I'm a UK expat currently in Japan, and was sold the exact same product. I showed him Dan's sheet, and he came back with the following points. I'm wondering about the validity of the below features he lists as arguments to keep the plan, specifically in relation to my return to the UK one day.
- 5% allowance - He pointed me to this provision on HMRC site: http://www.legislation.gov.uk/ukpga/2005/5/section/507. But the following seems to present it as related to investment bonds? http://www.which.co.uk/money/savings-and-investments/guides/investment-bonds/withdrawals-and-charges/
I have literally never heard about this, I have a feeling they are trying to bamboozle you with legalese to try and keep you onboard, in a sense of "Oh look how complicated this all is, thank God I have this nice man to take care of it all for me and that he is working in my best interest"
If he can't explain it in a way you understand it, then he doesn't understand it himself.
- Top slicing - Again, bond related, but also applicable to these insurance wrappers?
Was never explained to me, but I found this article:http://www.telegraph.co.uk/finance/personalfinance/2839800/How-top-slicing-works.html
Seems to be similar to Time apportionment relief in that it takes the total gained at encashement and spreads it over the policy lifetime then taxes you on a part of this.
I find this to be utter bollocks.
Will explain in the next part:
- Time apportionment relief - http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0008
This part was explained to me.
But it's a load of bullshit tbh.
The idea is that if/when yo return to the UK, when you encash the policy you will not be taxed for the time you were out of the country.
For example on a 25 year plan, if you opened it abroad and then moved back to the UK with 15 years left of the policy, you will pay tax on 15/25th of the capital gains, and NOT on 10/25ths.
The reason this is shit is:
Nobody in their right mind would open this policy in the UK.
If I were to head back to the UK I would look to close up all of my investments offshore and cash out, then take that money and invest it in something tax efficient in the UK.
But you cant cash out of this policy if you want to head to the UK, because you are locked in.
So you will be locked into a policy (as an example 15 more years) which has high fees, is inflexible, and is tax inefficient.
These products are sold as being tax efficient because of your status as an expat.
When that changes, the tax efficient benefits of these polices are no longer in place and they are simply really shitty policies that you are locked into.
- Estate planning - Key point being the easy transfer of fund to my wife in the event of my untimely demise
At the risk of sounding dumb.
Does a Solicitor notorised Will and Testament not do exactly this?
The thing is that these ILAS schemes are actually Life Assurance plans with an investment arm bolted on.
What you actually buy, its a Life Assurance Policy which has a payout of 1% upon death.
That is not a typo.
Value of the fund + 1%
That is to say, if you have paid in for 20 years and you policy has a value of $500k and then you meet an untimely death, your spouse can expect a payout of $505k
You have put in $500k for $5k of life assurance.
The effective fee for these plans is around 3%/year.
This means the fee's are much, much, higher than any potential pay out your spouse would benefit from.
If your wife is a joint owner of the policy, ownership transfers to her and she gets no payout, rather she is shafted with the premium payments until the end of the policy.
If I dump this and go with a brokerage account, how do I get equivalent tax efficiencies? Is it impossible, and I simply shouldn't worry about it because my net will still be larger than this product?
What about the estate planning aspect? Assume a joint account, or TOD would make this point void?
Thoughts appreciated. Thanks.
Step 1: Understand the tax benefits of this product FULLY.
Step 2: understand the tax obligations of a brokerage acc.
Japan seems to have a CGT of 20% http://en.wikipedia.org/wiki/Capital_gains_tax#Japan
If you are investing in US stocks, then dividends will be taxed at 30% unless a treaty exists with Japan to reduce that.
For this reason I invest in EUdomiciled ETFs that pay the witholding tax on US dividends at 15% and 0% tax on non US dividends.
The CGT will only apply when you cash out a stock and make capital gains.
If you are in this for 20+ years, then the CGT you pay will depend on where you live when you cash out the portfolio (if ever).
Unless you intend to cash out your portfolio in full each year and re-balance.
I am totally NOT a tax expert.
I live in a country with 0% income tax and 0% CGT.
However, I know a place where you can get SOLID tax advice on ETFs/Portfolios.http://www.bogleheads.org/forum/viewtopic.php?f=1&t=134661
Open an acc there and run your questions past the smart people on that forum.
I recall there was a Norwegian guy who was giving advice about taxation issues as Norway has a very high rate of CGT.
You will also want to read this, thoroughly: http://www.bogleheads.org/wiki/Investing_in_Japan
Let me know how you get on, I would be keen to see what you find out and what options are available in Japan, purely for my own interests :)