[UK] How do Bogleheads feel about offshore investment bonds?

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Topic Author
rattle1299
Posts: 7
Joined: Thu Apr 13, 2023 3:57 am

[UK] How do Bogleheads feel about offshore investment bonds?

Post by rattle1299 »

I live in the UK. I've maxed out my pension and ISA allowances. At the moment I just put the excess into a taxable General Investment Account with standard ETFs. I've recently come across offshore investment bonds and am wondering if they are something I should be looking into.

As I understand it, the primary benefit of buying any type of investment bond is that you can withdraw 5%/year without realising a capital gain (see eg. https://connect.avivab2b.co.uk/adviser/ ... -brainers/). This is good if you need to use your invested capital to fund your life, and afaict not particularly helpful if you are investing savings that you won't need for years/decades (not entirely sure about that though).

Then the benefit of buying offshore rather than onshore is that the offshore funds don't pay corporation tax each year. This means that more of their gains are rolled over and so the investment grows quicker. You will personally owe this tax that they haven't paid, but now you only pay it when you withdraw your money. This tax deferment can increase your gains. (see eg. https://www.mandg.com/pru/customer/en-g ... ment-bonds) However, the funds seem to be *very* expensive. eg. I looked at a random Canada Life offshore bond. The Canada Life management fee was 125bps, the fund fee was 63bps, then the fund they invested in was another 38bps), so something like 225bps! Then you probably also need to pay an IFA to make sure you aren't doing something dumb.

This means that the bond will have to massively outperform a normal taxable investment in your GIA in order to be a good idea. I'm sceptical that it is likely to do this, but I have no experience or data. Is there a standard Boglehead position on offshore bonds? Are they something that everyone should do, or pretty much no one should do, or some people should do, depending on their situation?

Also, is my statement about investment bonds in the second paragraph correct? "This is good if you need to use your invested capital to fund your life, and afaict not particularly helpful if you are investing savings that you won't need for years/decades"

Thank you!
DJN
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Joined: Sun Nov 19, 2017 11:30 pm

Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by DJN »

HI,
According to ChatGPT OpenAI the following text provides an appraisal of the problems with offshore investment bonds:
"Cons:
Complexity and costs: Offshore investment bonds can be complex financial products, involving various legal, tax, and regulatory considerations. Setting up and maintaining an offshore structure may require professional advice, which can come with additional costs. Moreover, offshore investments may have higher fees and charges compared to onshore investments, reducing overall returns.
Regulatory and compliance risks: Offshore jurisdictions may have different regulatory frameworks and investor protection standards compared to your home country. It's crucial to thoroughly research the reputation and stability of the jurisdiction where the offshore bond is domiciled. Additionally, evolving international tax regulations and increased scrutiny on offshore investments may lead to changing compliance requirements and potential reporting obligations.
Currency risk: Investing offshore means exposure to currency risk. Fluctuations in exchange rates can impact the value of your investments and potentially erode returns. Currency risk can be mitigated through careful asset allocation and currency hedging strategies, but it adds an additional layer of complexity and risk to consider.
Reputation and perception: Offshore investments have faced criticism in the past due to concerns about tax evasion, money laundering, and opaque financial practices. While legitimate offshore investments are legal and widely used for legitimate purposes, the negative reputation associated with offshore jurisdictions may lead to public perception challenges or reputational risks.
It's essential to consult with a financial advisor or tax professional who specializes in offshore investments to assess your specific circumstances and understand the implications of investing in an offshore investment bond like the Canada Life Offshore bond. They can provide personalized advice considering your financial goals, risk tolerance, and tax considerations."

Far too long and verbose to give you the pros! But that should put you off.
FWIW a fee approaching 2% is unacceptable to me.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by Valuethinker »

DJN wrote: Wed May 17, 2023 6:17 am HI,
According to ChatGPT OpenAI the following text provides an appraisal of the problems with offshore investment bonds:
"Cons:
Complexity and costs: Offshore investment bonds can be complex financial products, involving various legal, tax, and regulatory considerations. Setting up and maintaining an offshore structure may require professional advice, which can come with additional costs. Moreover, offshore investments may have higher fees and charges compared to onshore investments, reducing overall returns.
Regulatory and compliance risks: Offshore jurisdictions may have different regulatory frameworks and investor protection standards compared to your home country. It's crucial to thoroughly research the reputation and stability of the jurisdiction where the offshore bond is domiciled. Additionally, evolving international tax regulations and increased scrutiny on offshore investments may lead to changing compliance requirements and potential reporting obligations.
Currency risk: Investing offshore means exposure to currency risk. Fluctuations in exchange rates can impact the value of your investments and potentially erode returns. Currency risk can be mitigated through careful asset allocation and currency hedging strategies, but it adds an additional layer of complexity and risk to consider.
Reputation and perception: Offshore investments have faced criticism in the past due to concerns about tax evasion, money laundering, and opaque financial practices. While legitimate offshore investments are legal and widely used for legitimate purposes, the negative reputation associated with offshore jurisdictions may lead to public perception challenges or reputational risks.
It's essential to consult with a financial advisor or tax professional who specializes in offshore investments to assess your specific circumstances and understand the implications of investing in an offshore investment bond like the Canada Life Offshore bond. They can provide personalized advice considering your financial goals, risk tolerance, and tax considerations."

