Shoring up the case for offshore bonds

Helen Morrissey looks at the results of the latest Retirement Planner Inquiry, which highlights how advisers are using offshore bonds as part of their clients’ retirement planning

Offshore bonds have always played an ­important role in ­retirement planning.

However, the recent reduction of the annual allowance you can put into a pension means that more people will look for alternative vehicles in which to invest surplus money.

In this month’s Retirement Planner Inquiry, we asked advisers to give us their views on how the offshore bond market is ­developing and how clients are using these products to strengthen their ­retirement ­planning.

As with previous Inquiries, we sent an email questionnaire to our readership and received responses from 113 advisers.

The first ­question we asked survey ­participants was whether they recommended offshore bonds to their clients.

The overwhelming majority of advisers do utilise these products, with 70% of survey participants replying in the affirmative.

The ­remaining 30% said they did not (see question one). Those who replied ‘No’ then left the survey.

We then asked the ­remaining survey participants to tell us how much of their business is offshore bonds.

More than half (60%) said offshore bonds accounted for ­anything between 1-10% of their business, while almost a ­quarter (23%) said it accounted for ­between 11-25% of their business.

Overall, 7% of survey ­participants said offshore bonds accounted for the majority of their business, with 3% saying it accounted for anything between 51-75% of their business while a ­further 4% said it made up ­between 76-100% (see question two).

Tax-efficient benefits

We then went on to ask participants to give reasons why they chose to recommend offshore bonds to their clients.

There were many reasons put forward, but by far the most popular reason given was tax efficiency, which was chosen by a massive 84% of those who took part in the survey.

Other popular reasons given ­included flexibility, which was chosen by more than a third of ­participants (38%), while 29% said the use of offshore bonds ­complemented their clients’ ­existing pension planning.

Other popular reasons given included ease of access to money, as offshore bonds enable holders to extract up to 5% per year if needed.

This is a welcome benefit over pensions where money is locked away until retirement (see question three).

We then went on to ask survey participants whether they felt that recent pension reform has had an effect on demand for offshore bonds.

For instance, one element of pension reform has been the decrease in the annual allowance from £255,000 to £50,000 per year.

Perhaps we may see a surge in ­demand for offshore bonds as clients look to find alternative vehicles in which to invest surplus cash? 

It would seem that so far, these changes have not had much impact on levels of demand, with 64% of participants saying they didn’t feel demand had been affected.

However, more than a third (34%) of participants said they had seen ­demand for offshore bonds ­increase after recent pension reform and only 1% said they had seen a decrease in demand (see question four).

Potential challenges

While offshore bonds ­undoubtedly have an important role to play in retirement planning, there are also several challenges advisers face when recommending these ­products to their clients.

By far the most common ­challenge according to participants was the cost of these products, with 40% of participants citing this as a major challenge. ­

Others said negative press coverage also proved problematic, with just less than a quarter (24%) saying there was a stigma attached to the term ‘offshore.’

Finally, we asked survey ­participants to let us know how they felt the offshore market should evolve in the coming years. 

Charges were again a ­popular choice for 44% of survey ­participants, with several ­advisers calling for a more transparent charging structure, while ­others said they would like to see lower charges.

Other issues on ­participants’ wishlists ­included the need for more ­providers and ­making it ­easier to use ­discretionary ­managers.

So it would seem that offshore bonds have an important role to play in many peoples’ retirement planning strategies.

Their ­flexibility and the ability to access funds make them a useful complement to pensions and it is likely they will be taken up by an increasing number of people in the future.

Question one: Do you recommend offshore bonds to your clients?

70% Yes
30% No

Question two: What percentage of your business is offshore bonds?

60% 1-10% of business
23% 11-25% of business
10% 26-50% of business
3%   51-75% of business
4%   76-100% of business

Question three:  Why do you recommend offshore bonds to your clients?

84% Tax efficiency
38% Flexibility
29% Complements existing pension plans
12% Ease of access to money
12% Other

Question four: How has recent pension reform affected demand for offshore bonds?

64% It has not affected demand
29% It has increased demand to a small extent
5%   It has increased demand a lot
1%   It has decreased demand to a large extent