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Friends Provident International Reserve Investment Bond

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    Have you got a Friends Provident International Reserve Investment Bond?

    The Reserve is a single premium international account, with an optional built-in whole of life insurance feature.  However, the life insurance feature is not intended to provide serious protection; it only pays 1% of the value of the investments in the Reserve account when you die. 

    Instead, Friends Provident International (FPI) says the core feature of its Reserve is its flexibility; i.e., it gives you the flexibility to build an investment portfolio that can adapt to support your changing circumstances throughout life, according to FPI.

    The Reserve is often recommended to expats by international financial salespeople, who push its potential tax benefits, as well as its flexibility. 

    Please note, as we will explain below, the tax benefits the Reserve can offer are not suitable for everyone they are recommended to. 

    What’s more, any of the features and benefits the Reserve may offer are often eroded by the massive fees and charges expats pay to have the product.

    Therefore, if you have a Reserve, sometimes referred to as an offshore investment bond, personal portfolio bond or wrapper, and would like to make sure it really is the most appropriate solution for you, we offer a free, no obligation appraisal with a chartered financial planner.

    Your appraisal includes a complete review of the charging structure of your Reserve, whether the tax benefits available apply in your situation, as well as a review of the effectiveness of your entire portfolio.

    Who is Friends Provident International?

    Who is Friends Provident International?

    Friends Provident International, or FPI, is part of the Aviva group.  In July 2017 Aviva agreed to sell Friends Provident International to RL360° parent International Financial Group Ltd.  However, FPI’s website has yet to reflect that change, still stating it is owned by Aviva.

    FPI is based in the Isle of Man, a jurisdiction with a good reputation for political and economic stability, known for its potential tax advantages and its investor protection scheme.

    FPI provides savings, investment and protection products - mainly to expats in Asia and the UAE.  It has offices in Dubai, Hong Kong, Singapore and the Isle of Man, over 500 staff worldwide, and its products are popular with international financial salespeople who sell to expatriates.

    A summary of the Friends Provident International Reserve Bond

    The FPI Reserve Bond is available to both individual and corporate customers.  It’s an open architecture portfolio and lump sum bond that’s sold in two forms: either capital redemption or whole of life.   The investment bond can be structured as either a collective investment bond or personalised.

    With the whole of life option, 101% of the account’s value is paid to beneficiaries when the bond holder dies.  With the capital redemption option, there is no life assurance, and the plan can continue to run even after the bond holder dies.

    Generally speaking, the Reserve is a slightly better option than FPI’s Summit or Zenith, or the likes of Generali Worldwide’s Choice account because you can have access to a broader range of investment funds and investment products.

    However, underlying fund management charges applicable to the investment funds – on top of the Reserve’s fees - make it an expensive approach.

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    The Reserve may be a flexible wrapper, but watch out for its high (and confusing) charges

    The Reserve allows for the consolidation of a number of investment vehicles into one single account, supposedly for easier management.  There are alleged cost efficiencies with the Reserve, as the sales charges for some funds can be rebated when accessed through the bond.  However, the reality for most expats is these cost efficiencies are eclipsed by the high fees FPI charges.

    The fees have to cover the commission FPI pays to the people who sell these solutions to expats, like you, as well as FPI’s own administration and running costs.

    You can choose how you want to be charged.  You can either opt for FPI’s establishment charge structure, or its annual policy charge structure.  If you’re considering a Reserve Bond, research the charges carefully, and consider the impact of them. 

    It’s sometimes alleged some salespeople don’t make it clear that there are different charging options - and financial consequences if the wrong approach is chosen.  It may also be the case that a charging structure that suits the 'adviser' best is presented to the client…

    Let’s take a closer look at the differences in the structure, and the real baseline costs you will have to pay to have a Reserve Investment Bond.

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    How the establishment charge structure for FPI’s Reserve Bond works

    The minimum premium you can invest is £50,000 (or currency equivalent). 

