For investors who object to fuelling the Revenue's coffers with tax from their savings, the answer could be offshore investments, writes Scottish Life Interna-tional advertising officer.
At last, motorists are lobbying the Chancellor to reduce the tax levy on the fuel they buy. But when it comes to investing their hard-earned cash, why is it that investors are happy to sit back and let the taxman help himself?
Many people seem comfortable investing their savings in products such as with-profits bonds and unit trusts. But who wins most out of these investment vehicles? The Inland Revenue.
In the same way that car owners pay tax on their vehicles – road tax and fuel tax – many investors pay income tax, capital gains tax and inheritance tax on their investment vehicles. If they also own a car, just think how much of the money is going to help refurbish certain politicians' offices.
Is there an alternative? Many people ask this question but how many get the right answer?
Offshore bonds provide a tax-efficient alternative to UK products but you won't hear the Government or the regulators broadcast their benefits from the rooftops. Why should they promote a product that will reduce their income?
This only adds to the mystique that offshore investment is for the mega-rich or those trying their hardest to avoid the taxman. While this may have been the case in the past, for some investors it could provide them with the additional legitimate rewards that their investments are due.
If you had the option of paying car tax now or later, what would you do? I imagine most people would prefer to pay it later at a time to suit them, if at all.
Unlike the motorist, UK investors have this choice. So why do so many investors choose to put their money into products that take the tax out now?
Current UK investment products are generally variations of products which have been around for generations, for example, the with-profits bond. Investors see direct-sales ads every week for these products. As a result, they do not think too long about what to do with their nest egg. It seems an easy choice to make or so we would be led to believe.
But as with any other major purchase, investors should do their homework or take independent financial advice to investigate the charges, features and, more important, the potential return on their investment over the required term.
Let's take with-profits bonds as an example. The industry's biggest with-profits bond offers an annual reversionary bonus rate of 4.75 per cent. Millions of pounds are invested in these products every year – millions of pounds whose growth is subject to tax.
Compare this with an offshore bond whose growth is not subject to tax at source. Add the fact that a tax-free income of 5 per cent of the initial investment can be withdrawn each year, along with the fact that the bondholder can decide when to pay any tax, and surely this should make anyone think twice before handing over their cash.
How many people who do not take independent financial advice actually take the time to check all this out? Like many other purchases these days, if it drops in their lap at the right time, they may just take it so they can avoid the inconvenience of shopping around or finding an IFA.
But take the case of the good old motorist. Would they just turn up and buy the first car they see without checking out the mileage, service history and gadget list? Would they buy the car just because it has been around for a long time? I think not. Why are people prepared to take this approach with their investments?
We cannot point the finger of blame in any one direction. However, for some time now, many IFAs have been asking the taxing question: “How can I minimise Hector's benefit on my client's investment?”
Many clients of these IFAs are now beginning to see the shimmer of the headlights offshore.