Expat guide to offshore investment
Overwhelmed by the number of offshore investment products? Expatica's expert Russell Hammond explains the basics for investing abroad and using offshore investments for portable retirement planning.
With an ever-growing number of professionals opting for a perpetually transient lifestyle, the desire to invest in an international or ‘offshore’ manner is becoming increasingly popular. Offshore investment can offer several benefits for expats living and working abroad, and hence is increasingly being considered by expats as a viable investment solution to match their international mobility, as well as a solution to portable retirement planning.
Benefits of offshore investment for expats
The key driver of popularity for offshore investment is that many expatriates want to avoid the situation where they have ‘bits and bobs’ of investments scattered around the world. They lose track of what is invested where and are, often, presented with logistical issues when attempting to gain access to, or manage, the investment after they leave that particular place. Offshore investing irradiates these irritations.
Furthermore, the tax efficiency of the international investment centres is often seen as an ‘added bonus’ for those individuals who make use of these investment areas.
First, let’s look at what the term ‘offshore’ does not mean. It does not mean investing in a small, shady, semi-legal island state somewhere where the rules are informal, at best, and they could be here one day, gone the next. Far from it. Today’s offshore centres represent the very best in international wealth management:
- High levels of statutory consumer protection.
- Investments are completely geographically portable and manageable irrespective of where you move to or from – they follow you.
- Often offer a much wider range of investment funds and different investment choice.
Examples of these premier investment centres include the Isle of Man and Channel Islands, or EU Member States such as the Republic of Ireland and Luxembourg. All of these jurisdictions benefit from stable governments, strong regulatory controls and measures to protect policyholders.
Why invest offshore? Wealth management
When somebody decides to make use of an international investment centre for their financial needs it is to get capital, which they already have, working harder for them and thus generating a return. Or, it is about redirecting a proportion of their income, every month, to work towards building a fund of money for the future to address future financial demands such as retirement or child university costs.
With inflation running at 3 percent plus and banks only returning 2 percent, it is imperative that you have your money working as effectively for you as possible. Otherwise, you are in effect losing money each year.
What to invest offshore
We have answered the question, as to why we would invest offshore. The next question is what do we invest into offshore?
When an expatriate wishes to invest a lump sum of money, more often than not they will make use of what we call an offshore investment bond. This is the most popular form of offshore investment where you can make use of a wrapper in which you can hold a variety of investment funds, such as unit trusts and open-ended investment companies (OEICs). Because the wrapper is based offshore, within an international investment centre, you have a huge range of different funds to choose from including:
- Guaranteed return funds
- Managed Futures Funds (these funds can make money whether the markets are going up or down)
- Stock Market Linked – Developed and Emerging Markets
- Government and Corporate Bonds
- Structured Products (this is where you give away some gain for certainty of the outcome – so a capped, but guaranteed return for example)
- Plus many, many more.
It is the job of the financial adviser to recommend, in consultation with you, which of the above, and in what proportion, are right for you. This is based upon, amongst other things, your attitude to risk and volatility, investment time horizon, investment experience and age.
Offshore investment and international retirement planning: Portable retirement plans
The offshore areas are a great way for someone to save for his or her retirement, particularly for expats living and working in several different countries. Regarding where and when you will retire, this is very much dependent upon your situation at the time. It is often difficult to plan where and when one will retire, and as such, the flexibility that is a feature of international investment means that we do not have to make this decision until we come to retire.
Offshore retirement plans are geographically portable so they are unaffected as you move to different places in the world. The plan stays in the same place, while you move around, all the time growing tax free. It can be the perfect solution to any expatriate's long term retirement investment needs.
How the retirement plan would work
Basically, you sit down, with your financial adviser, and work out how much you need to save each month to hit your target retirement fund and then invest this money, each month, into your plan. This money is then further divided across a variety of different underlying funds.
Downside to offshore investing
There used to be one big downside, in particular, with offshore investing. This basically was the then tedious process of communicating with the offshore investment centres. Based in overseas jurisdictions it used to involve long distance phone calls and or a note tied to the leg of a carrier pigeon. OK, it never actually involved that! However, it was a big headache with the time differences etc. Herald the information age and the internet. Now, everything is done online so managing your money in the Isle of Man is no more difficult than managing your money with your local, high street bank.
Tax advantages to offshore investing
With offshore investing the tax advantages are more about tax control rather than tax avoidance. What this means is that because your investments are based in a tax-neutral investment area, you are normally able to decide where and when you pay tax on your investments. For instance, imagine that you have been paying EUR 500 a month into an offshore retirement investment plan for 20 years. Now in year 19 of the plan, you are looking forward to gaining access to your ‘nest egg’ and putting your feet up during your retirement. You are now resident in Ireland and have accumulated some gain payable on your retirement investment plan. So, what can we do to limit our tax liability? Well, what you can do is establish your tax residence elsewhere and in that place cash in the investment. For example, you decide that you will take a consultant’s job in Holland for a few years, just to ‘top up your final retirement fund’, and thus not put your feet up just yet... As the Netherlands does not impose Capital Gains Taxes on investments, you could cash in your investment while you were resident there and upon returning to Ireland, would have availed yourself of any Irish tax liability.
In short, offshore investments offer a highly appropriate solution to the transient expatriate who wishes to invest and make financial plans, for his or her future, without the inconvenience and disruption of needing to re-establish a fresh plan every time they should move jurisdiction. The offshore plan will move with you.
Russell Hammond / Expatica
Russell Hammond is one of Expatica's financial expert and an investment specialist and senior financial adviser advising clients worldwide. Updated 2014 by Russell Hammond.
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