    For any investment made from £50,000 up to £1,000,000 you either pay: - 

    8.5% on the very first day you establish the bond. 

    Or, you pay an annual percentage of your premium, over either 5, 8 or 10 years. 

    For any premium over £1,000,000 (or currency equivalent), if you choose to pay on day one it is 8%.  Otherwise, again, you can choose to pay an annual percentage over 5, 8 or 10 years: -

    Premium from

    Day one

    5 year (p.a.)

    8 year (p.a.)

    10 year (p.a)

    £50,000

    8.5%

    1.9%

    1.25%

    1%

    £1,000,000

    8%

    1.86%

    1.21%

    1%

     You don’t have to be an actuary to work out that it’s cheaper, relatively speaking, to opt for your establishment charge to be taken in one lump sum on the day you set up your Reserve.  However, your financial salesperson might point out how unpalatable it is to lose up to 8.5% of your investment in one go, and encourage you to opt for the 5, 8 or 10-year charging structure.  Be aware: they make more money if you do! 

    FPI deducts your establishment charge from the General Transaction Account (GTA) in your policy currency.  The establishment charge is based on the amount of money you invest on day one.  So, that means, if you opt for a 5, 8 or 10-year charging period but choose to withdraw some of your money within that period, your annual charges will still be based on the original amount invested, you won’t get a reduction in fees if you reduce the amount you have invested. 

    It’s very important to keep in mind that there is no way out of paying this establishment charge.  Therefore, know that financial penalties will apply if you cash-in your policy during the establishment charge period.  This is because FPI pays commission to your 'adviser' on the day you establish the bond, and unless you opt to pay your charges up front too, FPI has to claw back its initial financial outlay from your investment.  

    FPI is never going to be left out of pocket…the charges will always fall to you to pay. 

    If you decide to add premiums to your bond, the minimum is £5,000 (or currency equivalent), then you will also be charged an establishment charge on that premium too.  But you can choose a different establishment charge period for any additional premiums if you want to, or even pay them up front, which works out cheaper.

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    Additional fees you will pay if you choose the establishment charge structure for FPI’s Reserve Bond

    The establishment charge is just the beginning.

    You also pay a fixed quarterly administration charge – every single quarter for the entire lifetime of the policy.  At the moment that is as follows: -

    Currency

    Quarterly administration charge

    GBP

    99.50

    USD

    126

    AUD

    161.8

    CHF

    124.3

    EUR

    108.7

    HKD

    1,010

    JPY

    14,220

    SEK

    1,030

    You may also pay a trail commission to whoever sold you the bond. 

    This is an amount of money that is added to the above administration charge as a percentage of the policy value, and it is just paid to the 'adviser'.  Obviously, it’s better if you don’t pay this trail commission!  So, if you’re thinking of setting up a Reserve Investment Bond through an 'adviser', explicitly state you do not want to be paying trail commission.  They might ‘sell’ the idea to you that if you want them to continue to look after your investments, you have to pay trail commission…we’d urge you to think long and hard about this!

    Remember, unless you opt to pay your establishment charge in one lump sum on day one, if you cash-in your Reserve during the establishment charge period (of 5, 8 or 10 years), an early cash-in charge equal to the outstanding establishment charges will apply.

    How the annual policy charge structure for FPI’s Reserve Bond works

    If you don’t like the sound of the establishment charging structure, you can pay an annual amount every year for the lifetime of the policy instead.  The amount you pay is a percentage of either the value of the policy on the day the payment is due, or the total premium paid in – whichever is highest on that date. 

    You might assume it would always be based on the value of the policy, as surely it should grow, right?  Well, no, as the value of investments can rise or fall, and you may decide to withdraw some funds or partially encash your bond during its lifetime.  Then, the value of the policy would be lower than all the premiums ever paid in.  At which point, FPI would start basing your charges on the sum of all the premiums ever paid in – because that way, they get more money!

