This week marks Global Money Week, with schools and other institutions across the globe doing their part for financial education, including in the UK. This is particularly important as recent research has found that a significant percentage of English and Northern Irish adults are lacking financial skills.
Financial skills deficit
The scientific study, which looked at financial knowledge and skills across the world, found that a third of adults in England could not work out how much change they should receive (source: A. Bhutoria, J. Jerrim, A. Vignoles, 2018. The financial skills of adults across the world: New estimates from PIAAC). In other measures of financial knowledge, such as calculating the cost of goods according to a certain unit, English and Northern Irish adults also ended up scoring below average.
This is worrying news, and could explain why a separate study from financial education charity MyBnk sees 54% of parents call for schools to spend more time teaching kids about personal finance. Fifty-six percent would even choose to cut time from the national curriculum to teach children about budgeting and how to avoid debt.
With the Financial Conduct Authority warning that young people are building up an alarming amount of debt, this is certainly a group that could use a better understanding of finance. To help young people get to grips with their own money management a bit better, money manager Plum has compiled a list of tips:
1. Save yourself from yourself. It's easy to get tempted by advertisements or your friends to spend more than you intend. To make sure you can still pay your bills, Plum suggests setting aside whatever you need to get through the week/month, in a separate easy access account for instance, so you can't get tempted into spending too much.
2. Avoid your overdraft. It's easy to get tempted into using your current account's overdraft, with banks often giving students special deals that reduce the associated fees. However, it's not a healthy habit to get into. If you absolutely can't resist the urge to dip into the red, consider switching to a special student account that offers free overdrafts, or even a basic account that doesn't have an overdraft facility.
3. Track your spending. If you keep an eye on how much you're spending and what on, even just by logging into your online bank account once a week, you should be able to see what you're spending too much money on. This includes things such as subscriptions that you're not getting anything out of, which you may be better off cancelling.
4. Use credit sparingly. Aside from your overdraft, you may be tempted to get a credit card to pay for things. Always remember that you'll need to keep up with minimum repayments and pay back the whole debt eventually, so if you really must have one, make sure the card comes with low or 0% interest and no management fees. Our Best Buys may be a good place to start.
Offshore savings accounts allow you to save in different currencies. And, contrary to popular belief, you don’t have to be hugely wealthy to take advantage of them.
Offshore savings accounts may have a high profile thanks to scandals involving famous names using them to avoid paying tax – but the reality is that account holders do still need to pay tax. In truth, there’s little point opening an offshore account in the hope of dodging tax because you are generally liable for tax on the interest you earn in the same way you would be in the UK.
However, there are a number of other benefits to holding an offshore savings account. Read on to find out if this could be the right savings account for you.
What is an offshore savings account?
Offshore accounts are savings accounts located outside the holder’s country of residence, in this case the UK.
They can be used to stash euros and dollars (as well as other currencies), which can be handy if your salary is not paid in sterling. Most accounts can be opened by anyone over the age of 18, although some are only available to those living outside the UK.
While it is often necessary to invest at least £5,000 or £10,000 to open an offshore savings account, others require a minimum deposit of just £1.
Offered by many high street banks and building societies as well as private banks, most of the offshore accounts available to UK savers are based in the Channel Islands or the Isle of Man (which have separate tax jurisdictions) and, as such, can be operated by post, phone or online.
Is an offshore account for me?
Offshore accounts are not for everyone, but they are useful if you work or live abroad, regularly travel overseas or hope to retire to another country.
The ability to save in the currency in which you are paid or expect to fund your retirement, for example, removes the risk of losing out on exchange rate fluctuations.
Some people actually use offshore accounts to ‘play’ exchange rates in a bid to boost their returns by converting the cash back into pounds when sterling is weak (as well as deferring the tax bill on their returns – see below for more details).
However, you could lose out if you have to change your savings back to sterling when the exchange rate is poor.
Even though some offshore accounts can be opened with £1, the high operating charges – withdrawal fees can be up to £25 – make them less attractive to smaller savers or those needing regular access to their money.
