 1.5pc of the investment value annually to the bond provider, a fixed £400 annual charge and a 0.5pc to 1.5pc “establishment charge” for the first five to 10 years, paid to the adviser. In addition, they may also pay an initial commission to the fund manager of 4-8pc and an annual management charge ranging from 1-3pc.
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Mr Instone said: “To illustrate the point: a portfolio of £100,000 growing at a rate of 5pc per year for 20 years would only actually achieve a return of 0.08pc per year, due to the typical underlying charges. This would leave the portfolio at a value of £107,768 after the 20-year term and mean charges of £88,698 were paid.”
The lack of regulation in the offshore marketplace can make it extremely difficult for expats to identify exactly how much they are paying in fees for their investments, according to Anna Sofat, founder of Addidi Wealth.
Ms Sofat recommends that expat investors ask their adviser to explain all of the charges applicable to any investment product being recommended in full.
For her offshore clients, Ms Sofat has broken down the offshore investment offering into its separate elements, as she said expats “often do not need a bond wrapper as they are not subject to UK tax”.
A bond wrapper has tax planning advantages, if you have to pay tax in the UK.
Ms Sofat added: “For example, in the Middle East there is no tax so why would expats there want a bond wrapper? In China, there is no tax on international income for the first five years you are there, so there is no point in having a bond wrapper. In the US, the bond wrapper is not protected anyway.
“I would tell expat investors to ask their adviser, and have a list of the charges that they could potentially apply and ask them to justify them.”
While many offshore advisers are unregulated, the UK adviser market is heavily regulated, and it is possible to find a UK-based adviser that specialises in offshore advice, said Ms Sofat, so you can effectively have the best of both worlds.