    The annual percentage you pay is in turn determined by the value of the total premiums you’ve paid into your Reserve.

    Total premium from

    Annual policy charge

    £100,000

    0.35%

    £500,000

    0.25%

    £1,000,000

    0.20%

    £1,500,000

    0.15%

     As stated, this charge is taken every single year.  And whether it is based on the value of the policy or the total premium paid is determined at the date the charge is due.

    Additional fees you will pay if you choose the annual charge structure for FPI’s Reserve Bond

    Unfortunately, the fees don’t stop with the annual policy charge.  There is a hefty initial charge which can either be taken on day one, or spread out quarterly over 5 years.  The initial charge is deducted from the General Transaction Account (GTA) in your policy currency, and it’s based on the amount of money you invest.  This means it doesn’t change even if the value of your investment does…so if you partially encash, it will still be based on the overall amount you invested.

    So, you either pay a flat 7% on day one…or, you pay 1.506% a year, split into quarterly payments, for 5 years.  Again, it’s not rocket science to see it’s ‘cheaper’ to opt for the up-front payment.  But, if you don’t fancy handing over 7% of your investment on day one, keep in mind that even if you encash the whole product early, FPI will still claw back this fee as an early cash-in charge.

    This initial charge will also become due on any additional premiums you pay.

    As above, there may be trail commission taken to pay your financial salesperson every year, if you sign up to this.  And then there is a quarterly administration charge payable, unless your initial premium is over £500,000 or currency equivalent, and then this fee is waivered.

    Currency

    Quarterly administration charge

    GBP

    99.50

    USD

    126

    AUD

    161.8

    CHF

    124.3

    EUR

    108.7

    HKD

    1,010

    JPY

    14,220

    SEK

    1,030

     Minimal additional premium if you opt for this charging structure is £10,000, or currency equivalent.

    In addition to your establishment or annual policy charge, the following charges may also apply:

    • Dealing charge
    • Asset exchange charge
    • Ad hoc charge
    • Interest on an overdrawn GTA
    • Inflation (FPI says: “Our appointed actuary sets the fixed sterling amounts once a year, 28 days before the end of December, in line with Isle of Man inflation. We may increase the charges above the rate of inflation if there are increases in our costs above inflation.”)
    • External fund charges
    • Investment adviser’s charges
    • Delivery and receipt charges
    • Safe custody charges
    • Stockbroker fees
    • Discretionary fund manager’s charges

    Discover the fees and charges you are exposed to

    To understand what these amount to in real financial terms annually, and the impact they’re having on your portfolio’s performance, we strongly recommend you take advantage of a free X-Ray Review™.

    It details everything you need to know – it’s quicker than getting a PhD in maths, which is about the only other way you’ll be able to decipher your fees!

    Free X-Ray Review™

    Benefits of a Reserve Investment Bond from Friends Provident International that you might have heard

    Investing in individual funds can be very time consuming and paperwork intensive, and so one of the many benefits that is often sold, is that in these days of ever tightening regulations to prevent money laundering, the Reserve has the advantage that once it is set up, there is no extra paperwork (other than dealing instructions) required to change investments or add new ones.  

    You also get a quarterly statement summarising all the constituent investments on one statement (where you can see the deduction of all the fees as well)!

    Another perceived benefit is that it can be easier for your heirs and beneficiaries to manage your estate when you die if all your main investments are under a single bond.

    We mentioned above that the integral life insurance element is not designed to provide real protection, it is added for 2 reasons:

    • It brings the investment under the protection of the Isle of Man government. The advantage of this is that if Friends Provident International Ltd were unable to meet their obligations to you, then the government should guarantee 90% of the value of your investment at that time.  Whether it really would be able to pay out is another matter.
    • It can provide tax advantages in some jurisdictions…however, this benefit is massively over-sold, especially to those in low or no tax jurisdictions like the UAE, where being able to defer tax with a bond is not a benefit needed.

