Understanding offshore bank accounts

Whether you are working overseas permanently or temporarily, or if you are an expat on the move, offshore banking will play a key role in facilitating your time away. Despite its reputation for exclusivity, the offshore retail banking sector is accessible to just about everyone. You don’t have to be wealthy to participate. Minimum deposit levels are sometimes as low as £100.

Offshore accounts are found in three main finance centres - Guernsey, Jersey and the Isle of Man. These are the locations from which hundreds of thousands of expats choose to manage their money. The islands’ high streets house the subsidiaries of banks and building societies whose names are familiar to Brits and, of course, whose staff speak English.

However, offshore banking’s reputation recently took a battering when two Icelandic banks, whose offshore subsidiaries were based on the Isle of Man and Guernsey, collapsed, leaving their depositors severely out-of-pocket. This proved to be a somewhat overdue wake-up call to the financial services authorities on both islands, who have modified their depositor compensation schemes accordingly.

Now, as a depositor with a bank licensed on either island, you are guaranteed a compensation limit of £50,000 in the event of a bank’s failure - per bank invested. Always read the small print of a bank’s terms and conditions to make sure you don’t inadvertently place a further deposit with a second bank which shares the same ultimate owner as your first deposit-taker. This would disqualify you from your compensation rights to all but the first bank’s depositor protection scheme. Compensation schemes are important to achieve peace of mind. Jersey, alas, has yet to smell the coffee. This island has no depositor protection scheme in place.

So what can you expect from an offshore bank account? Both working and retired expats abroad will be looking for a service that will facilitate the transference of a salary or pension on a regular basis. Currency matters will be a significant factor for many. It might be that as an expat you’ll receive your salary in euros and be meeting regular sterling mortgage payments or a pension in sterling and need to convert to the local currency. Conversion rates/charges will be critical.

What is an offshore bank account?

In recent years, offshore banking has stepped out of the shadows of being all about money laundering and started being a great place for the average individual to invest their savings. Offshore banking is simply the act of banking with an institution outside of your country of residence.

The term “offshore” began as a description of banking from accounts located on the Channel Islands; however, now many countries have banking institutions that offer an international bank account. The majority of offshore banks are still located in the Channel Islands, as well as Swiss and Andorran banks. There are several benefits to opening an offshore savings account and now that there are more and more internationally known banks offering these accounts you no longer have to feel like you are banking with strangers.

Since government regulations differ, offshore banks may be located in a jurisdiction with fewer regulations than the account holder's home country. This results in lower overhead costs which are passed down to the account holders through higher interest rates. If the account holder resides in a politically and economically unstable jurisdiction, then offshore savings accounts can provide a stable environment to save and grow assets. It is important to note here, however, that there may be a greater risk of loss should that economy falter. Not all governments require account insurance such as the FDIC required in the United States.

Some offshore banks offer services that are not available from a domestic bank such as anonymous bank accounts or additional investment opportunities. While it is illegal for United States expatriates to not report interest income on their US income taxes there are some depositors that can benefit from the different tax regulations regarding an offshore bank account. Interest is generally paid without any tax deductions with offshore banking. Having an offshore account is not illegal, only when the account holder fails to report his or her savings income according to their countries requirements does it become an illegal activity.

If you are planning to be living abroad, or even just traveling extensively, it is beneficial to have an offshore savings account. Offshore banks work with multiple currencies. Access to your money would be more widely available and easily exchanged into the currency needed. This also provides a unique opportunity for account holders to take advantage of currency exchange rate fluctuations.

There was a time when opening an offshore account required a large initial deposit. This is no longer the case. The internet has created an avenue for opening offshore accounts that make it even easier for the average individual to open and manage an offshore savings account. There is no need to travel abroad to open accounts. No longer are the advantages of offshore banking reserved for the wealthy. Even if you are not an expatriate or a world traveler, offshore savings accounts can present a unique addition to your investment portfolio.