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Top 5 Questions to Ask Before Buying an Offshore Savings Plan
Anthony Noto, CFA
Living abroad, you might have been approached about ‘special tax-advantaged investments available only to expatriates’. These are commonly investment products and services based in a low-tax or tax-free jurisdiction. This article focuses on the offshore savings plans offered by insurance companies (or their associates) and are not to be confused with the standard banking and brokerage accounts offshore offered by global banking and brokerage companies.
An offshore savings plan is promoted as one way to help fund goals such as retirement. The idea is that you invest regularly into a tax-advantaged, offshore savings plan that helps you grow your savings for the future. A number of independent investment advisory companies catering exclusively to expatriates have been set up to sell these products. However, offshore products put out by insurance companies can be highly complex, to the point that even very knowledgeable investors have been caught off-guard by some of the intricacies. With the allure of exotic locations and tax savings, a number of people sign up without fully understanding the investment.
Here are the top 5 questions to ask before signing up for any offshore savings plan:
1. During the plan term, what happens if I reduce contributions or take money out to use for something like my child’s education or a down payment for a house?
This is an important question to ask your investment company. The plan term for an offshore savings plan is typically 20-30 years. Be aware that most offshore savings plans charge their administrative fees based on assumed, rather than actual, contributions. This means that if you stop contributing, contribute less than planned, or withdraw some of your contributions at any point during the plan term, your fees are still based on what you agreed to contribute and what the account balancewould be if you kept contributing according to schedule.
2. 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. With one offshore savings plan plan company, if you cash in a 30 year plan with 25 years remaining, the surrender charge would be 91% of the money you contributed during the first 18 months. Make sure to check your investment company’s policy.
3. What happens if I move to another country?
If you move to a country where the taxes are higher, say because of mandatory contributions into a government-sponsored retirement program, you may wish to stop contributing to your offshore savings plan. The surrender penalties described above make canceling the plan an unattractive option. Since fees are based on assumed contributions, suspending or reducing payments while you are home means that fees will take an increasingly larger bite out of your past contributions. Check to see if this holds true.
4. What is the tax treatment of an offshore savings plan?
Offshore savings plans are located in tax-free or low tax jurisdictions. The actual tax advantages of these plans, however, depend on a number of variables, such as your nationality, place of residence while making contributions, and place of residence when you take distributions from the plan. This gets complicated as expatriates live relatively mobile lives, and international tax laws are dynamic and complex.
Americans, for example, are taxed on worldwide income and miss out on most, if any tax benefits of offshore savings plans. For citizens of other nations, the advantages will depend on your specific circumstances. The only way to be certain of a plan’s tax benefits is to hire a qualifiedtax professional to periodically assess the plan with respect to all relevant tax jurisdictions’ policies (such as your home country, country of current residence and the country you plan to reside in next).
As governments share more and more information, whether voluntarily or through process of law, be aware that attempting to keep accounts hidden from tax authorities is an increasingly ineffective and risky strategy.
5. How much in commissions will you make if I sign up for this plan?
The money you contribute to an offshore savings plan is intended to support goals such as retirement. However, your contributions will also ultimately fund your advisor’s commission, the independent financial company’s profit, the offshore plan company’s profit and the investment fund companies’ profit.
Figuring out exactly how much money you lose to fees is difficult because of complicated and opaque fee structures, but the simplest way to see part of what you would be paying would be to ask your advisor how much they will make in commission from your plan. As an illustration, independent investment advisory companies usually pay their advisors commissions based on how much and how long you sign up for. Although not all companies have the same pay scale, the standard commission for an advisor who sells you a 30 year plan with a US$1,000 monthly contribution would be US$7,200. The majority of that commission would usually be paid to the advisor a few weeks after your first contribution.
Conclusion
There is no ‘one-size fits all’ investment solution for expatriates because our personal situations and goals can vary so widely. Minimizing taxes should be one consideration when investing, but you should not get carried away with fears of a tax bogeyman.
Depending on your circumstances, tax efficient investing within a simple brokerage account held in your home country or elsewhere may actually be a good strategy for you. Compared to offshore savings plans, brokerage accounts might offer considerably more investment choices, transparency and flexibility for you. The cost to set up a brokerage account is minimal, and no load index funds and ETFs charge annual fees in the range of 0.1% to 0.5%. Tax treatment varies based on nationality and residency. Some countries also offer attractive, tax-advantaged savings accounts, such as an IRA or 529 plan in the United States.
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 , 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. |
