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Should you invest in a 25 year savings plan?

Few expats have any idea of what the future holds for them, so what’s the sense of locking yourself into a 25-year savings plan?

Long-term savings like this are old hat.

The financial world has moved on and into the 21st century where ease of access and flexibility are king for savers.

Most expats have no idea what will happen tomorrow and trying to guess where you and your finances will be in five, 10 or 15 years down the road is impossible.

That doesn’t mean stop saving. Keep on contributing, but instead of an out-of-date savings plan, look at modern alternatives.


Dangers of savings plans

A 25-year plan is a gift to your financial adviser who should be looking after your interests but can’t resist the temptation of a pay day bonanza.

Most expats don’t know that such plans are ‘front-loaded’ and pay the adviser a huge commission from the day they start saving.

Saving $1,000 a month for 25 years adds up to $300,000. The commission could be as high as 4% of the plan value, which totals a bumper $12,000 for the financial adviser.

That’s $12,000 out of an expat’s pocket and into the adviser’s bank rather than into expat savings.

It’s difficult to reconcile how advisers recommending long-term savings plan can be giving best advice to their clients.

Insurance company sources reveal that expats tend to realise how bad a deal their savings plan is after around seven years, but are then trapped by exit penalties that can wipe out what had already been saved.


Disappointing investment returns

For those that stay the course, the promised investment returns often fail to materialise.

That’s because the charges are often between 6% and 9% a year, so the plans must yield stellar returns to give a profit.

The alternative for expat savers is putting together a fund portfolio through an online platform offering low-cost investments.

Dealing direct generally means no commissions or adviser charges – but many offer a reasonably priced managed option for expats who do not have the time or inclination to look after their own portfolio.

The range of funds is far wider than those offered by most savings plans – including low-cost trackers and ETFs, bonds, mutual, options and futures across a selection of global markets.


What steps can expats take to safeguard their savings?

Lifetime saving is about being nimble and consistent, so you can nip in when the chance arises.

Nimble means not locking into products with sky-high exit or fund charges, but being ready and willing to move your money if the right opportunity comes along.

And they do eventually arrive.

Old products become outdated, better products are released and new providers enter the market with up-to-the-minute ideas.

Financial markets are continually evolving, but one old rule that seems to persist is drip-feeding money into savings over a long period to gain the benefit of compound interest and cost averaging.


Compare the market

Funds grow exponentially with the magic of compound interest, while the risk of buying high and the market collapsing is countered by adding a little money often rather than a large amount all at once.

Time also gives investors the chance to collect more data and review their portfolios with greater insight.

For expats who remain UK tax resident, sheltering savings in a tax-free ISA is an additional option to consider.

The conclusion for expats is savings are good, but be careful about how you are managing your portfolio.

Look deeper than the projected returns to see how charges and penalties impact an investment.

Compare the market and don’t let salesmen greedy for commission hassle you into buying something that benefits them more than you.

ExpatSavingPlans.com offer non-contractual and low-cost savings alternatives, so are worth checking out.


Should you surrender your savings plan?

The best return on a contractual savings plan is nearly always achieved by letting the investment run until maturity. Any encashment before maturity can lead to a much lower return due to the heavy early surrender penalties.

Contractual savings are generally only suitable where the saver requires discipline and is sure that they will not want the money until the end of the term.

If you have fallen into the trap by taking out one of these plans and would like some advice, speak to a fully qualified, ethical professional - we're happy to help! 


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