Living in Japan - Offshore Insurance Wrapper?

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Topic Author
twoyen
Posts: 60
Joined: Fri Nov 22, 2013 8:42 am

Living in Japan - Offshore Insurance Wrapper?

Post by twoyen »

Hi All,

Managed to find my way here after looking into setting up a retirement fund and investing in general.
My knowledge on these things is very limited, but would very much appreciate any advice or knowledge you could give me.

A bit of background info:

I’m a NZer living in Japan and will be for the foreseeable future (at least 5 years, or possibly until retirement).

I have talked with a financial advisor over here and they recommend I invest in an offshore insurance wrapper. In case it is relevant, we both have life insurance which we are happy with.
A few of my concerns about this investment vehicle is that we would have sign up for a fixed term (10 - 30 years) and there are fees to cash out early. We would also pay the advisors a percentage of our investments for the period of investment.
However, the sound of the insurance wrapper being tax free, a mobile investment so we can access and continue with it if we were to move back to NZ, and that we can make monthly contributions in yen by credit card and therefore no need to pay for overseas transfers, is appealing.

While I have been brewing over this, I have signed up for a NISA account which is a non-taxable brokerage account.
http://www.morganmckinley.co.jp/en/arti ... r-not-nisa

According to the article this sounds similar to the UK ISA system. If this is the way to go for now, I will probably max this out (10,000 USD per year for 5 years). There is also the option of starting up one of these in her name too.

The company I have signed up with have around 150 international ETF funds (including vanguard and iShares etc) to choose from so should be able to select a few decent ones from there. My concerns are that this is through a Japanese institute and can only fund this while living in Japan. Seeing as it is only possible to do this for 5 years, would something like an insurance wrapper investment be something that we should start up simultaneously or perhaps direct all of our investments into?

Also wondering if there are any other investments that can be made while living overseas?

Really appreciate you taking the time to read through this.

Twoyen
Last edited by twoyen on Thu Dec 12, 2013 9:30 pm, edited 4 times in total.
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cowboyinasia
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Location: Seattle metro

Re: Living in Japan - Offshore Insurance Wrapper?

Post by cowboyinasia »

Hi. I've no idea about an insurance wrapper.

But I think you should look into overseas investments. I'm a Yankee lived in Japan a while and they didn't tax my overseas earnings, until after the fifth year. Not sure what it means from your wife's standpoint though.

Good luck buying a house or flat. My wife and I looked into that. Between the traditionally low quality of construction, the stagnant economy, and the falling population, the issue seemed to be finding a house where we would not lose very much money if we had to sell again. I left Japan a couple years ago and am VERY happy I didn't buy a house there.

Still, we love our years there greatly.
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cowboyinasia
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Re: Living in Japan - Offshore Insurance Wrapper?

Post by cowboyinasia »

Just re-read your post. I'd be very wary of investing by credit cards. I lived overseas in a few places so had some experience wiring money. Credit cards are probably expensive in fees and exchange rate.

Good on ya looking for a good way to safe and invest for the future.
Topic Author
twoyen
Posts: 60
Joined: Fri Nov 22, 2013 8:42 am

Re: Living in Japan - Offshore Insurance Wrapper?

Post by twoyen »

Hi Cowboyinasia,

Thanks for your reply.
Yeah, I've been in Japan 8 years total now, so any investments I make will be taxed. Bit of a bummer, but dems da rules.
The NISA account sounds like a good way to get around all of this, but as mentioned not quite sure what to do after the 5 years.

In reference to purchasing a house, we are only really thinking of purchasing back in New Zealand at the mo. I agree with what you said about houses in Japan; they are definitely not built to last.

Thanks again for the input. Will also see what options there are without using credit cards and that.
Were you investing through a broker account you had already set up back in the states when you were overseas?

p.s. I've edited my original post to include some more info about the insurance wrapper (but probably wont really find out most of the info unless I actually commit to it).
bpp
Posts: 2017
Joined: Mon Feb 26, 2007 11:35 am
Location: Japan

Re: Living in Japan - Offshore Insurance Wrapper?

