Research from Canada Life earlier this week suggested that over a third (36%) of advisers expect to recommend more offshore bonds to clients following reductions to annual and lifetime limits for pension contributions. But not everyone agrees.
Higher cost
Hargreaves Lansdown chartered financial planner Danny Cox said the tapered annual allowance for higher earners and the decrease in LTA would obviously encourage affected clients to look elsewhere for tax-efficient savings once their pension and ISA allowances were fulfilled.
But while offshore investment bonds had appeal for tax deferral reasons, the tax benefits were often offset by higher investment costs, he said.
Cox explained: “They only really suit those investing upwards of say £150,000 ($213,110, €193,950) for at least seven to 10 years – the lower the investment amount, the longer the term required.
“An offshore bond for an onshore client makes no sense, it’s less tax efficient than anything else."
“The key assessment of whether these provide good value here is the rate of tax payable on exit. There are clear advantages for a higher rate taxpayer paying basic rate of tax on profits.
“The downside is that all profits are taxed as income, potentially at 45% where are capital gains can also be deferred and tax paid at a maximum of 28%.”
Venture Capital Trusts
St James’s Place has been seeing a significant increase in the levels of business into venture capital trusts (VCT) but not into offshore investment bonds.
Tony Mudd, head of division and technical research, said: “An offshore bond would not be the first thing I think of as an alternative to pensions. I think the biggest beneficiaries of the reduction in the LTA and annual allowance will be VCTs, and we have already seen a significant increase in the levels of business we are writing in that product area.”
Mudd said enterprise investment schemes (EIS) were the other clear winner, but come with higher risk, with no dividend stream; so the suitability profile will be quite different, therefore not an obvious replacement.
“You have the tax liabilities on any percentage uplift and any significant capital return. Realistically you need to be a reasonably sophisticated investor to get involved with these kinds of products and not everyone is. That needs to be made clear.”
He said beyond VCTs, more vanilla unit trust and international investment bonds might be alternatives worth considering, with a similar internal tax structure to pensions.
Steady appetite
Meanwhile, both Nucleus and Novia have failed to spot any increase in appetite for offshore bonds.
Nucleus said that in 2016 so far, the platform took new business from 39 accounts worth £5.6m. During the same period last year, new business in offshore bonds increased across 38 accounts, to amounts worth £6.25m – showing barely any increase.
Novia chief executive Bill Vasilieff said he failed to see the logic of providers claiming offshore bond sales would increase.
“An offshore bond for an onshore client makes no sense, it’s less tax efficient than anything else. If your dividend is safe in the UK, you will suffer the withholding tax and then your basic or higher rate tax when you cash it in.
“I’ve not heard that from any of the offshore bond providers or advisers. I think its wishful thinking from the providers’ side.”
Qrops rise
Rather he said the clear winner from the changes to the pension regime for the offshore market would be the Qrops providers.
“We have definitely heard about business picking up there, and also into enterprise investment schemes for those with a higher risk appetite.”
But the first stop, he said, should be an Isa for a higher rate taxpayer, before anything more esoteric were considered.
Hargreaves’ Cox added: “On the basis that most pension funding involves sums of £40,000 or less, offshore investment bonds are unlikely to be a major beneficiary, unless they can develop more regular savings options at a lower cost.”
