Each month in an exclusive survey with Incisive Research, RealAdviser canvasses a broad panel of advisers for their views on a wide range of different topics. This time we are delving into the world of offshore investing. With regulation improving and a range of additional products to choose from, we wanted to find out how just how many advisers were using offshore funds, why and who for? Are the tax benefits all they are cracked up to be? Which jurisdiction is best and why? We also look at what makes a good offshore product and why some advisers still choose not to invest offshore.
Offshore investing has had a bit of an image problem. It has been seen as the territory of drug barons and shady international businessmen. Or people have mistakenly thought it offered an all-encompassing way to rid them of inconvenient tax liabilities. But international regulation has improved and many jurisdictions have worked hard to ensure they are no longer perceived as providing a haven for money-launderers, but instead as offering everyday tax planning solutions. How is the offshore market developing?
Offshore funds are offered by the majority of well-known life companies, with Axa, Royal Skandia and Canada Life International proving the most popular. Take-up of offshore funds is improving - 93% of advisers now have clients who invest in offshore funds, the majority of which, 69%, have up to 25% of their clients investing in them. Of those asked, 41% of advisers also felt that the proportion of their clients investing in offshore funds would rise in 2006.
So what are the main advantages and disadvantages of offshore investing? Collin Jelley, head of tax and financial planning at Skandia, says: &Gross roll-up is one of the key attractions to investing offshore. Most offshore life companies are established in a territory where income and capital gains in non-resident policyholder's funds are not taxed locally.
&Focusing on offshore bonds, additional tax benefits such as time apportionment relief and the ability to top slice gains back to inception add further planning opportunities, especially for higher rate tax payers.&
Jelley believes there are disadvantages but they are far outweighed by the potential benefits. &Offshore products may be more expensive than their onshore counterparts but for very good reasons, he adds. &From a bond perspective this can be attributed to the flexibility of the product and the fact that it is likely to be distributed in multiple countries requiring specific local support.
&With regard to offshore bonds, tax relief cannot be reclaimed against the life company's expenses.&
Advisers were also asked how much their use of offshore funds was dictated by changes (current or pending) to regulation. The majority (60%) said regulation did not make a significant difference to their attitude.
However, Murray Drummond, chief executive at Standard Life international believes regulation is still an important driver for the offshore market. He says: &Regulation is key in this market. One of the key reasons that the UK market has been seen as successful, as it has recently, is as a result of regulatory and fiscal developments.
&For example, the introduction several years ago of mandatory reporting of taxable gains to the UK Revenue helped reassure both the authorities and the industry that this could become a legitimate mainstream market.&
Standard Life International moved into the offshore market as an insurer in January 2006 as a Dublin-based company selling to UK residents only. Drummond says that tax control is still one of the biggest positives in the market.
He comments: &Tax deferral is not a myth. There are clear opportunities for certain individuals and companies to defer tax effectively. The important thing is to identify which clients will genuinely benefit from the benefits of tax deferral. The safe haven angle is less of a factor in the main cross border market in that EU regulation is increasingly harmonising the environment between countries and applying similar rules to non-EU. Also the tightening of rules around money laundering and proceeds of terrorism is leading to much greater sharing of information between jurisdictions.&
Jelley believes the tax benefits of offshore funds are as good as the general consensus within the market suggests, he says: &Offshore investments can be complex and require advice. Offshore investing will not suit everyone. Gross roll-up works well for longer-term investments. Many of the tax benefits offer real value and when combined with trusts offer extremely good tax planning.&
Offshore funds are based in different jurisdictions, with each respective haven offering its own benefits to investors. The report found the most popular areas for offshore funds to be Luxembourg with a 90% approval rate, closely followed by Dublin 75% and Isle of Man 59%.
Drummond says: &The important aspects of a jurisdiction include providing business-friendly regulation and at the same time a strong environment to reassure clients and distributors that their money is safe and problems can be prevented before they occur. The main choice for companies is between Ireland and the Isle of Man, both of which are excellent offshore jurisdictions for sales into the UK.