Post by bpp »

Hi twoyen,

My first inclination is to recommend staying far, far away from the insurance wrapper, or indeed, anything with the word "wrapper" in it, which basically just means extra fees.
The only advantage there may be to it is a small tax deduction if it is a Japan-domiciled insurance vehicle -- and even there, any tax savings you might get will be more than eaten up in excess fees. Since this is an offshore vehicle, I doubt you'd even get that tax break.

The NISA is clearly the way to go for the first 1,000,000 yen per year for both you and the wife. I wouldn't worry about what happens after 5 years yet -- there could easily be a change in the law by then to extend the amount one can have invested, for example. But even if not, and for any extra amounts you may be able to invest above 1,000,000 yen/year now, I would recommend going with a discount broker that handles foreign ETFs, like SBI, Rakuten, Monex, or one of the slightly-less discount, but bigger and more established brokerages like SMBC Nikko, Nomura or Daiwa.

Where did you open the NISA, by the way? What are the fees like there?

Add:
Have you seen the wiki page here on investing in Japan?
http://www.bogleheads.org/wiki/Investing_in_Japan

Also, this thread may be of reference on tax considerations for investments in (and offshore from) Japan:
http://www.bogleheads.org/forum/viewtop ... 2&t=111555
Topic Author
twoyen
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Joined: Fri Nov 22, 2013 8:42 am

Re: Living in Japan - Offshore Insurance Wrapper?

Post by twoyen »

Hi bpp,

Wow, thanks for all the info, this is great. I will study through all of the links you have provided.
Also, I think you are right with sticking with the NISA for now. 1 mil JPY a year investment is definitely more than enough as starters, and if we also start up one for my wife, we can double that, so we'll stay with this for now and will open up new accounts as we need to.

Are you also thinking to use a NISA account?
I have signed up with SBI. From what I could see they seemed to have a reasonable, if not larger selection, compared to Fidelity or Rakuten and some other brokers available in Japan. The fees also seem more favourable with SBI. It actually looks like for the first year of NISA it will be free of charge to buy foreign ETFs and stocks etc!! Seems to be a win all round with no capital gains tax :D
https://www.sbisec.co.jp/ETGate/?_Contr ... &getFlg=on

Do you invest in many Japanese funds or are you mostly focusing on investments back in the US?
Any kind of ETFs or mutual funds you would recommend for a beginner to get involved with to start?
traineeinvestor
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Location: Hong Kong
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Re: Living in Japan - Offshore Insurance Wrapper?

Post by traineeinvestor »

Greetings from another expat Kiwi.

They sell those insurance wrappers in HK too (and lots of other places).

Dump anyone who "advises" you to sign up for one of these things. The key features are (i) an extra layer of fees (ii) usually a commitment on your part to pay in for a few years (iii) exit costs. Unless there is a very significant tax benefit which you cannot get elsewhere, there is nothing in these products that you cannot do yourself at lower cost. I would also have huge reservations about some of the statements they are making - the last time I looked at one of these products, they emphasised that there were no charges for switching between funds but completely failed to mention the considerable bid ask spread every time you sold one fund to buy another.

I have been told that the wrappers offer no benefits under NZ tax law and will not shelter you from a look through for the purposes of NZ's tax on offshore investments (Note: this advice was taken a few years ago when the current tax regime was just being introduced so may not necessarily be up-to-date.)
bpp
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Location: Japan

Re: Living in Japan - Offshore Insurance Wrapper?

