In the race for investment returns, many expats invest. Whilst this is much wiser than keeping money in the bank, not all plans are made equally.
A case in point is savings plans and offshore bonds. In the offshore expat markets, savings plans are one of the most commonly sold financial products. Few people seem happy with them.
In this article I will review some common expat savings plan, portfolio bonds, pensions and pension trustees for UK expats; and discuss whether people should keep investing into them or seek an alternative arrangement.
The article below is long and extension due to reader requests to add more content, compared to the original version.
I can’t promise anything, apart from the fact I will try my best to find a suitable solution.
What are expat savings plans?
Most expat savings plans are insurance-investment plans, offered by expat financial advisors and wealth managers, locals and banks. If you die you will get 101% of the value of the account. For example, if the value of the investment is $100,000, your offspring will get $101,000 on death.
Typically, the plans have a contribution period. 5 years is often the shortest time you can save, with 25-30 years being the longest plans. Typically, the 20-30 year savings plans are sold more widely-sold in the expat markets.
These plans are generally coming from Isle of Man, Jersey, Cayman Islands, Bermuda, Puerto Rico, Guernsey and numerous other offshore locations.
That isn’t the problem with these plans. All locations, offshore and onshore, these days have strict investment rules in the wake of the financial crisis. It does also make sense for expats to invest offshore, for tax reasons, with the exception of Americans.
The issue is more the investments within the plans, and the terms and conditions, not the locations where the money is held.
Who buys these plans?
People from all around the world. In general, I find British expats are most likely to buy the plans, followed by Nordic, French, Indian, Chinese, Australian and numerous other nationalities.
What can you do if you have one of these plans and are worried about them?
Seek advise. Depending on the terms and conditions associated with your account, it may be possible to go for a cheaper alternative or reduce the existing fee structure in the account. I hope this article helps in that process.
Who are the major providers and products and where are they sold?
Major providers and products include:
- Generali Vision
- Zurich Vista
- Friends Provident Premier Advance Savings Plan
- Hansard Vantage Savings Plan
- RL360 Insurance Company Limited (RL360) Quantum
- RL360 Paragon
- AXA Pulsar
- Providence Life Compass Account
- Hansard Infinity Wealth
- Hansard Infinity Wealth Access
- Premier Trust Global New Horizon
- Premier Trust Global Premier Provest Principal Protection
- Premier Trust Global Provest plan
- HSBC International Wealth Builder Accounts
- Canada Life Offshore Savings Account
These plans are sold all over the world. However, Singapore, Hong Kong, Dubai, Abu Dhabi, Qatar, Amsterdam, Shanghai, Thailand especially in Bangkok, Kuala Lumpur, Jakarta, HCMC in Vietnam, Spain, France, Tokyo, South Africa, Seoul, Germany, Switzerland and Brussels are some typical destinations where the plans are sold.
The plans are also sold in Phnom Penh in Cambodia, Manila, Laos, India and countless other emerging destinations, where expat numbers are rising.
The lump sum products associated with these life companies are also sold extensively in Australia, Canada and New Zealand, due to QROPS pensions and SIPPS for British expats.
Due to the fact that most of these insurance companies are based in the Isle of Man or other overseas British territories, it is common for British expats to buy the policies.
How do they typically work?
The cost of the plans is typically levied upfront, due to sales and admin costs. The client is then reimbursed some of that cost at the end of the plan, in the form of bonuses.
Let’s take a simple example of a person who buys a 10-year savings plan. If he or she pays the premium over 120 months, the total costs of the plans are often 1-2% per year.
Sounds reasonable enough. But if the client stops paying halfway through the contract, the actual cost is closer to 4% per year, because the end of contract bonuses are usually not given back to the client.
Premium holidays are possible, but they don’t come cost free.
Can the client make good money on these plans?
A small percentage do, but almost all those small percentage of success stories are people who keep contributing to the end of the term.
However, only 3%-4% of people contribute to the full 25-year terms. I have seen several people make quite reasonable returns from 10 or 15-year plans.
