As an expat, you will have access to invest in many different ways. The purpose of this literature is to talk about the different expat investment solutions or ways to hold the various asset classes and securities but not the actual securities themselves, i.e. Equities and Bonds etc.
What’s available to you will depend on which country you are now a resident in, but your options will generally be ‘Onshore’ (your new home) or ‘Offshore’ (tax havens).
Generally, exploring offshore options in tax havens such as the Isle of Man, Jersey & Guernsey makes sense. However, people living in a developed country will also explore onshore options that build up wealth in a tax advantageous way and, where possible, with employer contributions, i.e. UK Pensions, the USA’s 401K’s or Super Annuations in Australia.
You may even prefer to use a local bank, a private bank, buy real estate or even a DIY platform where you select your investments. Then there are all the things you have done so far which may need to be reviewed now you have moved overseas.
Naturally, the strategies you choose will be the ones that suit your current and future plans. However, thoughtful planning makes it possible to put yourself in a more advantageous tax position before moving back to the UK or elsewhere in the world.
Offshore financial planning can be just as if not more complex than onshore, then cross-border planning is even more so. That makes it essential to seek independent advice from a qualified, experienced and highly recommended advisor in your region. Many expats opt for an array of investment options, usually overseen by financial and wealth advisors.
Do not rely solely on this article when making an informed decision. This article was created as an aid only. Your situation will influence which investment choices are most suitable for you.
Many pages on this site are dedicated to pensions; however, I will try and summarise.
Pensions are tax-incentivised retirement plans that are often integral to someone’s retirement plan. As pensions are not accessible until 55 and are generally paid into by both individuals and employers, they typically end up being one of the most significant assets in people’s portfolios. Pensions are available in various types and can be administered by an employer or the individual.
UK Pension contributions are added pre-tax, saving either basic rate or higher rate taxes. Then withdrawals are subject to income tax after your 25% pension commencement lump sum. The US operates the same ‘pre tax’ system, whereas Australia is the exact opposite; the money goes in after-tax then can be accessed tax-free.
Once you have moved overseas, reviewing all previous pension arrangements would be beneficial to see if they are still fit for purpose. It may be that the schemes you have are still perfect for your needs and should be left alone even though they have now frozen. On the other hand, it could be that transferring to another scheme or even transferring within the UK would be a good idea.
Other popular pension jurisdictions outside the UK are Malta, Gibraltar and Guernsey. These are known as QROPS (Qualifying Recognised Overseas Pension Schemes). You can transfer from a UK pension to a QROPS if you are a resident of Europe or a resident of a country with schemes that carry the QROPS status, i.e. Aussie Supers. Transfers that do not meet these criteria are subject to a 25% tax charge in the UK.
Nowadays, the investment criteria are very similar in all schemes, so what determines the pension jurisdiction you choose to hold your pensions in is usually what’s available to you and where you will be a resident when you decide to access the money.
QROPS can also be suitable for people with large pension pots; however, in recent years have lost most of their additional benefits originally sold on have been taken away. So as a general rule, people now keep their pensions in the UK and decide whether to transfer to a QROPS at the point they are retiring, as at this point, they are sure where they will be when they retire.
QROPS have been criticised in more recent years because of their previous much lighter regulation. This allowed less experienced, less qualified and less ethical advisers to recommend investment strategies with high fees or additional commission. Thanks to changes in legislation, this is no longer the case; however, many expats still hold these types of investments within their QROPS and are none the wiser.
Pensions have their very own tab on this site with plenty of information. Some of my favourites are:
An ISA is a safe, simple, tax-efficient investment choice for many UK residents. However, ISAs are only available to UK residents, which means that even if you live in a country outside the UK and are not considered a UK resident, you’ll not be able to open an ISA or add any funds to an existing one.
ISA’s are funded with ‘post tax’ earnings, after which have no liability for income (including dividends) or capital gains tax. This makes them very tax efficient. ISA’s have funding limits of £20,000 per annum for anyone who qualifies to use them. They can be cash ISA’s or a Stocks and Shares ISA. The latter will have access to a range of investments, not just stocks and shares. You can freely switch between the two with no penalty.
A common mistake expats make is to have high amounts of cash ISA’s. With interest rates so low and the fact everyone has a personal allowance for income tax in the UK, what’s the point in holding cash inside the tax-efficient ISA. At present, it’s rare to see any interest even offered on cash deposits in the UK, and no interest means no tax.
Assuming no other form of UK income and a base rate return on your UK assets, you would have to be holding over £5m to exceed the personal allowance. So to make the most of your ISA’s is better to have higher growth and higher income-generating assets in an ISA and hold cash in the bank. This way, you use the tax efficiency. You can always switch them back to cash in the future if necessary.
It is naturally feasible for an individual to have an ISA before departing the UK. However, it is crucial to know whether your ISA will still be tax-efficient in the new country of residence based on your new location. Therefore, it is prudent to look into possible options that are more tax-efficient in the short and longer-term.
An offshore bond, often referred to as a portfolio bond or tax wrapper, is basically an insurance policy for life. It’s a combination of a tax wrapper and an investment platform. Generally, investors hold investment bonds if they provide current or future tax benefits.
Bonds can also come in the ‘Onshore’ format, which are taxed slightly differently. UK residents can invest in either onshore or offshore whilst residents outside the UK generally opt for the ‘Offshore’ version located in Guernsey, Jersey, Isle of Man, Jersey, Gibraltar and Guernsey – in addition to other locations.
Offshore bonds have many benefits, with the main one being that there is no tax on any of the underlying investments, even as a UK resident. The bond itself is taxable, but not until all of the money invested has been removed. This allows a tax-free income for 20 years, assuming you only draw 5% of the value of the initial premium.