Post by bpp »

twoyen wrote:Are you also thinking to use a NISA account?
I have signed up with SBI. From what I could see they seemed to have a reasonable, if not larger selection, compared to Fidelity or Rakuten and some other brokers available in Japan. The fees also seem more favourable with SBI. It actually looks like for the first year of NISA it will be free of charge to buy foreign ETFs and stocks etc!! Seems to be a win all round with no capital gains tax :D
https://www.sbisec.co.jp/ETGate/?_Contr ... &getFlg=on

Do you invest in many Japanese funds or are you mostly focusing on investments back in the US?
Any kind of ETFs or mutual funds you would recommend for a beginner to get involved with to start?
I am planning to open a NISA. I think SBI is a very good choice for you. Being a US citizen, they won't let me buy US-domiciled ETFs, so I have to use the more expensive brokers, like Nomura and SMBC Nikko. But for you, there would be no such problem.

For US tax reasons I avoid Japan-domiciled funds, using US ones (Vanguard, iShares, etc.) through the above brokers. These reasons would not apply to you, though the Vanguard and iShares ETFs are hard to beat in any case.

For your stocks, since you want to be 90% non-Japan, the obvious first choice would be Vanguard Total World stock index fund, VT.
That is also what I use to get non-Japan exposure. For the Japanese part of my portfolio (I weight 50/50 Japan/non-Japan), I make my own passive portfolio of individual stocks.

I also split my bonds 50/50 Japan/non-Japan, unhedged, though most folks around here would recommend keeping bonds completely domestic, or at least hedged into domestic currency. You'll have to think about what makes sense for you, especially since you indicate uncertainty as to where you will be in the long-term future. But again, there are some good ETFs for non-Japan bonds (BND, IGOV, etc.). For Japanese bonds (beyond what is contained in IGOV), I might suggest looking into Japanese savings bonds, 個人向け国債.
Grt2bOutdoors
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Re: Living in Japan - Offshore Insurance Wrapper?

Post by Grt2bOutdoors »

The only one on the winning side of the investment will be the broker or financial advisor. Stay far away from those trying to sell you insurance.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Karamatsu
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Re: Living in Japan - Offshore Insurance Wrapper?

Post by Karamatsu »

It's a bit off-topic but maybe we should start a NISA thread since January would probably be the time to open one if we're going to. I've been wary of them precisely because they touted so heavily. Nothing like this happens unless the people doing it see significant profit potential, or some other benefit. I wonder if the idea is just to tie up cash so that the banks and institutions can use it for policy reasons?

And then, for a US taxpayer (and so, even farther off-topic) it's all kind of moot... the IRS will tax gains in the account even if Japan doesn't, and we can't use Japanese funds, ETFs, or J-REITS due to the PFIC rules. I wonder if there is any residual advantage? Maybe if we can use US-domiciled funds, though... Hmmm... Have you (bpp) had any difficulties buying US-domiciled funds through your JP broker? I seem to remember Nomura handled tax reporting very well. Not sure about Nikko.

For the OP just be aware of the tax implications of any given investment in both countries, and how the tax rules will fit together (or not). It can get very complex, so keeping things simple is a big virtue.
bpp
Posts: 2017
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Location: Japan

Re: Living in Japan - Offshore Insurance Wrapper?

Post by bpp »

Karamatsu wrote:It's a bit off-topic but maybe we should start a NISA thread since January would probably be the time to open one if we're going to. I've been wary of them precisely because they touted so heavily. Nothing like this happens unless the people doing it see significant profit potential, or some other benefit. I wonder if the idea is just to tie up cash so that the banks and institutions can use it for policy reasons?
A NISA thread probably makes sense. Or discussion could be appended to the Japanese tax thread: http://www.bogleheads.org/forum/viewtop ... 2&t=111555

That said, I will be lazy and reply here first.

The heavy promotion of NISA accounts by brokerages makes sense to me, given that once one opens a NISA account at one place, one is locked into that brokerage for the next 4 years. By which time inertia will probably set in. So it is important for brokerages to sign up as many new customers as possible right now.

