Offshore life products used to be treated with some skepticism by onshore advisers. That time is now well past and offshore bonds have entered the armoury of mainstream investors, says Rob Griffin
Turn the clock back 20 years and the offshore life industry was a vastly different animal from the one that is in operation today.
Back then the idea of spiriting money out of the UK was viewed as borderline criminal; financial advisers were even wary about suggesting it.
But times have changed, insists Jon Baker, senior marketing executive at Clerical Medical International. The past two decades has witnessed a major transition.
"Offshore used to be seen as elitist, shady and just for the wealthiest people who had their own stockbrokers," he recalls. "Nowadays the market is a lot more accessible and there is plenty of choice. Many people now have offshore bank accounts and invest in offshore bonds through mainstream providers."
Its popularity is illustrated by the latest statistics. Sales of offshore products in 2004 enjoyed bumper growth in both single and regular premium new business, according to figures compiled by the Association of International Life Offices. Total worldwide new offshore life business stood at £8.3bn - compared with the £6.8bn figure recorded the previous year. While sales of single premium products rose 19% to £5.2bn, regular premium worldwide sales were up 31% at £311m.
In a statement, AILO's chief executive Stuart Fairclough, said the figures were proof of the industry's strong growth: "I expect 2005 to be another strong year as more people look to offshore investment solutions to meet their needs for tax efficiency, wider choice and flexibility," he added.
A combination of factors is behind the shift in sentiment.
Top of the list is inheritance tax planning. Soaring house prices over the last few years have increased the number of people who are likely to find their total wealth exceeds the £275,000 per person tax-free threshold currently allowed.
Next is the growing enthusiasm for moving abroad. As far as the UK is concerned, there are now 15.5 million expatriates spread around the world, almost a million of whom claim their pension overseas. Many who have made the move have done so in search of a better quality of life and to escape the increasing levels of duties being levied at home - including the increasingly unpopular council tax, which has rocketed in recent years.
Finally is the consumer's demand for choice.
Are advisers prepared?
However, in such a fast-changing environment, intermediaries need to be sure they are in the best position to take advantage of the potential benefits. Offshore may have become more mainstream, but are IFAs properly prepared?
The first most important step for advisers is to ensure they have a thorough understanding of the subject, says Gerry Brown, technical manager at Scottish Life International. A decent working knowledge will not be enough.
"Advisers will need to educate themselves and find out exactly what is available in the marketplace," he says. "They need to know how the process works and be able to discuss the different options with their clients."
An increase in the amount of choice now available in offshore jurisdictions has been one of the major trends in recent years.
The products offered today include a wide range of international funds as well as wrappers which enable investors to access funds without limit - both UK-based fund managers and international superstars.
They also cater for different risk appetites. Advisers who do their research properly will find everything from lower risk capital guaranteed funds to racier, specialist products and hedge funds.
Can an intermediary make a decent living just from selling offshore life products to expats? It might be possible, but Steven Whalley, head of marketing at Scottish Equitable International, would not encourage them. He favours a wider approach.
"I do not think anyone should just focus on selling offshore bonds," he says. "No adviser is going to build a business in that way. Offshore products are a very important part of their investment tools which should be used when giving advice to a client."
Take the good with the bad
Not everyone is convinced by the arguments. The traditional criticism that offshore bonds are more expensive than their onshore cousins still applies in some cases.
Danny Cox, head of individual advice at Hargreaves Lansdown, is among those with reservations. "You do have some tax advantages but, ultimately, they have got to be good enough to absorb the extra costs," he says. "The charges and some of the performances have led people to question whether going offshore is the right move."
Also, while the charges may have been reduced over the years, this has had a detrimental impact on the commission rates offered to advisers. In many cases the increasing popularity of investors going offshore means providers have not had to offer such high rates of commission to advisers. It is a trend which is likely to worsen.
However, Vivienne Starkey, managing director of London-based IFA Equal Partners, believes there are benefits to looking offshore, although she recommends that advisers take advantage of the increase in provider numbers to strike a lucrative deal.
"Several providers are offering a wrapper which you can then use to appoint your own investment managers," she says. "It means you have someone managing your money that actually knows you and your investment aims."
Anna Bowes, savings and investment manager at Chase de Vere Financial Solutions, agrees. "We use offshore products quite a lot," she says. "You need to be very familiar with what is going on and build a rapport with the different providers."
So, what does the future hold? Well, as far as Nic Burton, Royal Skandia's offshore marketing manager, is concerned, there are plenty of reasons to feel confident about the future demand for offshore products.
"In the UK the taxation position will continue to be a main driver," he says. "There does not appear to be any particular desire to reform the inheritance tax laws."
Baker at Clerical Medical is also optimistic. While acknowledging the threats posed by areas such as fund supermarkets, he is confident offshore products will continue growing in popularity among IFAs looking to offer choice to their clients.
"There could be changes in regulations but the industry is very resilient," he says. "On the whole the outlook is very rosy."
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