Far too long and verbose to give you the pros! But that should put you off.
FWIW a fee approaching 2% is unacceptable to me.
DJN
I think ChatGPT does not understand the specifics of the UK investment bond market.

For example the comment about currency risk (they are almost always issued in GBP).
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by Valuethinker »

rattle1299 wrote: Wed May 17, 2023 5:47 am I live in the UK. I've maxed out my pension and ISA allowances. At the moment I just put the excess into a taxable General Investment Account with standard ETFs. I've recently come across offshore investment bonds and am wondering if they are something I should be looking into.

As I understand it, the primary benefit of buying any type of investment bond is that you can withdraw 5%/year without realising a capital gain (see eg. https://connect.avivab2b.co.uk/adviser/ ... -brainers/). This is good if you need to use your invested capital to fund your life, and afaict not particularly helpful if you are investing savings that you won't need for years/decades (not entirely sure about that though).

Then the benefit of buying offshore rather than onshore is that the offshore funds don't pay corporation tax each year. This means that more of their gains are rolled over and so the investment grows quicker. You will personally owe this tax that they haven't paid, but now you only pay it when you withdraw your money. This tax deferment can increase your gains. (see eg. https://www.mandg.com/pru/customer/en-g ... ment-bonds) However, the funds seem to be *very* expensive. eg. I looked at a random Canada Life offshore bond. The Canada Life management fee was 125bps, the fund fee was 63bps, then the fund they invested in was another 38bps), so something like 225bps! Then you probably also need to pay an IFA to make sure you aren't doing something dumb.

This means that the bond will have to massively outperform a normal taxable investment in your GIA in order to be a good idea. I'm sceptical that it is likely to do this, but I have no experience or data. Is there a standard Boglehead position on offshore bonds? Are they something that everyone should do, or pretty much no one should do, or some people should do, depending on their situation?
Given the expense ratios, they look unattractive. They don't escape Estate Tax do they?

At one time they were used to pay bonuses without National Insurance. However I think that loophole has been long closed.

If you think you will retire at a lower tax rate than you currently pay, I can see these having some benefit.

Also, is my statement about investment bonds in the second paragraph correct? "This is good if you need to use your invested capital to fund your life, and afaict not particularly helpful if you are investing savings that you won't need for years/decades"

Thank you!
I don't actually see the applicability. In both situations, you want to maximize your returns and a part of that is minimizing your costs.
Topic Author
rattle1299
Posts: 7
Joined: Thu Apr 13, 2023 3:57 am

Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by rattle1299 »

I don't actually see the applicability. In both situations, you want to maximize your returns and a part of that is minimizing your costs.
True, but I'm not sure that withdrawing 5%/year without cap gains is actually useful if you don't need to withdraw that money anyway in order to pay for your lifestyle etc. I can't see any tax or investment benefit on withdrawing the money unless you *need* to withdraw from *somewhere*, in which case yes this seems like a good place to withdraw from. Wdyt?
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by Valuethinker »

rattle1299 wrote: Thu May 18, 2023 4:08 am
I don't actually see the applicability. In both situations, you want to maximize your returns and a part of that is minimizing your costs.
True, but I'm not sure that withdrawing 5%/year without cap gains is actually useful if you don't need to withdraw that money anyway in order to pay for your lifestyle etc. I can't see any tax or investment benefit on withdrawing the money unless you *need* to withdraw from *somewhere*, in which case yes this seems like a good place to withdraw from. Wdyt?
I suppose I don't see the advantages over a straight annuity. Given the high expense ratios.

Capital gains tax rates have not (yet) been raised to the point where it is (to me) a huge consideration. Capital gains tax is a quality problem to have. Granted the allowances have been sharply cut. But the marginal rate is still low - at least until the next change of government.

If you have a diversified portfolio of assets which is quite large then there's probably little wrong with this product, but it looks like a bet on the credit rating of the insurer. We know from the Global Financial Crisis that their solvency is not guaranteed. So I would be cautious having more than 5-10% of my portfolio in such instruments.
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galeno
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Re: [UK] How do Bogleheads feel about offshore investment bonds?

Post by galeno »

Our only bond holding is AGGG. We see no need for any other.
KISS & STC.
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