Overwhelmed by the number of offshore investment products? Learn more about the basics of investing abroad and using offshore investments as a portable retirement plan.
Benefits of offshore investment for expats
The key driver of popularity for offshore investment is that many expatriates want to avoid scattering investments 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. They could also end up inadvertently affected by political developments, currency devaluation as seen with Brexit, or rapid economic changes. Offshore investing irradiates many of these irritations.
Furthermore, the tax efficiency of the international investment centers 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 centers represent the very best in international wealth management:
- High levels of statutory consumer protection.
- Investments are geographically portable and manageable irrespective of where you move to or from.
- Often offer a much wider range of investment funds and different investment choice.
Examples of these premier investment centers include the Isle of Man and Channel Islands, or European Union member states such as Ireland and Luxembourg. All of these jurisdictions benefit from stable governments, strong regulatory controls, and measures to protect policyholders.
Why invest offshore?
When somebody decides to make use of an international investment center 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 over 3% and banks only returning 2%, it’s imperative that your money works effectively for you. 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 expatriates wish to invest, more often than not they will make use of 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, there is a wide 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
It’s 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
Offshore areas are a great way for someone to save for his or her retirement, particularly for expats. 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. As such, the flexibility of offshore investment means that you don’t have to make this decision until retirement.
Offshore retirement plans (such as those available for British pensioners) 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 works
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.
Downsides to offshore investing
There was once one major downside with offshore investing: communication with offshore investment centers. Based in overseas jurisdictions, the methods for communication often delayed decisions and caused anxiety for many investors. This was a big headache when dealing with an investment center in a time zone far, far away.
Today, everything is done online; managing your money in the Isle of Man is no more difficult than managing your money with your local bank.
Tax advantages to offshore investing
With offshore investing, the tax advantages are more about tax control rather than tax avoidance. Because your investments are based in a tax-neutral investment area, you are normally able to decide where you pay tax on your investments.
For instance, imagine that you have been paying €500 a month into an offshore retirement investment plan for 20 years. Now in the nineteenth year of the plan, you’re looking forward to accessing your nest egg and putting your feet up during your retirement. You are now resident in Ireland and have accumulated some gains 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 to take a consulting job in the Netherlands to top-up your final retirement fund. You’re not putting your feet up just yet; but, as the Netherlands does not impose a capital gains tax on investments, you could cash in your investment while resident there. Upon returning to Ireland, you would have availed yourself of any Irish tax liability.
Offshore investments offer a portable solution to the transient expatriate looking to invest and make financial plans for the future, without the inconvenience of re-establishing an investment plan every time they change jurisdictions. The offshore plan moves with you.