What are expat savings plans?
What are Savings plans/ pension plans?:
The most common plan ‘sold’ to expatriates. Commonly sold but commonly complained about also!
These plans are now banned in the UK and most regulated jurisdictions. Yet offshore with shaky regulatory frameworks, they are still open to new business and new clients.
In the past most savings plans are provided by insurance providers or investment companies. They offer a 1% life assurance element added in. Meaning if you died your beneficiary would receive 101% of the value at death. This is not life insurance but life assurance. Slightly different and the 1% is in effect of negligible benefit in regards to the bigger picture.
Each plan has a term, I.e the duration or length of investment period. This is 5 – 30 years in some cases. In short the longer the term the more expensive the plan.
This is due to the length of the plan being linked to the commission amount. The longer the plan the more commission in short. Suddenly it all makes sense why you have a 25 year plan? Sorry if this is you!
Small amounts can make sense for long term plan, yet large amounts should be for short term only. Depending on the client or circumstances granted, but that is the safe rule of thumb.
The reason: longer term plans have longer initial charging periods to cover the higher charges.
Initial Period (IP)/ Initial Charging Period (ICP)
This is the portion of the plan that is directly linked to charges and commissions to the advisor. Higher charges that swap your initial units or investment amounts into commission for the advisor. You cannot take this portion of the investment or you will face HIGH surrender fees. The longer tem plans have higher surrender charges, meaning if you have a long term plan typically your surrender value will be 0% if you stop at this stage. 100% loss after 2 years of investing if you are ‘advised’ badly!
Allocation Units
These are the units you buy after the initial period is completed. This money is liquid and can be withdrawn with no surrender penalty or cost. However, this would not be wise as this money is in effect your money to grow. If you withdraw all of your allocation units you are only left with the initial period.
Also the charges are based on the initial investment. So if you lower your investment or withdraw money this only increases the charges. Charges are set after the initial contract and remain static. Yet if your charges were for example 1% of $1,000 and you lowered your investment to $500 you would have doubled the cost ratio!
Jurisdiction
Typically Isle of Man, Guernsey, Cayman Islands, Mauritius and many more.
All locations have strict investment rules in the wake of the financial crisis. Different jurisdictions do have different rules yet in reality they all promote themselves as safe in regards to security. This is in effect true, it is not often that jurisdictions become unsafe or bad advice.
The devil is always in the detail. How high are the charges, how safe are the underlying investments, will your advisor manage your account or simply disappear once the money has been sent and commissions earned?