    The tax advantages of the Reserve Investment Bond from Friends Provident International

    The tax advantages of the Reserve Investment Bond from Friends Provident International

    In the UK and some European countries, investments in offshore bonds give a gross rollup.  This means that apart from withholding tax deducted at source, they are not taxed on a yearly basis - but only when a taxable event takes place.  A taxable event could be redemption or the death of the bondholder.

    The switching of assets within a bond is not a tax event and therefore is a totally tax neutral activity.

    Another advantage that is sold heavily, and yet often not even applicable, is that bonds like these allow you to withdraw up to 5% a year of the capital put into the bond.  This 5% withdrawal is not included in your tax calculations.  This can continue for 20 years, or until the full capital deposited is withdrawn.

    In addition, if the full 5% is not used in any year, it can be carried forward to the following years.  So, if an investor withdraws nothing for 10 years they can take a one-off 50% (of capital) withdrawal followed by 5% a year for the next 10 years, or their withdrawal allowance could be increased to 10% for 10 years for example.

    Gains from life wrappers like the Reserve are not subject to capital gains tax - but they are taxed under special income tax rules in the UK.

    Another advantage is that almost any type of asset can be held in an offshore bond, apart from physical real estate.  However, it’s important to note that there may be some restrictions on what can be held in order to make the bond tax qualifying, depending on your country of tax residence.

    The Reserve Investment Bond is not tax efficient for everyone, and the full extent and impact of its fees are not always made apparent during the sales process.

    Friends Provident International Reserve Investment Bonds and QROPS or SIPPs

    Offshore investment bonds, like the FPI Reserve, are sometimes wrapped within a pension.  The pension is a tax wrapper, the bond is an investment platform (albeit another tax wrapper normally too), and this is sold as a solution for a flexible and tax effective way of managing retirement income…

    However, the FPI Reserve Bond should not be used within a QROPS or a SIPP, because when you start to drawdown your pension, the charges on the FPI Reserve Bond can remain based on the original investment, which means that charges will effectively rise pro rata as your capital decreases.  The effect is an erosion of your remaining capital at an exponential rate. 

    In conclusion, should you start, keep or encash a Friends Provident International Reserve Investment Bond?

    If your financial adviser works on a transparent up-front fee only basis, taking no commission from their recommendations, then the FPI Reserve Bond could be considered by those requiring a bond wrapper.

    However, it’s fair to say, in the majority of cases, the FPI Reserve Bond ends up being an expensive option when you compare it with a pure platform custodian plan. 

    Furthermore, the potential tax benefits are often not only outweighed by charges, but not even applicable in many cases.

    If you have or are considering purchasing a Friends Provident International Reserve Bond, make sure you understand your personal tax position today and what it could be in the future, and weigh up any benefits you believe you’re getting against the bond’s lack of flexibility, and high charges - which all too often are not explained fully, and can last up to 10 years (or for the lifetime of the bond).

    The FPI Reserve doesn’t offer you access to a full range of discounted funds, direct equities or passive funds to invest in - unless you seek outside funds or use a stockbroker…which can in turn incur more costs.

    If you want to know more, discuss your options, position or portfolio, contact us for a no obligation consultation with a chartered financial adviser, or request your free X-Ray Review™ today, and we’ll do everything we can to help you.

    An essential disclaimer - and your next steps...

    IMPORTANT NOTE:

    This guide aims to provide general information on the financial product set out above.  It is not intended as personal advice but as a short and simplified summary of a complex subject, and so please do not make any decisions based solely on the contents of this guide in isolation.  

    Whether or not a particular investment is appropriate for you will depend on many factors, including your individual needs, circumstances, approach to risk, and capacity for loss.

    For a personalised analysis of your FPI Reserve Investment Bond request a free portfolio X-Ray Review™ - it will highlight if you can cut costs, improve your returns and how to make the very most of your savings and investments.  It's free and no obligation.

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