Offshore Investment Bonds: What are you Paying?

Investment bond (a.k.a. portfolio bond) fees can be pretty damn high. Read on to see what fees you are being charged, or may not know you are being charged.

Investment Bonds?

Investment bonds, otherwise known as portfolio bonds, are lump sum investment vehicles which combine a life assurance wrapper to create a tax efficient holding vehicle for your investments. This tax efficient wrapper however is more often that not of no benefit to the expats that are sold these products.

They are distributed by life assurance companies such as RL360 (PIMS), Friends Provident International (Reserve), Utmost International (Professional Portfolio Plan), amongst a sea of others, through financial advisers around the world.

List of all the Charges you Could be Paying

The list below details all the possible charges that an expat with such a product can expect to pay, many of them are not explicitly explained, because of course, who would be crazy enough to invest through one of these vehicles if they know all the fees. So without further ado...

  • Establishment Charges:

Depending on the structure, this is taken upfront. So on an 8 year 1% per annum establishment structure, 8% is taken in initial fees, upfront. This can be as high as 10%.

  • Administration Charges

Sometimes referred to as the wrapper charge, this can be anywhere between $400-$800 (or currency equivalent) per year.

  • Dealing Fees

Applied to every single sale or purchase of a fund or asset. The cost varies between providers and some provide a number of free switches per year so do your homework if you plan to make a lot of transactions.

  • Early Withdrawal Charges

If you wanted access to your money early, depending on the charging structure taken, early withdrawal, or surrender charges will apply. For example, on an 8 year establishment structure, the charge could be 8% in the first year, reducing by 1% to 0% after 8 years.

  • Fund Management Charges

Every fund has its own management charge, otherwise the fund managers may as well pack up and go home. Mutual funds are more expensive that ETFs, so expect to pay anywhere between 1.2% to 3%, depending on what mutual funds you invest in. Passive ETFs (which is what you should be buying more of), can cost anywhere from 0.2% to 1%.

  • Fund Trail Commissions

These cheeky fees are paid from the more expensive share classes of certain mutual funds. Advisers that use trail-paying share classes get paid regular commissions at the expense of your performance, so always check the total ongoing cost of the funds you are in and switch to the cheapest share class possible. Most of the broker funds we review have trail-paying share classes, with total ongoing costs sometimes in excess of 2.5% per annum.

  • Adviser Service Management Charges

This is the fee your financial adviser will charge you to manage the portfolio and provide ongoing service, however poorly it is delivered. It is often around 1% per year of the total value of the portfolio. If you have been charged the establishment fee and are being charged service management fees as well, then, well, frankly, you've been had. Unless you're happy with that, of course.

If you hold an investment bond within a UK pension structure (QROPS or SIPP), your charges could be higher. On top of the charges mentioned above, there will also be trustee fees which can cost up to GBP 400 per year.

There you have it. Some of these fees may not be explained to you, indeed you may not see them (such as the fund charges), but you best believe they are there, and they are a drag. It is not uncommon to dissect an investment bond and have to explain to someone that they have been paying in excess of 3% or 4% per year in CHARGES.

Have a nice day.