Does your insurance bond offer the necessary protections needed by UK expats?
Single premium insurance bonds have been a popular ‘wrapper’ to hold investments for higher net worth individuals that reside in the UK. They are a useful tool for deferring tax on income and gains, allowing the investor to decide how and when to pay tax.
However, this is all based on UK taxation rules that apply to UK tax residents. Yet, they are still regularly being sold to expats with the promise of the same taxation benefits. While local Czech regulated insurance products with a capital savings element here in the Czech Republic do have taxation benefits, the insurance bond products (Both EU and non-EU) typically being sold here do not meet the threshold of an insurance product here.
To qualify as an insurance product with tax deferred advantages, there are at least a couple of tests that are applied.
- Underwriting risk. An insurance policy should underwrite risk and so each policy should be assessed on age, occupation, health, location and so on. Yet, expat investors in these insurance bonds always are offered the same conditions. Test failed.
- Guarantees. The insurance company must provide some investment guarantee. This could be an annuity or a guaranteed return underwritten by the insurance company. Typically, insurance bonds do not offer guarantees. Test failed.
Country Specific Issues
I am talking here specifically about the Czech Republic. In other EU countries there are often ‘tax compliant solutions’ that allow the sale of such products. There is, indeed, one such product that is compliant here in the Czech Republic that we – Aisa International – do have access to (which meets the definition 2- above) that is not available to the expat insurance advisers here.
Regulator Action
We are aware of at least two ‘expat’ advice firms that have had their insurance licences revoked (all documented on the official Czech National Bank Register) for selling such non-EU insurance wrappers to Czech residents.
Unfortunately, this does little to protect past investors in such products and we know that representatives of these non-EU companies are regularly flying in ‘under the radar’ to sell these products via advisers in this country.
Further, even the EU insurance bond products could be deemed to be outside of the permissions of the insurance licence held in the Czech Republic for the reasons mentioned above.
Why are they sold?
I recently took a call from a British investor, resident in the Czech Republic who had been sold such an insurance bond while resident here. Not only was the non-EU insurance policy not regulated for sale here (offering no local regulatory protection), it offered no taxation benefits at all.
So why on earth did a financial adviser sell it?
As far as we can see-
- Commission. These insurance products pay the adviser up to 7% of the invested amount, committing the investor to high charges for up to 10 years to pay that commission back to the insurance firm. If the investor as a change of heart during that period, there are penalties for withdrawal starting at 10% in the first year! (For reference, investment platforms used by investment advisers do not generally pay anything at all to the adviser).
- Adviser does not have an investment licence and can only sell expensive insurance products.
In the UK, such sales on this basis would be called a breach of Consumer Duty and in the US a breach of Fiduciary Duty. Our Compliance Officer covered some of these issues in a recent Expats.cz article.
Summary
If you have been sold such a product then there are a few issues to consider.
- Have all income and gains been declared to the Financial Office (tax advice may be needed)?
- If sold by an IDD (insurance intermediary) adviser, you should ask yourself if you are happy that the adviser may have acted outside of their regulatory permissions. If so, you have little regulatory protection.
- Was the person that sold it to you even on the Czech National Bank Register as an insurance adviser? If not, who is responsible for the advice? Search by name here.
- Just how much will it cost to get out of such a product and onto a more compliant platform? (Clue- it is invariably better to take the hit now rather than subjecting your savings to unnecessary high charges for several years as the break–even point arrives quickly!)
- Speak to an expat advice firm that has both investment and insurance permissions to assess your options.
Doing nothing is not really an option in our opinion!