Pros and cons of offshore investments

Looking at offshore bonds specifically, Darius McDermott, managing director of Chelsea Financial Services laments that progressive UK governments have made them less attractive over the years but there are still a number of positives; one of the main ones being the tax deferral benefit.

As well as several tax advantages, other benefits include their usefulness as a tool in generation planning, according to Rachael Griffin, head of technical marketing at Skandia.

This is because the bond may be assigned by way of gift to the policyholder’s heirs, without incurring an immediate tax charge.

Offshore bonds can sometimes be split into different segments with different investment strategies. So, for example, suggests Mr McDermott, one segment could be saving for school fees for a grandchild and another segment could be saving for a house deposit for a child.

Another advantage can be extra choice that offshore investment can often offer.

A good example, proposes Simon Willoughby, head of proposition at Axa Wealth International, is the growing fund sector which provides specialist funds that are often not available ‘onshore’ , such as certain collective investment schemes and fixed term deposits.

However, this choice can introduce additional risk so it is important to ensure clients understand this risk before any investment is made.

It can be a disadvantage to some investors that usually they will be required to put down significantly higher minimum investments than their onshore equivalents – for example £10,000 to £20,000 for a lump sum and £1,000 for monthly payments.

While the cost associated with offshore investment in comparison to the equivalent onshore investment has dropped over the years; offshore will often be more expensive. This is often to compensate for the additional complexity of this type of business

Also, an insurance company issuing a bond outside the UK is unlikely to benefit from the UK policyholder protection, though some jurisdictions have their own schemes.

Therefore it is important to ensure the jurisdiction that is chosen has sufficient layers of protection, urges Ms Griffin.

“They can also hold higher risk investments than most onshore products and therefore are often only suitable for a particular segment of the market.”

Mr Willoughby adds that while overseas territories like the Isle of Man are considered secure, other jurisdictions do not have the same standing, as the banking crisis in Cyprus has highlighted.