Why regular savings plans might not be the best solution for expats

As an expat, the chances are that you’re earning more abroad than you used to at home and that you have fewer tax liabilities than back in your home country. Whilst that puts you in a better gross financial position, what is often the case, is that the lure of a better lifestyle with increased expenditure can leave you in the same net position as you were back home. We all have goals and dreams, but the reality is they require financial discipline and planning for you to ever realise them. Everyone needs to save money regularly to ensure these become a reality, but what is the best way to approach this?

Saving on a regular basis is great way to build up a sizeable sum of money over time. The key principles to success are to start as soon as you can, be disciplined (pay yourself first) and take full advantage of compounded growth and as an expat gross roll up, whereby you build up a sum year on year without the impact of taxation at source like back home. When we talk about ‘saving’ in this article, we are actually referring to investing.

Many expats have taken the initiative and started saving for the future, however more often that not, they’re sold into a savings plan offered by Life Insurance companies such as RL360, Zurich and Friends Provident International. These plans are contractual i.e. they lock you in for up to 25 years and pay the adviser who sold the plan an often-large upfront commissions. Due to the large commissions, these plans have very high costs in the early years of the plan, large penalties if premiums cease to be paid and huge penalties should you wish to surrender the plan.

Whilst these plans can work if the terms are rigidly adhered to, you will get back far less than other more modern investment options due to the eroding effects of the charges on your long-term investment growth.

If you’re considering a regular savings plan to help you fund your retirement, buy a property, or pay for your child’s education, we recommend first weighing up your options. Below, we’ve put together just some of the reasons why alternative options may be more lucrative than the typical savings plan bought by expats…

Your circumstances might change 

Regular savings plans are a great way to build up your assets by committing to paying in an agreed sum each month. In return, you stand to return capital growth on your money above the rate of inflation and you would certainly hope above the returns you would expect by leaving your money languishing in your current account. Though it’s important you consider both your short-term and long-term goals before you make a savings plan commitment, as your circumstances may change and you could be left out of pocket. If you were to lose your job but you’d agreed to save US$2,000 per month, for example, you could see the charges on your underlying investments rise exponentially, eating in to your annual returns and in worse case scenarios you could start to see your plan erode to a value less than the contributions you have paid in.

Before signing up for a regular savings plan as an expat, understand your responsibilities and your rights, and have a back-up plan should you be unable to save month to month.

Your money is restricted

Another drawback to regular savings accounts is that they’re not as flexible as your current account - and in some cases, you may be unable to withdraw money at all for a set period.

The idea is that you’re able to deposit money in a regular savings account as often as you want, but you might be restricted from withdrawing. Some Insurance companies limit withdrawals by time (i.e. only withdraw once per month) or percentage of your saved assets (i.e. only withdraw 5% or US$5,000 per month). Understand the restrictions and costs associated with your scheme and ensure you have assets to hand to pay for life’s unexpected emergencies.

Reducing premiums can be costly

Some companies charge you to reduce your premiums on your savings plan, so understand the terms of your contract before you sign up. Don’t be encouraged to invest or save more than you can comfortably afford, either - remember, you can always increase your payments down the line or invest in other savings plans to make your money work harder for you.

Potentially low rates of return

Although regular savings plans will typically yield greater returns than standard cash accounts, you are unlikely to get the best rate of net return on the market by going to your working with a financial advisor on commission. If you’re confident that you won’t need to access your money for a set period of time, then you might be better off looking into other savings schemes with fixed western platform style costs, though look for government assurance that your savings will be covered should the insurance company fall into financial difficulty.

Consider what your compounded growth will be net of charges, not gross! You need to calculate what your plan would have to yield on an annual basis net, just for you to breakeven. Your typical balanced investment portfolio will look to grow (not in a linear fashion) at around 6% per annum over time. Some of these regular savings plans can have charges in excess of 8% per annum in the early years of your plan and even after the initial period can have ongoing charges between 3 & 5%. With global inflation sitting at around the 3% mark, the true return on these plans can often be negligible when costs are taken into account.

The full potential of your savings isn’t always realised in these styles of plans and you may generate better returns by holding money in an alternative more flexible account.

Is your money protected?

Depending on the size of your regular savings plan, your money might not be fully covered should something go wrong. Be conscious of where you put your cash and note that offshore regular savings plans may not afford you the same protections you receive in your country of residence. If in doubt, speak with an impartial financial adviser and consider diversifying your savings portfolio to spread risk and increase returns.

Remember: financial advisers want to make money

• “Start with a higher premium to get the bonus then reduce your contributions later.”
• “Longer policies deliver better returns. Don’t worry about the penalties!”
• “I’m a British financial adviser - you can trust me!”

If your adviser has uttered anything like the above in a meeting, this should prompt you to do thorough due diligence. Read the fine print of any recommendations and truly understand your year on year charge position for the life of the plan.

Ask questions; what happens if I need early access to my capital? What happens to the charges and my surrender value, if I stop, lower or indeed increase my premiums during the policy? How risky are my underlying investments?

If you are going to have one of these plans, make sure the term works for you. If you are returning home in 5 years, are you going to be able to maintain contributions back home for a further 15 years, when your net pay will inevitably decrease. These types of regular savings contract do not sympathise with a change in your personal situation. You are expected to maintain premiums for the life of the plan, and you will be penalised with increased charges if you do not.

Unfortunately, many advisers work on commission only and are therefore going to push products that pay them the best - even if that means sacrificing your returns. An adviser will receive five times the commission for signing you up to a 25-year policy than they would a 5-year plan, so be very mindful when speaking with advisers and remember that regulators only regulate in their own countries, so as an expat, don’t assume just because someone has undertaken their financial training in the West, that they will have the same virtuous values when selling products in a less stringent jurisdiction.

Consider other investment options

Finally, consider whether regular savings plans are the right option for you, and remember that they carry risk just like any other investment. Calculate your potential returns and weigh up your options in comparison with flexible, non-contractual platform alternatives. Be sensible with your assets and create a varied and balanced portfolio - that’s the only way you can properly protect your financial future as an expat, wherever you are.

Wrapping up

There are so many saving and investment options to consider as an expat that it might feel overwhelming on first glance. Regular savings plans are a great way to make your money work for you but they are so commonly mis-sold to expats, so it’s important to do your own research and educate yourself.

Exercise caution when speaking with financial advisers and remember that nobody cares about your family’s financial future as much as you do. Use your best judgement and choose a qualified financial adviser with a good track record. Good luck!