The dangers of offshore bank accounts

Many savers trusted their money to offshore banks before the financial crisis hit, and they're still waiting to find out how much money they might have lost. But harsh though it may sound, I can't feel too sorry for them. And other investors should learn from their misfortune.

"The forgotten victims of the credit crunch" That's how David Budworth in The Times describes savers who trusted their money to offshore banks before the financial crisis hit. Many are still waiting to find out how much money they might have lost in remote spots such as the Isle of Man and Guernsey. But harsh though it may sound, I can't feel too sorry for them. And other investors should learn from their misfortune.

According to Budworth, "the sense of injustice is stark." The government bailed out UK savers with deposits at UK banks when they collapsed, so that savers lost nothing. And then the government extended the compensation scheme somewhat arbitrarily to fully cover savers in Icelandic bank Icesave. But as he notes, "their compatriots who lost money in Kaupthing Singer and Friedlander Isle of Man and Landbanki Guernsey have not been so lucky".

But, leaving aside the government's inconsistent and purely political decision to bail out Icesave savers (who would not normally have been fully covered under UK compensation scheme rules) surely there's a clear difference between the two groups and an important point of principle at stake here.

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UK savers who declare their interest for tax purposes are entitled to protection from the government. Offshore savers, who often benefit both from high interest rates and low, or even no, UK tax on interest, are not. And I just don't buy the idea that "many are UK citizens who spent time abroad and were told, or believed, that they were not allowed to open a savings account in the UK".

These same people were savvy enough to navigate the minefield of organising living and working overseas. The naivety argument doesn't stack up. What's more, the UK Financial Services Compensation Scheme rules have always been clear that offshore deposits like these are not covered.

Budworth's best point is his last one: "the message being sent out to UK savers seems clear; if you value safety, you should give offshore banks a wide berth". Quite right. Lesson one - there are no free lunches in financial markets, so a high interest rate is offered for a reason, and that reason is likely to be risk related.

Those Icesave savers who were bailed out by the UK scheme can therefore consider themselves pretty fortunate. Lesson two if you feel the need to keep money away from the taxman in an offshore account, fine. But you can't expect one of his colleagues to bail you out if things go wrong.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.