Smash hit

“Unit-linked assets are held separately by a custodian,” Lockie said. “So I do not see a fundamental issue for offshore bonds, provided you are careful about the underlying assets held within them.”

Unit-linked funds run by offshore life insurers have some ring-fencing or segregation designed to protect them from liquidators. The level of segregation of unit-linked assets in the Isle of Man and Ireland is similar to the UK protection. Guernsey’s and Luxembourg’s regimes could be seen as stricter than the UK.

Lockie believes offshore bonds remain attractive vehicles and not just for expats and those planning to retire abroad.

“They remain attractive for estate planning, trusts and also for people resident in the UK who manage to be abroad for the year they cash in the bond,” he said.

The two key benefits of offshore bonds are the fact that gains roll up tax free, which could add thousands of pounds to your returns at the end of the term, and the ability to defer tax.

A higher-rate taxpayer could draw income of 5% a year from an offshore bond, with no tax to pay (an onshore bond would have already incurred tax at 20%) and then cash the bond when they have moved into the basic-rate band or retired to a country with lower taxes.

Don’t think you can escape tax altogether if you remain a UK resident, though — you must declare the proceeds and pay income tax when the bond is cashed in.

As to the other asset classes that can go wrong, compensation is more complicated. The plight of the KSFIOM investors highlights the problems with cash on deposit through bonds.

For those UK investors with offshore bonds based in Ireland the situation is not straightforward. The Irish government has promised to guarantee bank deposits on an unlimited basis for those banks that have signed up to its guarantee scheme. These banks are Allied Irish Bank, Bank of Ireland, Educational Building Society, Anglo Irish, Irish Permanent and Irish Nationwide.

UK investors in offshore bonds with Irish outfits, which include the offshore arms of Prudential, Legal & General, Standard Life and Zurich, are covered by Dublin’s unlimited guarantee, provided the assets are held with these banks. Other Irish banks are not covered.

Compensation for structured products held within offshore bonds would depend on the investor protection in place in the particular jurisdiction in which the bank backing the structured product is domiciled.

“The investor protection position with structured products is exactly the same as banks,” says Ian Searle, business development manager, financial services at Standard Life. “If the bank that backs the structured product collapses, then bond investors have the same investor protection as bank deposit customers.”

“There is nothing fundamentally wrong with offshore bonds at all,” Lockie said. “You just need to understand the risks of the underlying investments held within them.”

We may lose our life savings

Alan and Hazel Bell, both 64 from Sussex, fear they will lose nearly $500,000 (£310,000) following the collapse of Kaupthing Singer & Friedlander Isle of Man.

The couple, who run a property development company but were hoping to retire later this year, have their personal and business accounts with the offshore arm of the Icelandic bank, totalling some $550,000. They would be entitled to just £50,000 under the Isle of Man financial compensation scheme.

“We are at risk of losing our 20-year-old business and our life savings due to the destructive actions taken by our own government,” said Alan.

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