A few months ago, one reader of The Australian Expat Investor shared with me some material on a “tax effective” offshore savings scheme that was being marketed to her. While I understand that there are worse products being pushed by “financial advisors”, here is a summary of some of the “features” of this product. You might be shocked!
Expats (particularly in the Middle East and Asia) are often targeted by “financial advisors” promoting products with such titles as offshore savings plan, offshore pension bonds, or life insurance savings plans. While it is possible that the product does deliver what the “financial advisor” says it will, these products are complicated, generally have very high fees, and generally attract very high commissions for the “financial advisor” (sales person). In addition, the financial advice regulations in many of the countries where Australian expats reside are quite weak, giving clients very little protection. I use the term “financial advisor” in inverted comma’s not to belittle professional financial advisors, but to highlight that many of these products are marketed by people calling themselves “financial advisors” but do not necessarily have the same qualifications as you might expect from one, say, in Australia.
In my article, How to protect yourself from dodgy offshore investment schemes, I outline some questions to ask and things to consider to ensure you are not investing your money in the wrong type of product. In this article, you will also see some of the things to look out for as I outline some of the “features” of this particular offshore savings scheme.
A Summary of the Offshore Savings Scheme
To give you a sense of what this product is about, here is some information contained in the product brochure and materials.
- a “regular offshore savings policy” issued in the Isle of Man…The policy offers the potential for growth over the medium to long term, where its value is linked to the performance of investment funds.
- Available in the following currencies – pound sterling, euro, US dollar, Swiss franc, Australian dollar
- You can invest in a range of investment funds
- Contributions as low as A$360 per month for a 10 year term
- Can make contributions using your credit card, direct debit, standing order, cheque, telegraphic transfer
sounds good so far, right?
it gets even more interesting…
- Allocation rate – depending on your monthly premium it is possible to receive 102% of your premium in investment units
- Premium incentive – if you choose a premium term of at least 10 years, then you will receive a one off premium incentive at the start of your policy (equivalent to 1.5 to 6 times your monthly premium)
- Loyalty Bonus – if your premium term is for at least 10 years, you will receive a bonus of 0.25% of the fund value of your regular premiums multiplied by the number of years you have paid premiums
this is starting to sound like a great investment, what’s the catch?
More jargon and terminating the Offshore Savings Scheme early
- Initial Allocation Period – at the start of your policy an initial allocation period applies. During this period, your premiums will purchase “initial units”. After this period, your premiums will purchase “accumulation units”. The initial allocation period is between 18 and 24 months depending on the premium term you have chosen.
- If you terminate your policy during the initial allocation period you will surrender the entire value of the fund. That is, if you change your mind during the first 18-24 months and wish to stop making contributions, then you will receive none of your investment back.
- In addition, if you choose to terminate after the initial allocation period, but before the end of the premium term, then you will be charged somewhere between 8 and 92% of the value of your initial units.
oh, and there are a few other charges you should be aware about…
The other costs involved in the Offshore Savings Scheme
- the initial unit charge of 0.50% per month on the value of your initial units
- contract charge of 0.125% per month on the current fund value (both initial units and accumulation units)
- monthly policy fee of A$9/month indexed every year to the Isle of Man retail price index. The brochure even states that this will create negative accumulation units during the initial allocation period.
- investment adviser fee – this is the fee you pay your investment adviser (that has presumably recommended the product). Their fee to be negotiated directly with you and can be deducted from your fund balance.
- additional charges – the funds that you hold within the offshore savings scheme will be subject to an annual management charge
What can we conclude about our Offshore Savings Scheme?
To be fair, the costs and risks involved in investing in this offshore savings scheme are contained in the product material in black and white.
The financial advisor even shared with our reader an illustration of what she might get back were she to invest. If she was to sign up to a 25 year term (and commit to $500 per month premium contributions) she would have invested $60,000 into the offshore savings scheme over the first ten year period. By my calculations, without any additional fees, $500 invested every month for ten years would be worth approximately $70k if it made 3% per annum return, and would be worth approximately $90k if it made 8% per annum return. However, based on their illustration, if she chose to terminate the policy on the ten year anniversary, she would only receive back between $56k (based on a 3%pa return) and $70k (based on a 8%pa return).
In my personal opinion, I would never invest in this type of product. When it comes to investing, if I don’t understand the product, then I don’t invest. If the fees or benefits are not clear, then I don’t invest.
It is possible, that in certain scenarios, this type of product might be a good investment. Many expats are attracted to these types of products as they see it as a substitute for contributing money into superannuation and providing a vehicle for long term savings with regular contributions. In certain scenarios or countries these offshore savings schemes may be tax effective, but will they continue to be tax effective when moving to a different country during the premium term? Or do the tax benefits outweigh the high fees involved in the product.
I believe there are other investment options for Australian expats that are tax effective, avoid the need to lock your money away for many years, have much lower fees, and will provide a better return. I review some of these options in 5 investment strategies that Australian expats can use to save for retirement.
In any case, I would always recommend speaking to a registered financial advisor in Australia before making a commitment to such a product.
If you have invested in a similar product or have had one marketed to you, share your experiences with other expats in our comment section below, or contact me directly.
Note – I have intentionally not disclosed the company marketing this product or the product itself. My purpose in sharing this information is to educate our readers on the nature of these types of products (there are many out there), so they can recognise the typical features and charges, and gain an appreciation of what to look out for when reviewing these investment opportunities in the future.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.