&We favour Dublin because it has a strong regulatory environment on the preventative side, typically requiring higher capitalisation than the minimum required under EU solvency rules. In the unlikely event that an Irish company did get into difficulty, the UK clients would be covered under the UK Compensation Scheme in the same way as onshore clients.
&A key advantage of Dublin over the Isle of Man is that as a full EU member it can take advantage of the cross-border EU legislation designed to make such sales easier. Also as a major European city there is a readily available supply of good quality staff and support services. These and other reasons have increasingly seen Dublin becoming the jurisdiction of choice.&
Scottish Equitable International (SEI) is about to launch a new Dublin-domiciled Wealth Management portfolio. Steven Whalley, head of marketing at SEI, says choosing the right jurisdiction is crucial in the success of an offshore product.
He says: &As Dublin is in the EU, regulation is on the same basis as the UK. This regulation will be a comfort for some. The recent realisation that EU providers selling to UK residents are covered by the Financial Services Compensation Scheme (covering at least 90% of the value of the investment) offers further investor protection.&
Advisers were also asked what the main features were in a decision to recommend an offshore fund. The results showed that advisers - as with onshore products - favoured fund performance as the main product selection criteria, with tax benefits, safety and cost also featuring.
Drummond says: &A provider in this market benefits greatly from having certain core strengths including a strong brand in the local market, good financial strength and a proven reputation on service (particularly important given the sums of money that clients are investing). This in itself is not sufficient - the product proposition need to be right too. There is a real and increasing demand for better transparency and good value in the core product. At the same time market developments such as the emergence of wrap have led to a need for greater flexibility in the mechanism for reflecting the advice cost within the product.&
Whalley says: &Having distribution thorough UK advisers means products are rigorously scrutinised. Key criteria are the financial strength of the company/group, flexible and competitively priced products, excellent investment choice and a top quality service.&
Whalley also believes that despite offshore investing becoming an attractive option for all, it does offer better options to certain people. He adds: &There are identifiable target markets that will be attracted to offshore life funds.
&They include high net worth individuals looking for tax benefits and investment choice. Individuals undertaking inheritance tax planning, those who either do or are planning to live or work abroad and increasingly those looking for retirement planning beyond just pension planning.&
The report backs up Whalley's view with 57% of adviser citing high net worth clients as the main audience for offshore investors, this was followed by 31% who felt it targeted those living abroad.
Jelley has his own views on what he deems the target investor for offshore products, adding: &Normally clients receiving investment and tax advice and who potentially want more flexibility from investment choice and options to achieve planning goals. Average premiums would also indicate that clients with greater investment amounts are more likely to invest offshore.&
With 93% of advisers offering offshore funds to their clients in some form, uptake is now fairly universal. But what about those who are not using offshore funds? Drummond has understood those concerns in the past but thinks they do not hold any weight now.
He says: &It is clear that there are still some clients and some distributors who are unsure about this market, often for historic reasons that have since been addressed. Having said that, the increase in sales in recent years is evidence that this is no longer a niche market and has already moved more mainstream. The arrival of new providers with 'trusted' brands should help expand the market further.&
Whalley agrees, but says advisers have an important role to play. He comments: &In the UK I believe most individuals are happy to follow advice. Advisers now are more positive about offshore investing as many of the early incarnations (high cost schemes from questionable jurisdictions) are now counteracted by highly competitive contracts offered by leading providers from well-regulated jurisdictions.&
Murray is optimistic about the future for offshore funds. He says: &Clearly as a new entrant of barely a month old we are very enthusiastic about the future development of cross-border sales through an offshore company. Long-term trends such as increasing personal and corporate wealth worldwide, improving regulation and better products are all set to support growth in this area.&
Whalley adds: &All of the drivers for offshore bond sales are becoming more evident. There is growing wealth, there is growing need for inheritance tax planning, more people are considering living or working abroad and, especially after the pension simplification rules are applied, there will be more using offshore life contracts in retirement planning.&
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