But even then, many people stop contributing, because in the first few years the charging structure is high. Unless the client knows that they will get a big bonus at the end of the contract, they often stop contributing.
What makes this particularly confusing is that the charges aren’t levied consistently. On the Generali plans, for example, the charging structure gets very high in years 7, 8 and 9. So high that it isn’t easy to make any on-paper returns.
But after year 10, the charging structure falls dramatically, to approximately 0.2% per year. Many people, therefore, stop contributing after 6, 7, 8 or 9 years.
How many years does the typical person invest in these plans for?
7 years is about the average, statistically speaking, for the 25-year product. A higher percentage of people investing in the shorter 10-year plans contribute until maturity.
If somebody wants to stop contributing, what can they do?
There are numerous options. People can go for a maximum surrender value and just stop the accounts. However, the surrender value can be quite low, depending on how close the client is to maturity.
For example, let’s say a client has invested in a regular savings plan. It is a 25-year plan and after 5 years the value is $100,000. There are still 20 years to go, and therefore, the surrender value might be extremely low. In comparison, if person B has $100,000 in a 10-year plan, and we are now in year 8, the surrender value may be 90%+ of the account value.
A second option is a maximum penalty free surrender and withdrawal, which can be reinvested elsewhere, in a more productive way.
A final option is to stop paying but take no money out of the policy.
Can somebody make money if they stop contributing?
It depends on many factors, including which funds are selected within the savings plans. In general, if people stop contributing they either lose money yearly on the plans, break even or at best make 4% per year. It is a numbers game. As the cost of the account will shoot up to over 4% per year, in some cases, due to non-contribution, if markets are performing at 8%-9%, the client’s account may go up by 4% if the right funds are selected.
What are the biggest mistakes most people make in this situation?
Researchers call it loss-aversion. People find losses more painful than gains. That is one reason why some people are terrified of investing in the first place, despite the fact the Dow Jones has gone from 66 in 1900 to 26,800+ this year – a 10% yearly gain.
In terms of savings plans, typically consumers will make the following mistakes:
- Keep contributing and wait until the value reaches a certain level
- Never consider alternatives
- Bury their heads in the sand
Sometimes, it is rational to accept a loss. Typically example. Let’s say your account is worth $100,000, but you can only get $80,000 back. Getting out of the account will cost you $20,000. A tough pill to swallow.
But let’s work something out. If markets perform at their average historical rate of return, your $80,000 will be worth over $100,000 in three years and about $207,000 in ten years.
Of course, nobody knows what will happen to markets. In the last 9 years, markets in the US have increased by about 300%, whereas they produced bad returns from 2000 until 2009.
However, statistically speaking, accepting losses can sometimes be rational if it leads to a better outcome.
Can I lose all my money if I stop contributing early?
Typically, these savings plans have an 18 month `indemnity period`. That means if you stop contributing before the first 18 months you will lose all your money. On the Generali plans, the 5 and 10-year plans both have indemnity periods of less than a year.
If you stop contributing after 18 months, it is a misconception that you are likely to literally lose all your money. What will happen instead is that the high fees will eat into the returns.
Are the plans flexible?
Not particularly. It is true that after the initial period is up, you can stop contributing, decrease or increase your premium, but each option comes with ramifications. Decreasing your premium will still potentially lead to very low returns or losses.
This is because the charging structure is based on the initial premium. So if you started with a $2,000 per month premium and then reduce your premium to $300 a month, the charging structure (percentage wise) will still be linked to the $2,000 premium.
Do they all work in the same way?
I have been asked one question commonly from readers of that blog posts and in person: do other savings plans usually work in the same way?
The answer, at least for the old school plans, is yes. Different providers have different fees, but all of them:
- Have high fees. Some have higher fees in other years than others, but overall, they are remarkably similar.
- Have especially high fees if you don’t pay in every time. The way the accounts work is that you are reimbursed some of the costs of the account if you pay in every month until maturity. If you even miss 1 month, you often can’t get the bonuses.
- Are much more expensive than various lump sum and newer savings products
Are there some circumstances when you should continue to contribute?
