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Into the main stream

The very concept of investing in offshore products from such far-flung locations as Dublin, Isle of Man and the Channel Islands is an alien concept to many people.<

The factors influencing international investors tend to follow a similar pattern to those seen in the UK domestic marketplace but with some notable additions.

The international investor also has to contend with other issues such as currency choice and a further dimension to their tax planning opportunities.

The offshore market has always contributed significantly to new business premiums of UK life companies.

The figures for offshore sales from the Association of International Life Offices have been increasing steadily over the last 10 quarters. These headline growth figures hide a number of trends within the offshore life market – the investment and product mix, which product providers are writing the business and the residency of the underlying investors. Such valuable information highlights emerging trends.

In a snapshot, the offshore life company sector has undergone a great deal of change over the past decade, with many of the original players either withdrawing from the market because of difficulty with particular funds, lack of scale or due to strategic changes at a parent group level – a situation which may not lend itself to generating customer confidence.

But latterly, there have also been new entrants coming into the market and rumours abound of further UK players entering the market next year. This all goes to underline further the importance attached to this market and the calibre of the companies willing to take part.

Ailo figures for offshore sales for the first half of this year topped 1.7bn, up from 1.15bn in the first half of 2003 and the growth is expected to be stronger in the second half of this year.

Such growth clearly stacks the argument in favour of the companies in the market but what about investors? What choices do they have and why would they consider, for example, going into an offshore bond anyway?

The utility of offshore bonds is well documented for UK investors. Most sales are based around the tax-deferral benefits, benefits that tend to be stronger the longer term of the investment.

A large percentage of UK- resident offshore sales, relate to issues of long-term tax planning, typically inheritance tax-related – discounted gift trusts proving popular over the years.

Barring any unforeseen radical overhaul of the inheritance tax system in the UK, predictions are that this market is about to take off due to the substantial increase in the value of residential property and the knock-on impact this has had on IHT thresholds for individual estates.

The inheritance tax take for HM Revenue & Customs has been growing steadily and will start to grow steeply from now on, making offshore investments a more attractive proposition to the mass market.

The concept of a place in the sun has also produced another growing market in the form of a post-retirement population wanting to retire abroad and an increasing number of advisers are positioning themselves as specialists in this field.

We are also seeing collaborations as generalist UK advisers seek advice from third parties on taxation issues particular to the countries where clients may potentially become resident. This planned change of residency can offer the opportunity of the tax-deferral benefits of offshore bonds and tax planning opportunities around the disposal of UK based assets.

In addition to the retirement market, the labour market is becoming increasingly global, with similar opportunities for advisers to offer counsel.

For the expatriate investor who may return to the UK, there are the potential tax benefits around time apportion relief, whereby for the proportion of time that they are non-UK-resident they will not incur UK tax on a similar proportion of the growth of the bond.

For non-UK-domiciled and non-UK-resident, that is, foreign nationals, the tax status of a gross investment will still appeal but it needs to be compared with other products in the local market. We are finding that investors tend to want and prefer a gross environment and also like the ability to access funds that cannot be held directly, for example, some professional investors’ funds (Pifs) are key points of differentiation.

Additionally, some funds are usually only offered through a life fund, some CPPI funds or with-profits funds being accessed in this way. The latter continues to attract money offshore – four times that of the UK market for the first half of 2005.

For many international investors, the attraction of investing in a product issued from a well regulated jurisdiction with a choice of currencies will be a key driver over investing funds in their local markets.

Offshore inertia can be further reduced if the brand is well known to the investors and the intermediary. Those advisers recommending companies with respected global brands will have the advantage of having client awareness across these international markets.

But having such drivers pushing the envelope of market potential is pointless without a corresponding investment market that matches up. Customer choice is very important. Single-premium bonds tend to come in two flavours.

p Mirror fund products – they are offered with a set range of funds chosen to reflect the target market of the product. These often include in-house funds as well as externally managed ones and are effectively separate funds priced by the life company.

Where the underlying investment vehicle is often a collective, or number of collective investments, the fund will simply purchase units in underlying investment with a discount on the fund charges. These products should offer a distinct fund-based USP to the market.

Within this market, investors’ requirements have been, in part, similar to the UK with the recent popularity of lower-risk funds through distribution funds and multi-manager funds. A limited number of single-asset funds, particularly property funds, have also proved popular due to the outperformance of most other asset classes despite difficult investment conditions over recent years.

Research positions these products in the low to medium-risk part of the market, where many, although not all, life companies have consistently shown strength in managing such assets. Recent launches in this sector have been dominated by funds at the low to medium risk end of the market – examples being cautious managed funds, deferred distribution and multi-manager propositions. Many, investors have an international angle to their future plans so choice of currency is essential.

UK advisers and investors are familiar with the concepts mentioned above, although the choice in currencies is not that great outside of these products.

p The portfolio bond wrapper is the other popular option for offshore advisers.

Portfolio bonds can be used for a number of investment reasons ranging from cash-based investments, unfettered portfolio management through to holding discretionary manage- ment agreements (DMA) for asset managers.

These products invest in the underlying funds directly and the charges on these products tend to be more transactional but tend to offer greater flexibility across charging structures.

Therefore, if an investor is looking to hold a near-cash investment, the charges need to reflect the prospective return of the underlying investments.

The DMA market is a growing one, especially for many private banks which have caught on to th tax-deferral benefits of portfolio bond for the capital gains tax planning purposes of their wealthier clients while still maintaining control of the fund under management.

At the high end of the market, portfolio bonds are also used to access some of the more esoteric investments that can be sold offshore to certain types of professional investors.

With the offshore market evolving at product level to reflect the investment requirements of its changing and growing potential of its increasing customer base, we are increasingly likely to see offshore investing go mainstream over the next few years.


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