Savings: Choppy waters when you venture offshore

Offshore investments, especially roll-up funds that can accumulate all returns tax-free, may appear attractive to UK investors.

More than 40 investment groups, including Guinness Flight Hambro, Commercial Union, Lloyds, Midland Bank, Mercury, Newton and Rothschilds, offer them.

But the tax breaks on PEPs and offshore investments are very different. Offshore funds can only defer tax until the investor is in a lower tax bracket on retirement. But returns have to be declared when the investment is cashed in. "I'd think carefully before using offshore investments for clients who are UK residents," warns John Edwards, consultant with the independent financial advisers Berry, Birch & Noble.

He is wary of them because returns are treated as income, since no use can be made of capital gains allowances. "If you are going to retire abroad and become an expatriate, then fine. If you are staying here, they are dangerous and the income tax liability can be huge," he says.

Edwards criticises the higher costs of offshore funds. "Providers have to take on the cost of setting up offshore," he says. "This is charged to the fund, so it isn't apparent. However, returns can be lower than for equivalent onshore investments."

Offshore funds can offer a wide investment range. Guinness Flight Hambro's International Accumulation Fund has 14 sub-funds offering investment in sterling, dollar and international bonds, as well as international and European equities. It offers cash funds in five currencies, which can be used as an alternative to ordinary deposit accounts.

- Juliet Oxborrow

Juliet Oxborrow is editor of `What PEP and Personal Finance' magazine.