What types of offshore account are there?
Offshore accounts are available with both variable and fixed interest rates. Variable rate accounts often come with introductory bonuses and offer relatively easy access to your money, while those paying fixed rates generally require you to lock away your savings for between one and five years – just the same as standard savings accounts.
How do I open an offshore account?
Opening an offshore account is much easier than it might seem, providing you meet the minimum requirements set by the bank.
Once you’ve applied online or in-branch, you’ll need to supply ID to prove your identity just like you’d need to with any other account. Depending on the account, you may need to take extra steps to verify your identity.
There are a number of strict checks in place to prevent offshore accounts falling foul of criminals who want to launder money, evade tax or engage in other illegal acts. You could be asked about the nature of the transactions in your account – or your UK bank could be asked for financial reference documents.
If your application is successful, you’ll be able to make your initial deposit and begin using the account.
What are the tax implications?
It used to be the case that standard savings accounts would pay interest only after tax had been deducted at the basic rate of 20%, while offshore savings accounts paid interest without deducting tax. Since April 2016, both standard and offshore savings accounts pay interest without any tax deducted.
This is due to the introduction of the new Personal Savings Allowance. Basic-rate taxpayers have no tax to pay on the first £1,000 of interest, and higher-rate taxpayers will have no tax to pay on the first £500. But it’s important to know that interest earned above these thresholds will still be taxable, so you can't use offshore accounts to avoid paying tax.
You are obliged to declare any savings interest earned to HM Revenue and Customs (HMRC) on a self-assessment tax form and to pay tax on it in due course. If you don’t, you could face a big fine – plus interest on whatever you owe.
However, sophisticated savers can take advantage of the delay between earning interest and paying tax because they can keep the extra cash in their accounts for longer, thus boosting their returns by earning more interest.
Is my money safe in an offshore account?
Savers with money in a Financial Conduct Authority (FCA) authorized bank or building society in the UK are protected by the Financial Services Compensation Scheme (FSCS), which covers the first £85,000 (as of January 2017) held with each banking institution.
However, money held in an offshore savings account is not protected in the same way – even if a UK high street bank operates the offshore account you choose.
Before opening an account, you should therefore check with your provider to see whether your money will be protected by a different compensation scheme.
Banks licensed by the Guernsey Financial Services Commission, for example, are covered by the Guernsey Banking Deposit Compensation Scheme, which protects the first £50,000 per person, per bank. The Isle of Man's Depositors' Compensation Scheme, meanwhile, also protects up to £50,000 per individual saver.
Offshore bank accounts may sound great in theory, but make sure you’re aware of all the potential problems and pitfalls attached.
The mere mention of the words “offshore bank account” is enough to conjure up thoughts of tax evasion, unreported income and a wide range of other dodgy dealings. The bad reputation of offshore accounts was further reinforced by the Panama Papers scandal of early 2016, which involved many high-profile world figures and led to the offshore accounts of 800 wealthy Australians coming under investigation by the Australian Taxation Office (ATO).
An offshore bank account is one that is opened and held in another country. Offshore accounts are usually held in countries with minimal tax rates or other financial benefits, but there are plenty of other reasons why you might need to open an offshore account. For example, maybe you need fast access to funds to manage an overseas investment property, or perhaps to pay for your child’s education at an overseas financial institution.
Banks in countries all around the world offer accounts to attract overseas customers; some major Australian banks have dedicated units that deal with foreign customers. Our guide to offshore accounts explains how you can compare your options and choose the right account for you.
2. They’re legal
Yes, you read that right – there’s nothing illegal about owning an offshore bank account. But if you don’t declare the income and earnings from that account in your annual tax return, you will find yourself on the wrong side of the law.
Australian residents are taxed on their worldwide income, which includes the money they earn from overseas assets, rental properties, and of course, bank accounts. Any income earned from an offshore account must be declared in your Australian tax return, and you can claim a foreign income tax offset in Australia if you’ve already paid tax on your earnings in another country.
