The Pros and Cons of Offshore Banking

21 March 2019

For many, offshore baking is synonymous with backdoor deals, the super-rich and tax evasion, but the fact is that it’s a perfectly legal way to manage your finances more conveniently when living and working abroad. Offshore accounts make accessing your money more flexible for you, wherever you are in the world. This makes them perfect for expats who move around and travel a lot for work. Today, we look at some of the do’s and don’ts of offshore banking so you can decide for yourself.

 

What is It?

Although offshore banking used to exclusively refer to the British Channel Islands, the term now refers to those who bank in countries different to their own. Indeed, the Channel Islands are still a popular choice, but other countries such as Switzerland, Singapore and Germany (home to KfW, the safest bank in the world according to Global Finance). These countries and banks are chosen because they are usually found in areas seen to be politically and economically stable. Another big draw for many looking into offshore banking is that many institutions are found in countries with favourable tax laws.

 

The Pros

A major draw of offshore banking for many will be security. Knowing that your wealth is safe and secure can be a big weight off your shoulders, especially if you currently find yourself in a less economically or politically stable country. In fact, many counties over the years have frozen and seized assets in troubling times, which can, of course, be devastating. In these situations, having an offshore account instead of, or in addition to, your domestic one will give you peace of mind.

 

The number one reason so many people turn to offshore banking, and the reason it has a poor reputation, is that accounts can be opened in nations with “more favourable” taxation situations, and therefore save you money. Tax avoidance is illegal, but there are many situations where keeping some, if not all, of your earnings in an offshore account is perfectly legal and can lead to savings in the long term. There are some countries however, such as the USA, which tax their citizens on their worldwide income, regardless of where they work. For this reason, always make sure that you understand the relevant tax laws, and find a professional tax advisor who has experience handling money for those in your situation.

 

If you’re an expat that moves from one international assignment to another, then offshore banking can provide you with the flexibility you need. You don’t need to get used to and understand the local banking laws, when you can just use your existing offshore account. What’s more, depending on your chosen bank you can have access to accounts in multiple currencies, meaning that you can make payments in various global locations without occurring currency conversion fees.

 

Why Cons

The major barrier to obtaining an offshore account is that they often require a high minimum deposit. The figure varies widely from bank to bank and can depend on what type of account you wish to open, and whether the bank primarily caters for private or retail customers. Many offshore banks will also require a large minimum balance in your account at all times. There is a reason that offshore banking is primarily associated with the wealthy.

 

Unlike onshore banks, which usually provide a depositor compensation scheme to protect their customers in times of crisis, many offshore banks can be risky places to have your money if things do go south. Keep in mind that although your deposits may be covered up to a point, anything beyond this value may be at higher risk than funds kept in an onshore account.

 

It’s also worth remembering that if you have a large amount of money in an offshore account, this may actually make you a target for your government when it comes to tax time. Therefore, make sure you and your tax advisor have all your records straight when it comes to that time of the year so there are no financial discrepancies.

 

 

 

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