There are many advantages to working and living abroad: better weather, lower living costs and perhaps even a higher salary. But access to good financial advice isn’t usually one of them. Many expatriates are being well and truly ripped off, says Jason Butler in the FT. “Concentrations of affluent people in poorly regulated or unregulated countries have been a magnet for the unethical, greedy and incompetent financial services pond life which has been gradually expunged from the UK.”
This problem exists because the financial industry in the UK is more strictly regulated than it used to be, thanks in part to the introduction of rules a few years ago requiring financial advisers to have a higher minimum level of qualification and banning commission-based selling.
Unfortunately, the same protection doesn’t extend to British expatriates investing overseas, where any advice from a local adviser will be covered by local rules. Although most countries have their own set of regulations for financial services, many of these are inadequate compared with the UK – especially in Asia, Africa, the Middle East and parts of Eastern Europe.
Eye-watering fees and poor advice
This lack of regulation allows companies to sell savers “eye-wateringly expensive” financial products, which result in Britons paying up to seven times more in investment charges and commissions than they would in Britain, according to Katie Morley in The Daily Telegraph. One expatriate was charged 12% (£45,000) of the value of their UK final salary to transfer it into a riskier fund where none of the final salary scheme guarantees would be available. Another was sold an investment that would have incurred an exit penalty of 99% of their fund in the case of an early withdrawal.
These investment products are often “insurance bonds”, also known by other names, such as as “portfolio bonds”. These are provided by the offshore subsidiaries of life-insurance companies and are set up as life-insurance policies, but their main purpose is for investment. They usually come with a high up-front commission to the salesperson (which may not be well disclosed) and investors often then find themselves paying high ongoing fees on funds held within the wrapper.
The bonds typically have a fixed term and you may get back little or nothing if you surrender them early or stop contributing. They are often pitched as a good way to avoid tax, but the tax advantages for many expatriates are nonexistent: greater savings can often be achieved in a simpler and more flexible way with sensible planning.
How to avoid the scams
So, if you’re an expatriate, take great care when dealing with local financial advisers. First, distrust anybody who cold calls you or pushes to be referred to you through friends and other expatriates – these will always be commission-driven salespeople. Ask all advisers where they are regulated and what their qualifications are. Check the website of the local regulator to ensure that the adviser is authorised to carry out this kind of business. And don’t assume that firms that claim to be linked to well-known UK ones are automatically legimate: many dodgy firms adopt a similar name or simply lie.
If you need an adviser while abroad, try to find one who is regulated in the UK and who is prepared to deal with overseas customers. But generally we’d recommend that you take control of your own money. Learn a bit about tax rules in the UK and your new home (many expatriate destinations have low or no investment taxes and you may not owe UK taxes if you are out of the country for long enough) and build a portfolio of cheap, low-cost index funds and exchange-traded funds instead.
How to plan your tax affairs like the Camerons
The publication of Prime Minister David Cameron’s tax affairs gives us an insight into the family’s inheritance tax (IHT) planning. Cameron inherited £300,000 from his father, Ian, in 2011. This was not subject to IHT as it was below the £325,000 threshold. Four years before, Ian had gifted a £2.3m house in Berkshire – now worth £3.7m – to his elder son Alexander.
This would have been IHT-free had Ian lived for seven years after making the gift. He didn’t – but he lived long enough that Alexander benefited from taper relief and did not pay the full 40% IHT rate. Their sisters, Tania and Clare, were left a £1m London house by way of a trust, having previously been gifted a part-interest in the property – this arrangement should also have reduced any IHT liability.
In the same year that Ian died, his wife, Mary, gave David two gifts of £100,000 (presumably money inherited from her husband on which she would not have paid any IHT, as transfers between spouses are exempt). So long as Mary lives for another two years from this point, Cameron will have inherited a total of £500,000 from his father’s and mother’s estates without having to pay IHT.
Many newspapers have commented on this, but all these actions are entirely legal and are a good example of what can done to minimise IHT liabilities. However, it is important that gifts are made without “reservation of benefit”. For example, if Ian had gifted a house that he had continued to live in until his death, it would still have been subject to IHT.
Forex: there’s an app for that
Currency exchange and money transfers are a popular area with financial technology firms. The latest to launch in the UK is Circle, an app from a US-based tech start-up that lets users exchange money in sterling, dollars and bitcoin (euros should be coming soon) via the bitcoin blockchain. There are no transfer fees, but a mark-up may apply for currency conversions (unlike firms such as TransferWise, Circle doesn’t explicitly say how much this will be). Circle has an “e-money” licence from the Financial Conduct Authority and client deposits will be held with Barclays. However, it’s not clear whether Circle would be covered by the Financial Services Compensation Scheme in the event that something goes wrong.