You may not realise that offshore investments in these places can be useful. You don't need to be a millionaire. Offshore investment is simply investment outside the jurisdiction of the UK. Some of these locations have investor protection regimes deemed equal to the UK.
Many of the best-known institutions have set up offshore operations to take advantage of the more favourable tax regimes.
Andrew Meeson, international financial planning adviser at Clerical Medical, says there are two classes of people in the UK who can benefit in different ways from offshore investment.
"The first is someone who is not domiciled but resident in the UK, which basically means they live here now but their permanent residence and their roots are abroad."
Examples of a non-domiciled UK resident could be an American lawyer seconded to a London office, or one of the growing number of foreign sports professionals living in this country.
These individuals can benefit greatly from offshore bank accounts, as Mr Meeson explains. "If they have a bank account paying annual interest of pounds 10,000 a year in the UK a non-domiciled person would pay pounds 4,000 a year in tax, assuming they are a higher-rate taxpayer.
"But if the bank account is in Jersey they will pay no tax on it unless and until they bring the interest into the UK, so their investment rolls up free of tax. The interest may then be turned into capital over time and they can bring the money onshore without paying tax on it at all."
For those of us domiciled in the UK this approach is no use as every penny of offshore bank interest, wherever in the world it is earned, is taxable as part of our annual income by the Inland Revenue. However, there are other ways to make use of offshore accounts.
There are simple offshore savings accounts, which operate in the same way as a normal bank or building society account. The interest rolls up gross (before tax). Almost all the well-known UK based institutions have offshore branches. Current rates start at about 4.5 per cent gross on pounds 5,000. First Active Bank is paying 6.25 per cent on pounds 10,000 or more in its instant access offshore account. You pay tax when you bring the money back to the UK, so you can time your investments in order to minimise a tax bill.
Offshore insurance bonds have been popular with investors over the years. These are classified as a non-income producing investment although withdrawals of up to 5 per cent a year are permitted, free of income tax.
The 5 per cent withdrawals operate on a cumulative basis so if no income is taken in the first year, investors can take 10 per cent in year two. Income received in the bonds rolls up gross, compared with the equivalent onshore bonds, where income is received net of tax.
However, onshore bonds obtain tax relief on their expenses, and you don't get that offshore so the costs to investors are higher.
Scottish Life International marketing manager, David Ferguson, says: "The benefits of offshore gross roll-up more than outweigh onshore tax relief if the investment is held for more than six or seven years."
The minimum investment in an offshore bond is normally pounds 15,000 so investors need to be able to lock away large sums of money for a considerable period of time. The drawback to this type of investment is that tax will need to be paid when the money is brought back onshore.
Even so, figures show the offshore bond can still produce better returns than its onshore rival after tax is paid when the bond is cashed in. Clerical Medical International calculations show a higher rate taxpayer investing pounds 50,000 offshore for 20 years would gain pounds 14,785 after tax, assuming annual growth of 6 per cent and no withdrawals.
Mr Meeson points out that UK taxpayers can control when they bring the money onshore. If they save offshore while working, they could bring in the money when they have retired and perhaps moved from a higher to a lower tax bracket.
You may also read about personal portfolio bonds and offshore trusts. Personal portfolio bonds allow investors to hold a basket of unit trusts and investment trusts within the bond structure, but the minimum investment is usually about pounds 50,000. It is possible to transfer an existing investment portfolio into a personal portfolio bond held offshore but you will be liable to capital gains tax (CGT) on any gains when you make the transfer. As you can choose when to bring the money back to the UK, this is a very popular investment.
Offshore trusts had a moment in the spotlight recently when Geoffrey Robinson, the former Paymaster-General, was found to be the beneficiary of an offshore trust after he had announced Tessas and PEPs were to be scrapped for UK savers.
Offshore trusts are geared towards wealthy individuals who want to pass on their money to beneficiaries. It is better to make the most of tax breaks from PEPs, Tessas, ISAs and other onshore savings products before you start to move your investments offshore.
n First Active Bank, 01481 710400. For guidance on offshore investments consult an independent financial adviser. IFA Promotions, on 0117 971 1177, can give you the names of local IFAs.
n Matthew Craig is deputy editor of `Pensions Week'.Reuse content