It is essential to seek out independent advice from an experienced professional as there are certain assets that, if held, will be seen to be offensive by HMRC and aggressively taxed. This is not something you want to get wrong, and an example which are widely used are structured notes.
While portfolio bonds provide many benefits, it is crucial to be aware of all associated fees and possibly commissions that will be paid. Bond providers, also known as Life Companies, still allow advisory firms to charge high amounts, which the Life Co will also indemnify to the firm and collect back from you over 5 or 10 years.
Offshore Bonds are often used as the underlying platform within a pension (SIPP or QROP); however, be aware that if a pension (SIPP or QROPS) holds a bond, none of the tax advantages apply. This is because the pension itself will determine the tax, not the underlying investments or investment platform.
A top tip would be to add any fixed fees and calculate them as a percentage of your proposed investment value, then add on the percentage charges to calculate your TER (total expense ratio). This will include;
If this is higher than 3%, it should raise red flags. Paying fees is normal in finance to get quality service, but unnecessary fees will hinder growth. It’s like paying over the odds for a car; it doesn’t make it any better. You’ve just overpaid.
For more information on offshore bonds, such as the benefits they can provide and advice on how to tell the signs that you’re being overcharged, please reach out for a portfolio review.
These types of products are a form of the above. They are popular in the middle east and highly pushed by most financial planning firms.
As with any investment opportunity, weighing up the pros and cons is essential. On the positive side, they offer discipline that some people need to save money. Often referred to as a ‘Pension Replacement.’
On the negative side, they are expensive with high exit penalties should you want to withdraw. They also have access to a limited fund range. However, financial planners are also paid based upon your total commitment, which means they can be very persuasive in convincing you to commit for longer and save more.
My advice is to tread very carefully. These types of plans have been banned in the UK and are only allowed to be sold in a handful of countries. Ask the adviser if there are any alternatives you can compare against.
If you already have one, your options are to keep paying it. This is the best thing for the plan itself. Alternatively, you can stop paying and divert your monthly savings to a more low-cost platform. You can withdraw money or cash in the account, but it’s advisable to consult a financial planner to make sure you are doing the right thing.
For an introduction to the most highly recommended financial planner in your region, please feel free to reach out.
Like most assets, structured notes generally pay investors a return via income or growth. However, the income or growth offered by a structured note is contingent on the conditions set at the beginning of the fixed term, which is typically between 4 and 6 years.
The conditions are directly linked to underlying assets, with periodic reviews taking place to evaluate their performance.
The assets which are technically derivatives are generally indices such as the FTSE 100 or the S&P 500; however, you will sometimes see the underlying derivatives being a basket of stocks.
Structured notes offer capital protection based on a ‘worse of’ basis, meaning if one of the underlying derivatives is down more than 30% or 40% (typical barrier), investors will risk losing on a 1 to 1 basis.
Structured Notes offer a great way to grow your wealth in a slowly rising, slowly declining or flat market. However, they will cause opportunity cost should the markets rally, for example, a note based on developed market indices that all rise over 10% in 12 months; however, the note only pays an 8% coupon.
The more volatile the underlying derivatives, the more return is usually offered, but also one of the variables can be commission. This means if you own a structured note based around indices and I own a note based around stocks, both with a return of 8% and all else being equal. Mine paid the advisory firm higher commission, my risk-adjusted return is lower, and my risk to capital higher.
Because notes are an excellent way for advisers to earn more money, it is not common to find a whole portfolio of investments constructed using structured notes; however, they typically comprise approximately 10% of the total investment. Therefore, most reputable IFA firms will have compliance measures to limit note buying to 10% – 20% of the portfolio, and if not, pension trustees mostly now police this.
Another critical point is that most people don’t envisage the additional counterparty risk with a structured note. This is because the bank that builds the note can go bust, as we saw in 2008.
Investment banks usually offer this product and are not generally available on the main street and are typically marketed to sophisticated investors who have a high level of either wealth or understanding of derivatives.
Like pension plans, investing in real estate is a frequent element of a portfolio of investments. For foreigners, this can include their primary home and any additional properties utilised to earn a regular income from rental.
In the past, expats also could benefit from the increasing property costs by selling UK properties without paying UK capital gains tax. However, in April of 2015, the loophole was closed, and every sale of a UK home is taxed on capital gains.
Despite this shift in tax laws, the ever-increasing property costs make the UK an attractive option to buy a home for short-term and long-term returns.
It can be challenging for expats to obtain a mortgage in the UK for other properties, even though it is possible with the help of specific mortgage experts.
Other costs and charges worth considering when looking to invest in UK properties include the management fee of any company required to oversee the tenants, maintenance, and the taxation on rental income.
It is essential to note that the income from rental income earned from a property located in the UK is subject to UK income tax, which requires the filing of a tax return completed and could be taxed in the country where you reside. In the UK, you can still claim the tax-free personal even as a non-resident. However, you’ll need to submit the tax return, which will include any earnings received.
An investment platform is an online supermarket that allows individuals and advisers to put money into financial instruments. They typically provide a more comprehensive selection of investment options than what would normally be accessible to a typical investor.
They can be used for ‘DIY’ investing and for investing via an intermediary, i.e. a financial planning firm. Investment platforms have the following benefits:
Although most investment platforms charge administration, dealing and custody fees, the cost of managing your investments via platforms can be reduced while increasing the range of choices for investing.
Because of the complexity surrounding the tax and financial regulations, non-residents and expats will be limited in choosing between different investment platforms. However, through working with an advisor, you will likely broaden the options you have.
For more guidance on what may be suitable for you or a review of your current portfolio, please reach out, and we will introduce you to the most suitable financial planning company in your region.