Yes. If you are 110 months into a ten-year savings plan, it clearly makes sense to contribute for the final 10 months, as you will be given bonuses which will reduce the average cost of the account. Likewise, if you have invested for only 5, 10 or 15 years it may be worth continuing.
This will especially be the case if you have invested a small percentage of your income. It is common sense that an expat making $10,000 after tax will probably be able to afford a $500-$1000 monthly premium. An expat making $3,000 a month, might struggle to maintain the premium level.
Are there tax implications of coming out early?
Sometimes. If you deposit $30,000 into your home countries bank account, questions may be asked. That is one reason why seeking an alternative investment solution for the money often makes sense unless you are close to retirement.
Are there additional outsourced costs for investing?
Sometimes advisor firms outsource the management of the accounts for a 1% yearly fee. For example, Tilney BestInvest is widely used in Malaysia, Cambodia, Hong Kong, Thailand, Qatar and China – due to the fact they are sold by W1 Investment Group and Infinity Financial Solutions.
The problem is, investing in BestInvest from a UK platform and investing from an offshore base is quite different. Using BestInvest in the UK can be up to 5-10 cheaper than buying the same funds through an offshore life company. So typing in best invest reviews, or Tiling Best Invest reviews, into google, will often lead to reviews relating to UK SIPPS and regulated products.
What other insurance-related products are typically sold?
Offshore portfolio bonds are also widely sold. These are lump sum products which are typically shorter in length – for example 5 or 10-year charging structures. Such bonds are also used for British, Irish, Dutch and Belgium expats who want to transfer their pensions overseas. They are typically more flexible as 70% or more of the money can be withdrawn without penalty on day 1.
What are the provider and product names?
Some of the most popular and widely sold names are:
- Friends Provident International Reserve Investment Bond
- Friends Provident Summit Bond
- Friends Provident International Zenith
- Generali Worldwide Choice Account
- Generali Worldwide Professional Portfolio Bond
- Hansard International Capital Investment Bond
- Old Mutual (used to be called Skandia) Collective Investment Bond
- Old Mutual (used to be called Skandia) Collective Redemption Bond
- Old Mutual (used to be called Skandia) Executive Redemption Bond
- RL360 Pims
- RL360 Oracle
- Investors Trust Access Portfolio
- Investors Trust Fixed Income Portfolio
- AXA Evolution Bond
- Providence Life Horizon Portfolio Bond
- Providence Life Orbit Portfolio Bond
- Providence Life Polaris Portfolio Bond
- Premier Trust Global Premier
- Canada Life Wealth Preservation Account
Prudential International Portfolio Bond
Some of the biggest banks such as HSBC Expat, Standard Bank, Santander International Swissquote, Santander International, Lloyds International, Nedbank Private Wealth and Barclays International also offer products and funds. They tend to be slightly different lump sum products to portfolios bonds, but the fees tend to be high nonetheless.
Standard Bank has the Quantum series investments. Standard Bank Quantum Plus 10, 11, 20 and 23 are all part of the investment series. This investment seeks to cap the upside, whilst limiting the downside. Sounds good on paper, but the terms and conditions often mean you will get much lower than market returns.
Fees and charges within offshore bonds
Fees within offshore bonds are much more reasonable than savings plans as a generalization. That doesn’t automatically mean that is automatically explained in the application form and key feature, in a transparent way.
Also, many hidden fees eat into returns. This is especially the case with offshore pension transfers for expats, as the trustee fees can eat into the returns.
Once again it makes sense to get a second opinion on these accounts, especially if your returns are low.
As portfolio bond values can typically be higher, the fees become even more important.
Let’s take an example of an investor who has a $500,000 lump sum. The fund fees are 2% per annum, in addition to the broker management fee of 1% and the life insurance firms fees. Markets rise 8% and the investor gets a 4% per year return.
Ultimately, if the fees could even be reduced by 0.5%-1% per annum, that can make a huge compounded difference over time. It doesn’t sound like much, but it is $2,500-$5,000 in year one alone, and potentially close to $100,000 over a 10-15 year period.
