Do you have this type of investment with one of the big life insurance companies?
It could be with Generali Worldwide, Friends Provident International, Old Mutual International, RL360, Aviva Global, Zurich International, Investors Trust or Hansard Global it doesn’t really matter which. How much would you get back if you needed to get access to the capital from your investment?
We were recently helping one of our clients who happens to have several offshore regular savings plans. He wanted to liquidate one of them because he needed cash and wanted to know his best option. He had subsequently asked if we could provide some guidance.
First, the Generali Vision plan which was the closest to maturity. The policy had run 8 of its 10-year term and only had 2 more years left. We found there was still a 20% surrender charge after checking the valuation. This would have resulted him making a 1% loss after 8 years from this investment.
On the surface the plan had made in total around 19% over the 8 years he’d had it. Not the most impressive out come over this timeframe. Some of this would have been due to the effects of investing each month (unit cost averaging), although no contributions had been made for the past three years. So this meant there was no new money diluting the performance of the investment. It could have also been because of poor performance. Though in this case,the 5-year annualised return for the fund portfolio was at 8.43%.
The only other explanation for the lacklustre performance is policy fees taken by Generali. We’ve told you before that an offshore regular savings plan is expensive in our Financial Health Warning article. They were still taking a 20% surrender charge even though their fees had strangled performance over the past eight years. This completely wiped out any growth.
We moved onto the Friends Provident Premier that had been set up eleven years earlier & still seven years to run. They would apply a 12% surrender charge if he decided to liquidated his investment. Again in simple terms total returns to date were 35% slightly more respectable. The underlying funds had achieved double the performance of the overall policy.
Total growth would have fallen to 23% after eleven years if he decided to surrender it. Whilst this is certainly better than the Generali policy its still poor considering the performance of the underlying assets.
Finally, his Old Mutual Managed Savings Account that had been running for 12 years with 12 more to go before it matured. If he cashed this policy he would have a 3.5% total loss as a result of a surrender charge in excess of 24%.
Overall the policy had grown by 21%. This time we couldn’t comment on the performance as we didn’t have data going back far enough. Cheap units in the funds should have been bought as we knew our client had maintained contributions throughout the financial crisis. Since 2010 the growth of the underlying portfolio was over 60%.
The real story here
So across these three policies he would have paid almost £44,000 in surrender charges after paying in for over a decade giving him a total return of 4.62%.
Markets go through good and bad spells, we accept this and encourage investors to accept it also. Unfortunately this performance was a result of good market conditions, imagine if the markets wherein a downward phase.
We’ve raised the issue on numerous occasions of surrender charges and just how expensive an offshore regular savings plan is with the representatives of the companies who provide them.
The general response from them is “Well it’s because of all the commission that the broker takes”. Whilst commissions have a big impact this it isn’t the whole picture as the insurance companies grab the lions share of the fees taken from a plan.
To highlight this point, our clients Generali plan would have generated £7,560 upfront commission for the brokerage at outset. Yet after completing 8 out of a 10 year term Generali were still taking a surrender charge two and a half times more than the commission paid. All this in addition to the charges already taken whilst the policy has been running.
We’ve also discussed this with many brokers. The most committed pedlars of these high cost low return policies generally provide the same justification for writing them. This is, people need discipline and the surrender charges give them the deterrent that they need to keep paying into them. Making sure that they save for their future.
We would argue that the reverse is true. Generally a person will get disillusioned with their policy when they constantly get unimpressive returns. They then stop making any further contributions and excessive policy fees erode the investors savings. When they inevitably look to surrender the policy, they see that the situation is even worse because they must still pay a hefty surrender charge.
From an investor perspective, there are many reasons why these types of offshore investment policies are a bad option. Lack of transparency, poor returns, high fees, inflexibility to name but a few, though paying into a plan for 8 years only to find that you still haven’t made any money is a pretty big one. Imagine if you only have 2 years to go before maturity and found that there was still almost £20K to pay in surrender charges. How would you feel? You may already know.
Living and working overseas is extremely changeable and a person’s situation can alter dramatically. Along with all of the reasons above this is why we identified the Hallmark Account from Platform One. This regular investment plan allows you to surrender if you and get back what is was worth on the day that the holdings were sold no matter how long you have been investing.
No Surrender Charges, No Nasty Surprises, No Fat Commission!