3. Benefits of offshore accounts
The most obvious reason someone might want to set up an offshore bank account is to pay less tax, but there are plenty of other potential benefits offered by these accounts:
· The ability to earn more interest.
· Access to foreign investments.
· Access to foreign banking products and services.
· Greater privacy, for example, a business looking to protect its trade secrets.
· For large, well-known businesses, offshore accounts can protect against the risk of overcharging by suppliers.
4. Opening an account and making deposits
The process for opening an offshore bank account will vary depending on the financial institution. In most cases you will need to provide your passport, a bank statement and a signed declaration about the source of the funds being used to open your account. Deposits can be made by international money transfer.
5. Harsh penalties apply to non-declaration
For some, the temptation to simply not declare their offshore accounts and therefore avoid paying tax is too great. In other circumstances, such as for some of the high-profile figures caught up in the Panama Papers Scandal, offshore accounts are used to finance illegal activity or manage the unlawful income obtained from such activities, which is hardly something the average taxpayer wants to include on their next tax return.
Whatever the case may be, failing to declare your offshore account to the ATO is a big no-no and harsh penalties apply. Penalties start at around 75 per cent of the unpaid tax on those foreign earnings, plus interest, and there is always the potential for further investigation and prosecution by the Australian Federal Police or the Department of Public Prosecutions.
6. Tax havens
What do you get when you combine low tax rates, a stable political and economic climate, and a local regime that’s reluctant to disclose any information to foreign tax authorities? You get a tax haven, a country that attracts money from wealthy people and large corporations all around the world that are looking to reduce their tax bill any way they can. The Seychelles, the Cayman Islands, the British Virgin Islands, Switzerland and, until recently, Panama are all attractive destinations for money from all corners of the globe.
By setting up a bank account in a country that does not have an agreement to exchange financial information with Australia, an Australian taxpayer could theoretically avoid being taxed on the money in that account. In more complex cases, a dodgy taxpayer could set up a foreign shell company to conceal the true owner of money or other assets and make it even more difficult for the ATO to catch up with them.
7. The ATO and undisclosed accounts
In recent years, the ATO has dedicated plenty of time and resources to hunting down tax evaders all over the world, as people like Paul Hogan can testify. It’s also committed an increasing amount of resources to targeting wealthy Australians with undeclared income in offshore accounts, establishing agreements with governments and major financial institutions around the world.
From March through to December 2014, the ATO ran Project DO IT (Declare Offshore Income Today), which allowed Australians holding illegal money offshore to declare those funds and receive immunity from prosecution. These tax dodgers also had the opportunity to avoid many of the significant financial penalties normally associated with bringing this income into the Australian tax system, and as a result it’s estimated that $600 million in income and $4 billion of assets were disclosed.
8. Panama Papers investigations
The Panama Papers data leak contained information about the financial dealings of more than 214,000 financial entities connected to people in over 200 jurisdictions worldwide, including around 800 Australians. As a result, the ATO launched an investigation into the activities of those 800 people accused of hiding their wealth.
Around the world, many high-profile figures were implicated in the scandal including Vladimir Putin, David Cameron, the Prime Ministers of Iceland and Pakistan, and even kung fu film star Jackie Chan.
9. Voluntary disclosure
If you have an undeclared offshore bank account, the sooner you disclose it to the ATO the better. Coming forward before the ATO comes after you can significantly reduce the penalties imposed and also the risk of prosecution. However, you should always seek legal and tax advice from an expert, for example your accountant or lawyer, before making a voluntary disclosure.
10. Never hesitate to get professional advice
Although this article is only a very general guide to offshore bank accounts, you will have figured out by now that opening and maintaining an offshore account can be a complicated undertaking. There are many laws and regulations you need to abide by, not to mention myriad tax implications to consider.
With this in mind, it’s recommended that you get some professional financial advice before opening an offshore bank account. This will help you work out whether an offshore account is right for you, and what you need to do to ensure that everything is legal and above board.