Which Offshore Bond is The Cheapest for Expats?
I have completed a study in collaboration with a few partners on the cost of offshore bonds with some of the major providers on full and no commissions.
This is not a measure of how good the offshore bond is nor does it take into consideration factors that investors might see as important being safety, location, platform use, back-office support, efficiency, effectiveness, and investment options.
This has been done to try and guide investors to make a more informed option about what is in on the market and see through the fees. Unlike platforms, the transparency and charges in bonds are quite difficult to see due to factors such as commission and different layers of fees.
Normally, offshore bonds have a few layers of charges that can be manipulated depending on the amount of commission by the IFA and in order to understand how the results were concluded I will go over some of the costs.
Fees inside bonds
Establishment fee — This is a fee during the establishment period (normally 1,5,10 years). An example of this if the full commission has been taken would be 1% a year for 10 years. Based on the original premium value and any gains. (normally if it has an establishment fee and period stay well clear as it’s illiquid and maybe not in your best interest).
Admin Fee — This is a fixed fee imposed by the insurance/bond provider annually this is normally around $500 for most of the offshore bond providers.
Custody fee — This can be built into the admin fee or it can be an extra fee per annum.
Other than the cost of offshore bonds they have factors such as the surrender period which I have included below.
Surrender period — This is the amount you will sacrifice if you withdraw early, it is normally the amount you owe during the establishment period due to the company (mainly due to upfront commission taken). An example of this would take a bond of 1% a year plus a $500,000 and $500 per year admin fee for a 10-year charging structure. If you took the amount out after year 1, you would have a 9% penalty and in some cases the admin fee for the next 10 years.
Also, all of the bonds with the exception of ITA Access portfolio plus (1% plus admin charges of 450 GBP), Hansard 1Z (1% upfront plus 412 GBP a year), Momentum (0.65% sliding scale down to 0.45%) have these illiquid features attached and these are the only fee-based bonds (ITA Access portfolio charges 0.5% of the 1% plus admin charges to the advisor).
Notes on the study
This has been based on $500,000 as I see this as a feasible amount for the tax advantages to going into a bond and would be somewhat reluctant (unless building it up to this amount) to hold a bond over a portfolio.
Also, as trades on the bonds can be quite expensive I have factored trading 2 and 10 times a year.
The 2 elements on some of the providers have been done on the base amount and the other on full commission (normally 5% upfront) such as RL360
* The average bond dealing cost is around $45 dollars per trade.
Figure 1: Shows the amount of a 20-year period with the charges of bond providers. Cumulative fees based in USD and in the 000’s
Figure 2: Has incorporated trades in the mix
Summary & how to use this guide as an investor?
Firstly, I want to state that this is for offshore bonds only and the point of comparing to platforms that have been done in my other articles is not done in this article and study. If you want to view those articles, please visit my blog pages or I will put some links at the bottom of this article.
Platforms are much cheaper and for most people should be used. I see the comparison as an apple and orange comparison as the people looking for offshore bonds should be long-term investors, with ideally over $500,000 looking to withdraw when they are in a high tax country such as the U.K. or Australia that favours the offshore bondholders (read my article on tax on withdrawal on bonds in places such as the U.K.)
The problems with this study are that most bondholders don’t hold for 20 years so looking at investments that are illiquid for 20 years might not be the best option for investors.
It doesn’t take into consideration investment options, stability, protections, and back office support aspects.
It hasn’t incorporated surrender penalties on the bonds for those with an establishment period.
This should just be used to show the cost of bonds in the market.
Final thoughts
Bonds should mostly be used for tax and estate planning and although these have been missold due to commission would opt for a fee-based bond such as Momentum, Hansard Z1 if any. For U.K. pensions these are mostly useless to be used in over a platform and would not use anyone recommending a pension in an offshore bond.
Additionally, I would only be convinced in using them if given clear instructions on why this is more relevant in laymen’s terms over a platform with mathematical justification as I would generally opt for a platform option as it is a lot cheaper (even the trading cost can be 10 times cheaper alone) and flexible, plus if you do want the tax advantages you can put into a bond just before you move. If in doubt seek a second option from a qualified fee-based advisor.
For further reading, I have done multiple articles on each of these individual bonds and aspects to look out for if being proposed bonds by an IFA going over the base cost and commission cost of each of these bonds and going into a more detailed analysis on when they should and shouldn’t be used for investors incorporating aspects such as tax advantages over low-cost platforms.
If you have been advised to invest in offshore bonds or would like to review your current situation, please email me at info@investmentsforexpats.com.
Here are some of my other blogs relating to offshore bonds:
