Offshore deposit accounts should form the bedrock of any expat’s portfolio: not because they might beat equity or bond markets – they probably won’t – but because they are a safe, liquid pool of cash, says James Featherstone

Nobody particularly needs to be told how stock markets can bomb. Equally nobody needs to have it pointed out that the ‘under-the-mattress’ strategy of financial planning leaves something to be desired.

The astute expatriate, then, will have his or her savings sitting pretty in an offshore building society or high-interest cheque account. Unfortunately, due to historically low interest rates, most deposit accounts – onshore or off – don’t pay out a heck of a lot at the moment. Average savings rates for sterling accounts hover around the 4–5 per cent mark. Few accounts at the moment pay above 5.5 per cent. So making pots of money is not on offer.

Even so, deposit accounts are safe and secure. One alternative, putting your money into stock-market-linked bonds or funds, with a capital guarantee, sounds great. But there are two main drawbacks: one is that they usually have a longer term-length than deposit accounts. That means you will have to tie your money up to draw down the full benefits. Nobody would be advised to do that. The other problem is that most of them guarantee your initial capital, but do not guarantee any returns. If the markets you are invested in do not perform and you only get your initial stake back, in effect that means you have lost 4–5 per cent a year. You could have put the money in a deposit account and had that return guaranteed.

So with any financial decision of this sort, the most important thing to do is to ask yourself those basic questions of what risk you are prepared to run for what return, and with what codicils attached.

Equity markets do, historically, outperform in the long run (although it is worth dealing with one canard: equity markets have not returned 11 per cent on average per year since whenever it is meant to be – 1911 is the usual date given: the true figure is nearer to 7 per cent). Savings rates, by contrast, have historically returned around the 6 per cent mark. You might be able to find something paying 6 per cent at the moment, but only for a very high initial deposit and probably with a term attached.

Nevertheless, after a basic international current account, offshore deposit accounts should form the basis of your financial life. Any growth above inflation should be seen as beneficial, but not integral.

Most IFAs, when you sit down with them, will tell you one thing immediately: move surplus cash offshore if you are going to be an expatriate for more than a standard tax year (185 days in any one tax year is the Inland Revenue rule).

Graham Jacobs of UK tax experts Wilfred T Fry says, “There are a couple of good reasons to move your spare cash offshore. First, in the split year of departure [you won’t usually be moving abroad on the exact start of the tax year] UK interest paid after you leave will be treated as part of your taxable income, whereas offshore interest will not.”

“Second, unless you complete a ‘not ordinarily resident’ declaration, UK interest will continue to be paid to you net of tax. And even if a declaration is submitted, the gross interest will absorb allowances that would otherwise be available to set against other taxable income (for example rental profits).”

There is another reason why offshore deposits should be the thing you concentrate on first. Any financial advisor worth his salt will tell you to do nothing about setting up long-term investments in the first six months of moving abroad. Your work contract might not work out, in which case setting up complex offshore structures will merely be a pain to unravel when you have to move back home. That six-month period gives you time to think. Stick spare money into offshore deposit accounts in the meantime.

The main players in the offshore deposit-taking business are to be found in the usual places: Jersey, Guernsey and the Isle of Man. There is no difference between the three jurisdictions in terms of tax – that’s a matter for you and the Inland Revenue – although savings income will be caught under the EU Savings Directive from June this year. Interest paid on offshore deposit accounts will have 15 per cent sliced off it and given to the Inland Revenue. But – and this is a key point because many expats don’t yet understand what the concept of the Savings Directive is – only if you are meant to be paying tax in the UK or another EU country covered by the rules.

Currency is another thing to think about. Sterling, dollar and euro accounts all pay out differing amounts, with sterling currently paying the highest rates. (If you want to see truly poor rates, check out, if you can find one, a Japanese yen account.)

The higher the interest rate, the more restrictions there will be usually be on a deposit account. However, it is eminently worth taking the time to compare different banks’ and building societies’ identical accounts because they often differ in the amount of interest they pay. In particular – and without naming names – international banks often offer pitiable rates of interest on their deposit accounts. The reason is that they are simply not bothered about that part of the business. All other things being equal, you should look to a building society for your deposits. That’s what they do for a living.

One thing to keep a look out for is new deals from your deposit-taker. Building societies bring on-stream new accounts all the time, but often don’t tell you and don’t automatically switch you to the higher-paying account. A survey by MoneyFacts found that the majority of building societies left customers stuck in old accounts when the new ones became available.

Finally, be sure to look carefully at any restrictions on these accounts. Be sure that they fit in with your general financial needs. If you need to send regular payments back to the UK for school fees, for example, do not tie the bulk of your money up in accounts that impose penalties for the necessary withdrawals.