Understanding Offshore Pension Plans
As an expat, it’s possible that you’ve been approached by someone about an offshore pension plan either by phone or email. These plans are also known as unit-linked life insurance plans. They’ll claim that they can substantially improve your financial situation. Should you be considering this as an option?
What is an offshore pension plan?
Offshore pension plans are basically a combo of insurance with an investment strategy. Part of your money will go to the life insurance policy premium while the rest is invested in other equities. Once your money, along with many others, is collected, the insurance company will create a fund pool to invest in various markets, similar to a mutual fund.
Features include the ability to switch between funds during the policy, top-up facilities, changing the level of protection, extra riders to increase returns, options to surrender, and tax benefits.
What does an offshore pension plan cost?
This will vary greatly depending on the options and coverage you choose. Of course, according to most plans’ marketing material, you’ll get great returns and they say that it only needs to grow .4% to break even. However, this doesn’t include any fees paid into the plan, any external charges, or take into account any problems with the plan, like missing a payment. Some of the plans even promise bonuses that will credit money back into account. While these seem lucrative, they mostly serve as a distraction from the enormous fees that the funds take.
To get an idea of the charges that will be accrued, take a look at the terms and conditions of the contract. This will outline the fees and commissions that will be taken from the account. As a word of warning: your agent will receive a large bonus – called an “override” – for signing you up on this plan, hence why they can try to oversell you on them.
From the beginning, your contributions will be “locked up” until the end of the term. The problem is that since the commissions and fees are paid upfront, the surrender fee winds up being larger than any earnings. And even if the trust is based in a tax haven, your policy will be taxed based on where you are a resident.
Should I invest in an offshore pension plan?
In short, probably not. BBC recently did an investigation on these kinds of pension plans and found that even though the agents claimed pension fees were only 1.5%, they often wound up costing almost 80% of the investor’s contributions.
If you’re looking to invest while living abroad, always stick with a cost efficient and simple plan, not something that someone has to sell you on.