Remember as percentage fees go up if markets rise, a 1% fee in cash terms will become bigger and bigger over the years.
Some offshore bonds do have more low-cost fund options, including tracker funds. This means that many expats out there have plans which could be reduced in price dramatically.
As offshore bonds aren’t as long-term as savings plans and don’t have the same contractual dimension to them, they tend to attract fewer complaints.
Often in year 1, 70%+ of these accounts are liquid on day 1, rising to 100% within 5-8 years.
Funds within offshore bonds
The biggest mistakes is to have many illiquid funds held within the offshore bonds. Several of these illiquid funds, such as LM in Australia, collapsed due to liquidity problems or fraud.
There have been recent changes to the fund lists/fund centre which make it harder for advisors to pick such funds.
The performance of these bonds can vary differently depending on the funds that are chosen. For example, the Old Mutual Executive Investment Bond and RL360 Pims all have low-fee funds available, which can make a huge difference to the performance.
Fund performances and factsheets are all available online.
Should people complain to the regulators if they feel miss sold?
It depends on the market. Markets in highly regulated markets like the EU, Hong Kong or Singapore may get some luck going down this avenue, but it depends on what documents were signed on day 1, and what you can prove.
In most expat markets, financial services aren’t as well-regulated as in developed countries, and it is highly unlikely the regulators will care about any expat complaints.
In the majority of cases, therefore, complaining isn’t productive.
What are some of the other platforms that are typically used in the expat market?
Interactive Brokers and Internaxx are two of the most popular ones. Others that are commonly used include:
- DBS Vickers Securities
- E*trade Financial
- iFast International
- Novia Global
- Platform One International
- Praemium James
- Raymond James
- Saxo Capital Markets/Saxo Bank
- Ardan International
- Capital Platforms Isle of Man
What funds and discretionary fund managers are typically sold within bonds, savings plans and platforms?
In terms of funds, GAM Star Portfolios and Tilley BestInvest have been commonly used in Dubai, Cambodia, Bangkok, Hong Kong, Singapore and Kuala Lumpur. Both funds contain high fees.
In addition, the following funds are widely sold; both inside these plans and outside on independent platforms:
- Guinness funds – Guinness Global Equity Income and Guinness Global Investors
- VAM funds, including US microchip growth a and VAM managed funds such as cautious A and B.
- Commerzbank structured notes
- Valartis Group
- Momentum Investment Management.
- Harmony portfolios, including sterling balanced, sterling growth, usd balanced fund and Euro diversified
- SAM Group funds
- Brooks Macdonald strategic growth
- dvam funds
- Sanlam funds
- Various AXA, iShares and BlackRock funds.
- Franlin Templeton funds
- Pimco bond funds
- Castlestone low volatility income fund + faang fund
- St James Place alternative assets fund; greater European progressive unit trust, balanced portfolio and equity income fund.
- TAM Asset Management
- ARIA Capital Management
- NEBA structured notes/products
- Portman structured notes/products
- Chronus structured notes/products
Some of these funds have performed well, whilst others have not, for a whole range of reasons.
What Pension Trustees are often used together with offshore bonds?
For British expats, popular SIPPs and QROPS trustees are Momentum Pensions, STM Group, Forthplus pensions and the Sovereign Group. Others include
Pantheon Pension Trustees
Trireme Pension Services
New Zealand Endeavour
Hornbuckle Mitchell Group
The Concept Group
Bourse Pension Trustees
Baker Tilly Isle of Man/RSM
In many cases, you can lower your fees and improve your performance by making changes to these plans.
Should Americans buy these plans?
Before the FATCA law was enacted in 2010, it did make sense for American expats to invest offshore, although in a sensible way like everybody else.
These days, it is tough for Americans to invest productively offshore. Investing in an unproductive way can lead to tax problems.
For Americans who have already bought these plans, however, it makes sense to seek a solution like any other nationality, and get the plans working more efficiently.
Why do investors fail in general?
So often what happens is that people get emotionally connected to their existing accounts (not wanting a paper loss or waiting until it hits a certain level before selling) instead of just looking at the maths and academic evidence.