Meet Andrew, a 43-year old lawyer from London. He recently moved to Dubai as a partner within a leading global law firm, bringing his wife and two young children along.
With a tax-free salary; plus housing, schooling and family medical cover provided by the company, Andrew should have far more disposable income every month.
But shortly after arrival, Andrew was cold-called.
A charismatic ‘financial expert’ talked him through many lucrative investment options with ‘guaranteed’ returns, flexibility and reasonable charges. Andrew agreed to an offshore bond and invested £600,000 ($792,142, €703,505) – confident it will help him reach his investment goals.
As the value of his investment decreased, Andrew researched offshore bonds further.
A plethora of distressing consumer reviews revealed these are easily misrepresented. High commissions incentivise product salespeople to sell what pays more not what benefits investors. Fearful he’s in the same boat, he found AES International offers a second opinion.
Looking under the bonnet
After a detailed look into his offshore bond, Andrew was showed the evidence. Unknowingly, he agreed to a 10-year lock-in period (despite only planning to stay in Dubai for three-to-five years).
The ‘financial expert’ received an initial 7% product commission and 4% commission on the underlying investments. This 11% (or £66,000) was paid the day Andrew transferred his money.
Furthermore, he was charged the following annual fees:
- Establishment fee (1.83% pa for five years);
- OCF of funds 2.32% (AMC 1.75%);
- Portfolio management/advice fee 1% pa;
- Admin charge £428 per annum (0.07% on £600,000);
- Transaction charge £25 x 10; and,
- Total = circa 5.2%+ pa
It gets worse.
If Andrew withdrew funds within the initial charging period, exit penalties would apply. He has little recourse to complain given different regulatory and legal systems.
We see situations like Andrew’s almost daily in the Middle East. Sadly, rather than leaving the region with tax-free capital – many international professionals end up with less than when they arrived.
As UK evidence-based financial planners, we explain why and how an investor has experienced a poor outcome and typically look at various options to get them back on track.
This often involves reducing costs, re-evaluating their risk, re-structuring their investments and giving them a lifetime financial plan (including a cashflow forecast). We then regularly educate our clients on an evidence-based investment philosophy and why we believe it is better for them.
Three issues expats face when moving to the UAE
- Getting unregulated or substandard advice
Often, the rules and regulations governing financial advice in the UAE are different to ‘back home’. Search the UK’s Chartered Insurance Institute’s database for a chartered financial planner working in the UAE, who’s fee-based and legally works for you and not as an agent for a product provider paid by commission.
- Locking into high-charging investment bonds
Any investment product or fund with exit penalties denotes commission. Early surrenders will be penalised. Plenty of evidence exists about the damage seemingly free financial advice and inflexibility can cause. Simple, low-cost, transparent and flexible investment platforms as better options.
- Spending beyond your means
Spending less than you earn is vital. But expats often spend more than their pockets allow. Have honest conversations about whether certain expenses are needs, wants or luxuries.
General points about cash investments
Tax is no longer a consideration while in the UAE. Once you are a non-resident, you only pay tax on any UK income.
It’s critical that expats in the UAE (and globally) build their wealth on the right foundation. We recommend the ABC rule – if you’re from country A, live in country B, then you should bank in country C. We prefer highly regulated, tax-efficient jurisdictions like the Isle of Man or Jersey.
Note, however, if you have investments and return to the UK, you’ll be charged capital gain tax (CGT) on the gains made offshore.
There are ways to mitigate this.
General points about pensions
Many expats in the UAE are advised to transfer their defined benefit pensions, which is dangerous. Seek the advice of an international pension transfer specialist as offshore advisers are not qualified and experienced in advising on the matter.
Expats should:
- Continue to make UK state pension contributions. Up to 35 years.
- Make up for missed years. Expats can go back a maximum of six years.
Personal pensions
From the age of 55, 25% can be withdrawn tax free and the remaining 75% is taxed as income.
For UAE expats, living in a country with no income tax, they can withdraw their whole pension tax free.
To do this, they must have been offshore for more than five years. However, we don’t recommend this for IHT reasons.
This article was written by Stuart Ritchie, Chartered Financial Planner, APFS, Chartered Wealth Manager, Chartered FSCI. He is director of wealth advice at AES International, which was recognised in International Adviser’s Best Practice Adviser Awards 2018 as the best adviser firm in the Middle East.
