The following article will introduce the subject of portfolio bonds and the positive and negatives associated with them. I will touch on whether they are good investments or not, and what you should do if you have one, and are unhappy.
What are portfolio bonds?
Portfolio bonds aren’t linked to `bonds` in the typical sense of the word — they are not government or corporate bonds. They are umbrella products, that can hold almost any investment asset, and proportion to be tax efficient investment wrappers.
Portfolio bonds are typically offered by insurance companies in the expat market. Many of these life insurance firms are usually domiciled in the Isle of Man, Guernsey, Jersey, Luxembourg, Dublin, Bermuda, Cayman Island and other tax efficient locations for expats.
Portfolio bonds are available in a wide range of currencies. USD, Euros, British Pounds, Swiss francs and Japanese Yen are just some of the currencies on offer.
Where are portfolio bonds typically sold?
Worldwide. However, they are sold more extensively in cities with many expats. Dubai, Amsterdam, Qatar, Singapore, Shanghai, Bangkok, Switzerland and Hong Kong are just a few examples of cities where portfolio bonds are typically sold.
What investments can be held within portfolio bonds?
Each provider has their own investment rule. Numerous providers can accept almost any asset class, including;
REITS and other property related investments
How are portfolio bonds set up?
Typically clients need to produce anti-money laundering documents such as proof of address (dated in the last 3 months — such as bank statement or utility bill) and ID, alongside an online or paper application form.
After getting accepted and funding the case, you are a client of the life insurance firm. The broker is just advising you, for a fee, and isn’t holding your money.
What are the advantages of portfolio bonds?
For expats from numerous countries, there are some tax advantages. This is especially the case for British expats.
Portfolio bonds are usually tax-deferred, meaning that you can time your withdrawals to be tax efficient.
Often times, investors can take out 5% of a portfolio bond every year, without incurring tax penalty with the UK tax authorities, HMRC, up to a maximum of 20 years.
Many expats also use trusts to pass on their nest eggs to the next generation, in a tax efficient manner.
So portfolio bonds can be used as a legal way to minimize, or completely avoid, UK inheritance tax.
Furthermore, if you move back to the UK, the income on your investments are taxed according to your income. So if you have moved into a lower tax band by this stage (in retirement) you may minimize your tax bills.
Australians investing in portfolio bonds also have some tax advantages.
What are some of the problems with portfolio bonds?
Whilst portfolio bonds can be excellent cost and tax efficient investments, they can have the following issues;
Costs– Some of the older and more well-established life insurance firms, tend to sell expensive solutions. If you add in the management fee from the broker and fund fees, this all adds to cost.
Risky investments — structured notes, and some other risky investments, can destroy a portfolio, if not managed correctly
Because costs vary fantastically between brokers, life insurance firms, and funds within the bond, expat client A can be paying more than expat client B.
Let’s look at two examples;
Glenn, living in Dubai, invests $100,000 with a newer, cheaper, life company using the tax efficient wrapper. He pays 1.2% per year costs + 0.1% for index funds.
He could be paying 3x-4x less, than David in Singapore, who is being charged 2% by a more traditional and expensive life insurance firm, 1% management fee from the broker + `hidden fees` from the investment funds.
Can expats move with their investments?
Yes, they can. Usually, expats can move their investment with them. Exceptions exist, and independent tax advice is sometimes needed. As a generalization, expats moving to America should be particularly careful about continuing to contribute to investments, due to tax laws bought in since 2014.
Should Americans invest in portfolios bonds?
As a generalization, the answer is no. In the last 4–6 years, the laws have become more and more restrictive for American expats.
This also applies to joint passport holders, Green Card holders and American taxpayers.
Portfolio bonds and SIPPS/Qrops
People that have worked in the UK, even if they aren’t British, have often been advised to transfer their pension overseas. Often called QROPS and SIPPS, this allows the formerly UK-based expat to transfer their pension overseas.
Whilst this does have numerous benefits, especially for bigger pension pots that would be subject to UK inheritance tax, some of the same issues exist here.
In particular, adding pension trustees to the equation adds an extra layer of fees; the trustee fees. So investors now have the life insurance fee, broker charge, fund charges and trustee fees.
This can amount to up to 4%-5% a year in some cases. Therefore, to make this structure worthwhile, investors usually need to:
– Invest with cheaper funds and indeed life insurance firms to minimize costs
– Have an investment pot worth 150,000GBP or more to make the fees worthwhile. As some of the fees are flat fixed fees, the charges are too expenses on smaller accounts. Ultimately, a 1,000GBP trustee yearly fee is 2% of a 50,000GBP account, but 0.1% on a 1million account.
Are there usually charges for getting out of a portfolio bond?
Yes. When a portfolio bond is set up, an establishment fee is typically applied. This establishment fee is gradually applied against the policy.
So for example, if an establishment fee of 7%-8% is applied against the policy, you may be charged 1.2% over 10 years.
If you want to withdraw, you can usually take out 70% or more of your policy, free of charges, assuming that you keep the minimum balance in the account.
So on a $100,000 account, you may be able to withdraw $70,000 or more, on day 1. A charge will apply on the remaining balance, of $30,000 in this case.
This charge will apply on a sliding scale. In year 1, a 10% charge on the $30,000 may apply ($3,000), and the charge will gradually be reduced over the 10 years. This is merely an example, as each provider has different rules and regulations.
Beyond that, some funds within the bonds have minimum investment periods and lock in, whilst other funds have no charges for getting out.
Is there a maximum amount I can withdraw from the policy?
Yes. Some providers have a $20,000 minimum, whilst others have a higher minimum.
If I am unhappy with my offshore portfolio bond, what can I do?
There are a number of options. You can either exit the bond entirely, change the investments and/or transfer to another broker, who will hopefully manage your portfolio in a better way.
Have you ever taken over people’s portfolio bond investments?
Yes frequently. In fact, as per the article at the bottom of the page, many people approach me with underperforming existing investments.
Can I invest directly, without a broker?
Some portfolio bond providers allow you to self-invest. Others do not. It depends on the provider and its rules.
If I decide to top-up my existing policy, can the charging structure for the additional premium be different to the initial premium?
Most providers allow different charging structures for top-ups. So if a 7% establishment charge was implemented on day 1, as an example you can pick a lower charge for top-ups.
Will the policy become cheaper over time?
Yes. After the establishment charges are all paid for (after year 5, 8, 10 or 14 typically — again depending on the provider and the charging structure chosen) you no longer have to pay the yearly fee associated with the establishment charge.
That doesn’t mean it has become a free policy, of course. It has merely become cheaper. Fund and broker fees still apply, which can cost from 1%, all the way up to 5% a year, if you include hidden fees.
When are the charges taken out?
Some fees are taken monthly, and others quarterly and yearly. Most are quarterly or yearly.
Are portfolio bonds good investments?
It depends on many factors, including your tax situation and how you are invested. As per the article below, some of the old-school providers offer products which are expensive.
This tends to eat into the benefits, including tax benefits, of the product. In comparison, a small percentage of portfolio bonds are good value, especially if you are invested in low-cost funds, such as index trackers.
As a generalization, some of the newer providers are cheaper, as they can’t rely on brand names to sell expensive products.
What are your contact details?
For those with existing portfolio bonds, and SIPPS/QROPS, you can read the review article below. The article is especially useful for those that aren’t happy with existing returns.