One strategic issue with the NISA that occurs to me is that with such a short tax-free period, 5 years, one really can't count on capital gains. And if there is a loss, the cost basis is set to the new, lower value at the end of the 5 years, so there is some risk of actually increasing one's eventual tax bill. So it would seem to make sense to load up the NISA with low-volatility high-dividend payers, so one at least gets the dividends tax-free for 5 years. (J-REITS would be perfect for this -- except for US taxpayers, as you note below.)
And then, for a US taxpayer (and so, even farther off-topic) it's all kind of moot... the IRS will tax gains in the account even if Japan doesn't, and we can't use Japanese funds, ETFs, or J-REITS due to the PFIC rules. I wonder if there is any residual advantage?
If one's effective US tax rate on the investments in the NISA is lower than the Japanese tax rate of 20%, then there should be some advantage anyway. Even if not, only having to calculate capital gains in one currency would eliminate the double taxation that would otherwise occur due to currency fluctuations. (That is, a capital gain or loss as calculated in yen will always be different than that calculated in dollars when the exchange rate changes between purchase and sale, so foreign tax credits can never really eliminate double taxation on capital gains.)
Maybe if we can use US-domiciled funds, though...
Yes, and individual stocks and bonds should also be ok.
Hmmm... Have you (bpp) had any difficulties buying US-domiciled funds through your JP broker? I seem to remember Nomura handled tax reporting very well. Not sure about Nikko.
No difficulty buying US-domiciled ETFs through either SMBC Nikko or Nomura, though only Nomura handled the US taxes and paperwork correctly. SMBC Nikko treated me like a non-resident alien for US taxes (despite knowing I am a US citizen), which meant a) they automatically withheld US tax on dividends, which they should not have done, and b) they didn't ask me for a W-9, which they should have done. Nomura handles this all correctly, and their withholding agent sends me a 1099 for my US ETFs.

Unfortunately, Nomura does not offer foreign ETFs in its NISA, only Japanese stocks. So more limited in that respect than other brokerages.
For the OP just be aware of the tax implications of any given investment in both countries, and how the tax rules will fit together (or not). It can get very complex, so keeping things simple is a big virtue.
I think for the OP, since New Zealand does not tax its non-resident citizens, then as long as he is in Japan the NISA is definitely a winner for him. I can't really see any down side for him. If he does move back to NZ some day, then I imagine the NISA will just look like an ordinary taxable account to the NZ tax authorities. (With the caveat that I know nothing about NZ taxes!) He can always cash out when he leaves if that is not the case -- actually, would probably have to, if he gives up residency in Japan: http://faq.sbisec.co.jp/EokpControl?&ti ... ent=FE0006
Topic Author
twoyen
Posts: 60
Joined: Fri Nov 22, 2013 8:42 am

Re: Living in Japan - Offshore Insurance Wrapper?

Post by twoyen »

Thanks everyone for all of the input on this. I am now confident that the NISA account will be more than enough for our investment needs for near future. Now just have to break the news to the advisers.

SBI emailed me today to say my brokerage account is now set up so very excited to get this all going. I have around a month to make my decisions for my first investment with my new friend NISA. Hope my wife doesnt get too jealous.
bpp wrote: For your stocks, since you want to be 90% non-Japan, the obvious first choice would be Vanguard Total World stock index fund, VT.
That is also what I use to get non-Japan exposure. For the Japanese part of my portfolio (I weight 50/50 Japan/non-Japan), I make my own passive portfolio of individual stocks.
.

Perhaps a weighting of 90/10 is a bit much. I really have no idea how to work this out, but I see that you are 50/50. Is this to try and not let the market get too far ahead of the yen we are using to invest? i.e. is this to counter the costs of US based funds rising if the yen devalues?

And thanks also for the tip about the Japanese bonds. I will look into those.

In the meantime I'll be scouring these forums for further ideas. I'll put together a little list of a potential potential portfolio that I'll be investing into each month, so I'll definitely be back for some more input on what you all think.

Cheers!
bpp
Posts: 2017
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Location: Japan

Re: Living in Japan - Offshore Insurance Wrapper?

