“The Good, the Bad and the Ugly” – offshore investment as an expat

05/08/2022

The theme for this article is one of my favourite films, the legendary spaghetti western, The Good, the Bad and the Ugly. It’s a traditional story about cowboys and while some, like Clint Eastwood’s character, are the good guys, others are far from being that.

If you’re a British expat based in Hong Kong it’s likely that, at some stage, someone has tried to sell you some sort of offshore investment bond, also known as “insurance bonds”, “portfolio bonds”, “investment-linked assurance schemes” (ILAS) or just “bonds”.

In simple terms they are an insurance policy where the value is derived from the value of the underlying funds or assets it invests in.

The market place for offshore investment has always been the financial version of the Wild West, with particular emphasis on the villainous cowboys rather than the heroes.

I recently came across an offshore investment with a surrender penalty of close to 70%. Yes, 70%. So, if you were to invest £500,000 and wanted to cash out early, the company (and the introducing “adviser”) gets to keep £350,000 of your money.

One of the reasons I was motivated to set up a business in Hong Kong in 2014 was because I could see people were far more prepared to put their trust in a bank than in an independent financial planner.

Yet, at that time having arrived fairly recently from the UK (a jurisdiction with much higher ethical principles and professional standards), I knew there was a better way for people than simply trusting a large corporation with their money.

Many financial cowboys were erroneously describing themselves as Independent Financial Advisers, so that those who genuinely use that description were being unfairly tarred with the same brush.

Here, you can read about three of the primary types of offshore investments that expats are offered. It will help you see why there’s such a level of distrust, and why one of my reasons for setting up in Hong Kong was to counter such mis-selling.

The Good – “open architecture” investment bonds

All offshore investment bonds offer some key features that are attractive to expat investors who become UK resident, including:

  • Gross roll-up (or tax deferral) on your underlying investment returns
  • 5% annual tax-deferred withdrawal allowance.

Because they all offer these benefits, you can see them as the essential accoutrements of all cowboys – the boots, the guns, holster, and broad-brimmed hat. But beyond that façade, the similarities end.

In investment, Clint Eastwood’s character – the good – is a single premium offshore investment bond set up with an insurance provider on a nil-commission basis (transparent and low pricing). It gives you access to an unconstrained choice of investment options (that’s the “open architecture” bit). These include collective investment fund share classes known as “institutional” and “clean” – which means low pricing as no commission is payable on them.

Because of the nil-commission status, they are an attractive option for both you and fee-based planners, like us at Charlton House.

Such investments come with a whole host of flexible investment options. These include the ability to:

  • Split the bond into smaller segments to support your income strategy
  • Assign those segments to your spouse or partner, and children, for UK tax-planning purposes.

Based out of reputable financial jurisdictions, such as Dublin or the Isle of Man, these are serious planning tools recognised by HMRC that, as an expat, you should look to take advantage of.

However, beware, as they can be set up on high commission terms and so are not to be confused with their counterparts below.

The Bad – an insurance company bond

At first glance, you could easily be mistaken for thinking that one of these offshore investment options was “good”. But there’s a very painful sting in the tail. Maybe think about them as the shiny spurs in a cowboy’s boot heels.

To begin with, such an investment will offer you a very limited choice of investment options, either cherry picked (on commercially attractive terms) by the insurance company, or limited entirely to the insurance company’s own range.

These will tend to be retail share classes where you pay up to 1% more than the clean and institutional share class counterparts we referred to earlier.

You will also end up paying through the nose when it comes to the insurance company’s own charging structure.

Being restricted to the insurance company’s due diligence and preferred funds may not be a bad thing. However, this will usually depend on the ethics of the person selling you the investment.

The Ugly – the dark side of investment-linked assurance schemes

After the good and the bad, you now have to consider the ugly.

This particular cowboy has been the enemy of many an unwitting expat in Hong Kong and other expat hubs.

On the face of it, an offshore bond would appear to be an attractive investment option, blending long-term investment with life cover and, in the case of the worst of these schemes, the ability to save regularly.

But you need to be very aware of the long-term features – in particular the up-front charges, and early surrender or withdrawal penalties – that can leave you seriously out of pocket.

The financial devastation is often not realised until you receive your first policy anniversary statement where the small print becomes only too apparent. That’ll be long after the unscrupulous cowboy has ridden off into the sunset.

Such a scheme may, historically, have had a contractual savings term of 25 years to maximise commission to the adviser, and the charges to the provider.

You’ll be told you’ll need to invest a substantial monthly amount at first – perhaps £5,000 or more – with the promise that you can reduce this after two or three years if you think it’s a bit excessive.

That may well be correct, but all the charges (and, of course, the adviser commission) will be based on £5,000 for the full 25 years and you could well face the 70% surrender penalty I referred to earlier.

Sometimes this ugly cowboy will come disguised in the garb of the good, promising a wide choice of investment options. However, the wide choice will often consist of an obscure, esoteric investment opportunity.

In the Wild West such opportunities could have been a gold mine in Mexico. However, in modern times this could be investment in obscure crop-growing opportunities in Africa or South America, or holiday complexes in a country you’ve never heard of, or for that matter infrastructure for a new colony on Mars!

The promised “guaranteed annual returns” will turn out to be illusory, as your money performs a magic disappearing trick or becomes rather illiquid.

The cowboy adviser will have received a substantial commission on your contract and will be south of the Rio Grande long before you realise what’s happened.

Get in touch

If you want to know more about offshore investments or believe you might have been the victim of a cowboy, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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