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 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.

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 the likes of Generali Worldwide’s Choice account (now known as Utmost International's Choice) 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.

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.

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.

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.

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.

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 X-Ray Review™ today, and we’ll do everything we can to help you.