When it comes to an investment portfolio, I always like to look at it as a shopping trolley. You can push a trolley around from all the different supermarkets and fill it up with different items. That trolley is your product, whether it be an investment Bond, Unit, Trust, ISA or pension.
Then you can fill up your shopping trolley (or product) with lots of other stuff that is available at the supermarket, or fund manager. For example, you can add Heinz baked beans to your Tesco trolley or your Sainsbury’s trolley, and it will still be Heinz baked beans. Similarly, you can add a particular investment fund to your portfolio and it will perform the same regardless of what product it is part of.
You can add all these little investment funds to your portfolio, and they will all have their own advantages and disadvantages depending on the size and diversity of your portfolio.
One of these investment funds that an investor can add to their trolley is an offshore investment fund.
Offshore investments are important for diversity
Whenever the word “offshore” comes up in relation to investments, it tends to be looked at as a dirty word. We jump straight to stories of David Cameron and the Panama Papers, or celebrities looking to hide from the taxman with an offshore account in the Bahamas somewhere.
However, overseas investing has a part in all types of investment. An average risk investment portfolio should probably have at least half of its money invested in stocks and shares, but are all those stocks and shares going to be UK based? No.
You should never ruin your diversity by having all of your money in one asset class, but you should also never have it all in one geographical location either.
How to invest offshore
In order to get the right level of diversity, you need to offset your UK stocks and shares with investment funds outside of the UK, such as China, Japan, Europe or perhaps North America.
The other way to do this, if you want a more generalist global viewpoint, is to buy something called a Global Fund. This type of fund can invest anywhere it wants, so long as it’s not here in the UK. Global Funds generally offer a pretty good diversity to your UK investments because at least 80% of your money in these funds isn’t invested in the UK.
Weathering any recession, any time
As we have been saying throughout many of these blogs, to build a strong, healthy portfolio, you need to create something that can weather a recession at any point, and overseas investments can be a good way to potentially protect your money should the worst happen.
Having these overseas investments means that the UK can go into another recession, but if the rest of the world is booming, your overseas equities will potentially do very well and you will be able to weather the storm better.
At Applewood Independent, we believe that offshore investment in this way has a place in everybody’s portfolio.
Offshore investment bonds
Now that we have talked about investment funds, let’s talk about the shopping trolley itself. Generally, when we talk about Pensions, Stocks and Shares. ISAs, Unit Trusts or OEICs, they are all here in the UK, so it’s rare to find an offshore product.
But then you get to investment bonds.
If you are going to go offshore with your shopping trolley, you are probably going to go for something like an offshore investment bond.
However, offshore investment as a product isn’t for everybody. You probably need at least half a million invested already, most of that being from cash rather than pensions, even to consider using an offshore product like this.
Offshore investment bonds are a last resort
To go to an offshore product, you’ve got to have used all your ISA allowances, maximised your pensions, have hundreds of thousands in collective investments that generate CGT, and also have money in onshore investment bonds.
The benefit of using an offshore product is that it gives you somewhere else to put your money when there is nowhere else to put it and you’ve rinsed every allowance you’ve got from HMRC. When all those allowances have been used up, you have to save tax by using other investment vehicles.
That’s where an offshore bond comes into play.
The drawbacks of offshore investment bonds
When you put your money in an offshore bond, you’re not paying any tax and you’re not generating any tax immediately when your money makes profits. This can potentially make a huge amount of money for you, but you need to be careful…
Your profits will be taxed in the background at a similar rate to corporation tax, and there is gross roll-up involved too. This can be a benefit but when you want to bring your money back onshore, you will be seriously burned on tax if you’ve made a lot of money.
Even with this tax for bringing your money back onshore, in the right situation, offshore investment bonds are still worth investing in. They may not be as efficient, but if you’ve run out of avenues to put your money into, they can be your next best option.
Don’t start with an offshore bond
However, nobody should ever start their offshore investing with an offshore investment bond. There are so many other more efficient places to put your money first, and if you jump straight to a bond like this, you may face some of the big tax drawbacks that come with offshore investment bonds before you need to.
This is precisely why we would always recommend having an in-depth conversation about these matters with an independent financial adviser before making any decisions about your financial future.
Someone with solid experience in the pitfalls and opportunities of offshore investment can help you navigate these waters safely and help you come up with a plan that is perfectly suited to your goals.
I hope this has been useful, and if you have anything else to add, I’d love to hear from you. To find out more, feel free to get in touch by emailing firstname.lastname@example.org.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.