Top 3 Questions To Ask Before Buying An 'Offshore Pension Plan' Anthony Noto, CFA
Living abroad, you might have been approached about 'special tax-advantaged investments available only to expatriates’. These are commonly products and services based in a low-tax or tax-free jurisdiction. Offshore financial services can make sense for some expatriates, for example with standard banking and brokerage accounts offered by global banking and brokerage companies.
This article focuses on one type of product - offshore savings/pension plans, known within the industry as investment-linked life insurance. These products are promoted as a way to help expatriates save for goals such as retirement. The idea is that you invest regularly into a tax-advantaged, offshore investment that helps you grow your savings for the future.
Typically locking investors into terms as long as 20 to 30 years, and charging a list of annual fees, these products are very profitable for insurance companies. To encourage their sale, insurance companies offer hefty commissions to 'independent financial advisors’ – based on how long and how much their clients sign up for.
With the allure of exotic locations and tax savings, a number of people sign up without fully understanding the investment. These products can be highly complex, to the point that even very knowledgeable investors have been caught off-guard by some of the intricacies.
Here are the top 3 questions to ask before signing up for any offshore savings plan:
1. Can I See The Policy Terms And Conditions – Specifically The Fee Schedule?
This is an important question to ask your financial advisor. Ignore illustrations designed to make the investment look cheap and add up all these fees for yourself. The fee schedule will contain details for most of the fees you need to be aware of - administration fees, policy fees, foreign exchange fees, investment fees (which depend on funds chosen), etc. Be careful with the wording of how the fees are charged, as they are sometimes not straightforward (for example, 'initial charges’ are sometimes charged every year for the full term).
2. Do The Tax Benefits Apply If I Move To Another Country, Or Return Home?
Many investors mistakenly assume these investments will grow and be tax free because they are held in 'tax havens’ like the Isle of Man and Guernsey. Tax treatment actually depends on a lot more than this – particularly your nationality and where you live for the life of the investment. Depending on your circumstances, the investment might be tax deferred instead of tax free. When you take distributions during retirement, many countries in the world will charge income tax on it.
Some unscrupulous advisors recommend keeping these accounts hidden, claiming that tax authorities cannot tax or pursue money they are unaware of, and that tax havens have a vested interest in keeping client information confidential. Not only are these advisors giving the ridiculous advice to break the law, but they’re recommending breaking it for 20 to 30 years with a significant part of your life savings.
3. If an emergency occurs and I need to completely cash out my savings plan, how much of my money can I get back?
If you wish to close your account before the end of the plan term, the fees through the end of your plan are usually accelerated and deducted from any balance provided to you. After 5 years of a 30 year plan with one company, the surrender charge would still be 91% of the money you contributed during the first 18 months. It’s very important to save for retirement, but think about whether you would like to give up a significant part of your savings to fees like this.
Conclusion
Minimizing taxes is an important consideration when investing, but you should not get carried away with fears of a tax bogeyman and forget about the importance of cost. When looking at a 20 to 30 year time frame, a fee difference of 2% a year could make a tax saving strategy’s tax benefits completely irrelevant. Some offshore savings plans charge fees multiple times this amount.
There is no 'one-size fits all’ investment solution for expatriates because our personal situations and goals can vary so widely. Depending on your circumstances, tax efficient investing within a simple brokerage account held in your home country or elsewhere may be a good strategy for you. Compared to offshore savings plans, brokerage accounts might offer considerably more investment choices, transparency and flexibility for you – all at a much lower cost. Similar to offshore savings plans, tax treatment would vary based on factors like nationality and residency.
Whichever direction you take, research alternative solutions and talk to objective, qualified professionals before doing anything you may later regret. Best wishes with your investing.
Anthony Noto, CFA is the President of Noto Financial Planning, and a member of the Garrett Planning Network, an international affiliation of fee-only financial planners. Noto Financial Planning provides financial planning and investment advisory services to expatriates. Based in Shanghai, China, Noto Financial Planning is a division of Diacron.
Originally written May 2009. Updated by the author, June 2010