Post by bpp »

twoyen wrote:
bpp wrote: For your stocks, since you want to be 90% non-Japan, the obvious first choice would be Vanguard Total World stock index fund, VT.
That is also what I use to get non-Japan exposure. For the Japanese part of my portfolio (I weight 50/50 Japan/non-Japan), I make my own passive portfolio of individual stocks.
.

Perhaps a weighting of 90/10 is a bit much. I really have no idea how to work this out, but I see that you are 50/50. Is this to try and not let the market get too far ahead of the yen we are using to invest? i.e. is this to counter the costs of US based funds rising if the yen devalues?
I use 50/50 to cancel out the effects of exchange rate shifts. Basically, this way I don't care whether the yen goes up or down relative to the rest of the world -- I'll come out the same either way. Plus, I like the simplicity of divide-by-N solutions. If I didn't just split 50/50, I would probably use global market weights. Anything more finely tuned than one of those two options would feel like I'm getting too clever, at the risk of outsmarting myself. I'd probably also never really feel settled with some other arbitrary number, and would be tempted to keep tweaking it.

Anyway, since my expenses are in yen, I want more yen exposure in my investments than global market weight would give. So I go for the 50/50 option.

In a sense, it is all psychological. Your comfort point may lie somewhere else. Just pick something you can stick with.
Last edited by bpp on Mon Nov 25, 2013 3:39 am, edited 1 time in total.
bpp
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Location: Japan

Re: Living in Japan - Offshore Insurance Wrapper?

Post by bpp »

By the way, having written the following,
bpp wrote: SMBC Nikko treated me like a non-resident alien for US taxes (despite knowing I am a US citizen), which meant a) they automatically withheld US tax on dividends, which they should not have done, and b) they didn't ask me for a W-9, which they should have done.
...it occurs to me I should point out that US-based ETFs will have a slightly higher tax cost for you than Japan-domiciled ones, if held inside a NISA. Since you are not a US taxpayer, 10% will be withheld from the dividends paid out by these ETFs, and sent to the US. In a taxable account you can take a foreign tax credit for this withheld tax against your Japanese taxes. In a NISA, this is just lost.

If you held VT, for example, with about a 2.5% dividend rate, this would be the equivalent of an extra 0.25% in expense ratio. Added to the 0.19% actual expense ratio, your effective expense ratio would then be 0.44%.

If you instead held Japan-domiciled ETFs, you would save this expense.
For example, the MSCI ACWI all world ex-Japan ETF on this list (code 1554) has an expense ratio of only 0.30%: http://www.tse.or.jp/rules/etf/list/foreign.html
You could pair that with a TOPIX ETF (code 1348) that covers the Japanese market for 0.078%: http://www.tse.or.jp/rules/etf/list/index.html

On the other hand, the above ETFs have less volume than VT, and probably bigger bid-ask spreads. So it may not be such a huge savings in the end. But something to think about.

This may be a bigger issue with foreign bond ETFs (or maybe not, given yields these days), if you choose to include those in your portfolio.
A good choice for a Japan-domiciled foreign bond fund might be the Citigroup non-yen government bond ETF (code 1677, ER 0.25%): http://www.tse.or.jp/rules/etf/list/foreign-b.html
Topic Author
twoyen
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Re: Living in Japan - Offshore Insurance Wrapper?

Post by twoyen »

bpp wrote: ...it occurs to me I should point out that US-based ETFs will have a slightly higher tax cost for you than Japan-domiciled ones, if held inside a NISA. Since you are not a US taxpayer, 10% will be withheld from the dividends paid out by these ETFs, and sent to the US. In a taxable account you can take a foreign tax credit for this withheld tax against your Japanese taxes. In a NISA, this is just lost.
Thanks for pointing this out! It was something I was not aware about at all. Gives me something more to think about and will help with choosing funds.

You have been more than helpful!

I'm going to take this month to study it all and see what I can put together.
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