View more on these topics

Roll up formoney fornothing

As an actuary, I am always sceptical when I hear the phrase “money for

nothing”. I do not seem to be alone in this, as some 80 per cent of IFAs

out there appear to be so sceptical about the free lunch which investment

in offshore bonds can offer that they do not recommend them to their


But sometimes, when initial scepticism has been overcome, it is possible

to see that your clients can get money for nothing.

Gross roll-up is usually touted as one of the most important benefits

available to those who choose to invest in offshore bonds.

The most common descriptionof this benefit runs like this – weall

understand the benefits ofcompound interest and if theInland Revenue is

removing partof investors&#39 compound interest through taxation, the benefits

of compounding are substantially reduced.

Given my background, I have a compulsion to sit down and work out the

maths behind these statements because the best way to see the extra benefit

offered by gross roll-up is to go back to basic algebra.

These are easy to see. The factor lost when interest is taxed within a

bond is quite simple and can be seen as early as year two. When part of the

interest is removed at the end of year one through taxation, it is not this

part that is lost – as the investor will probably have to pay tax on all

growth ultimately – but the interest on this part in year two. In year

three, the investor then misses out on the interest on the tax paid out in

years one and two, and so on.

So far, so good. But this does nothing to quantify the value that can be

added. For this we need some real numbers. Like all factors involving

compound interest, the longer the term, the greater the benefits.

I compared two basic-rate taxpayer investors, both placing £20,000 in

a bond for 20 years which grows at 7 per cent each year. The first investor

invests onshore and is taxed within the bond each year. The second investor

invests in an offshore bond and is taxed at 22 per cent on the total gain

at the end of the 20-year term.

The results are quite impressive. The first investor onshore ends up with

a total net fund of £57,914 while the second investor offshore gets

nearly 12 per cent more with £64,767 net.

The difference for higher-rate taxpayers is relatively less at 6.5 per

cent, with £51,090 onshore and £54,436 offshore. The reduced

difference arises because higher-rate taxpayers only get taxed at the

excess over the basic rate at the end of the term.

This is quite astounding. Taking none of the other benefits of offshore

products into account, by keeping your clients&#39 savings onshore you are

saying goodbye to an extra return which truly represents money for nothing.

But the expenses on offshore bonds are higher, is the usual counter-cry

from the onshore brigade. Not true. The simple fact is that although

investment returns offshore roll up free of tax until maturity, offshore

companies do not receive tax relief on their expenses, unlike their onshore

counterparts. The slightly higher charges resulting from this are of little

significance, however, when compared with the figures overall.

Gross roll-up is of particular benefit when combined with another factor

of investing offshore. Offshore bonds are still classed as

non-income-producing assets, just like their UK counterparts. This means

that withdrawals of up to 5 per cent of your original investment may be

made each year for 20 years and is counted as capital withdrawals. Being

capital withdrawals, there is no immediate liability to tax.

This benefit is more meaningful if it is translated into figures. Take the

same example as before but with both investors taking withdrawals of

£1,000 each year for 20 years.

At the end of the 20-year term, the basic-rate taxpayer onshore is left

with £23,194 net while the equivalent offshore is laughing all the way

to the bank with 22 per cent more, or £28,391. For the higher-rate

taxpayer, the respective figures are £19,019 and £21,839 net, a

difference of 14 per cent.

Some quite thought-provoking results, I think you will agree. Perhaps we

in the offshore industry should be shouting these figures from the rooftops

of our offshore havens so that IFAs everywhere begin to embrace offshore

bonds as the grown-up, tax-efficient siblings of fledgling Isas – and not

just the 20 per cent or so of IFAs who appear to have overcome their

initial scepticism and allowed their clients to benefit from money for



Why the FSA must act on RU64

Regulatory Update 64 (RU64) was published by the Personal InvestmentAuthority (PIA) on 30 March 1999. Its “proper” title was Advice on PersonalPensions in Advance of the Introduction of Stakeholder Pensions.Although RU64 covers less than one side of an A4 sheet, from the outset ithas been contentious and difficult to interpret.The Association of British Insurers issued […]

Net firm in warning on electronic voting

Hopes that electronic voting will pave the way for major improvements inUK corporate governance have been dashed in a report sponsored byshareholder voting service E-vote.While electronic voting is due to become legal in the UK later this year,E-vote warns that millions of these votes could be excluded under arcane UKcompany law regulations.Under current law, proxy […]

Equitable strife

These rates ensure there is a minimum level of pen-sion which the policywill provide. Typically, the form of the annuity guaranteed was limited,for example, single life, payable quarterly or annually, level.More attractive forms of annuity, such as with-profits annuities or even aspouse&#39s pension, are excluded.In some cases, the guaranteed annuity is also only available on […]

Jupiter spends £1m to reassure IFAs and clients

Jupiter is running a £1m reassurance campaign in a bid to calminvestors&#39 fears following the departure of chief executive officer JohnDuffield.Letters have been sent to all IFAs who sell Jupiter products and to eachof its retail savers offering assurances that there will be no mass exodusof senior fund managers.The company has also launched an internal […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm