The Truth about Savings Plans

In 2006, $6 Billion of Offshore Savings Plans were issued by AILO firms. Of those only $60 million where originated in the UK. Why such a big discrepancy? Part of the reason is that FSA regulations are such that when the adviser discloses all the information to the client, the client can readily see all the pitfalls. 

That is not to say that savings plans are all inherently bad, but they are one of the most frequently miss-sold products. They are all so the one of the main reasons why “Offshore Financial Advisers” have such a poor eputation. 

There are 2 types of Savings Plans, Contractual and Non Contractual. If you have a long term savings goal and you are absolutely sure that your circumstances will not change over the period you will be saving, then perhaps a Contractual Plan may be to your advantage. 

For the other 83% of us you should be looking at a Non Contractual Plan. With a Contractual Plan your costs are based on you making all the contributions. If you miss contributions you will be raising your cost base. If you miss a lot of contributions you may find that the contributions you did make are not growing fast enough to offset the charges. 

With a Non Contractual Plan your costs are more in proportion to the amount actually saved. This way if you find yourself moving to a higher cost country and you have less disposable income available for investment, you can reduce you contribution or stop them all together without the charges continuing to grow disproportionately. 

Some of the things you should look out for when you are considering a Savings Plan: 

Bid Ask Spread - A bid ask spread is the difference between the price you pay for the underlying units and the price you will receive when you sell them. In a lot of plans this is typically 7%. This is a British invention; it is basically a 7% sales charge within the plan. Since you will want to look at changing your asset allocation at least annually this will greatly affect overall performance. 

Mirror Funds - A Mirror Fund is a fund that is created to mirror the performance of another fund. They will consistently underperform because they have higher management charges. The difference in Management Fees can be as much as a full percentage point higher. This may not seem like a lot but over a 5 year period this will typically mean that the Mirror Fund underperforms by 20%.  

Initial Units - These are the units that your early contributions go into. They are also the units that will be cancelled to cover the charges associated with your Savings Plan. Some unscrupulous “Advisers” tell their clients that these are the only contribution that they must make. They are in fact the contributions that you must make so your “Adviser” gets the full commission. If you stopped contributing to your plan after the Initial Period you will typically receive back a tiny fraction of what you have contributed. 

Bonus Initial Units - Some plans will offer a bonus allocation of Initial Units. This will create the illusion that your savings plan is growing at a fantastic rate. What you should remember is that those units are typically cancelled on a percentage basis to fund the plan.  

The attributes of the various Savings Plans that are available tend to be very opaque and you should not enter into any plan without receiving advice from a qualified professional. The plan on paper that promises the highest return is often the one that will be the most expensive if you miss a couple of payments. 

If you are looking to put money away on a regular basis or if you have an existing Savings Plan that is not performing and you want some honesty about what your options are. Please feel free to contact me and I will be happy to advise you. You can email me at; callum.roxburgh@gmail.com

The Wealth Manager