Check transparency in off-shore savings

In most cases this comes down to four factors: how much do you want to save each month, the timeframe over which you are planning to save, whether you require the flexibility to change contribution levels, and whether you require the flexibility to withdraw money early.

You may elect to speak to an independent financial advisor. The advisor will be able to present you with several illustrations from different policy providers for your preferred savings amount and term; but are all these illustrations giving you like-for-like results?

Unexpectedly, given the modern, highly-regulated, face of the offshore marketplace, the answer is 'no', so this article will take a look at why not and which policies are the cheapest and most transparent after the smoke and mirrors are taken away.

The reason that some illustrations are not telling the whole story is that the illustration systems only show the administration charges of the policy.

This is fine if the policy does not have any additional fund management charges or penalties for missing contributions, but many offshore savings plans do.

It is easy to establish whether there are any penalties for missing or reducing contributions, as this will be stated in the policy prospectus, but it is not so clear whether there will be any additional charges on the fund on top of what the fund manager is taking.

The tables below were published by International Advisor in 2008 and show the difference between the figures you see when your financial advisor gives you an illustration of potential returns and the net return that you would receive in reality once additional fund charges are taken into consideration:



The first table shows the gross returns; as mentioned above, these are usually the figures generated by the illustration systems and given to you as an illustration of potential returns.

This is essentially calculated as the contributions plus growth minus the policy administration fee(s). It does not include hidden costs such as additional fund charges or penalties for reducing or suspending the contributions.

The second table shows the returns after 'external' fund costs are taken into consideration. For most products there is a huge difference between the illustrated return and the actual net return.

One policy of note is the Generali International Vision, which rises from sixth in the top table to first in the table when the external costs are taken into consideration. In fact, the figures are exactly the same in the two tables for this policy; this means there are absolutely no hidden costs and the product is completely transparent.

This is because Generali International offers direct access to the funds; rather than 'mirror' versions of the fund which are managed by the policy provider with additional management and compliance costs. Many policy providers estimate the cost of 'mirror funds' to effectively add another deduction of 1.2% to 1.5% per annum.

As such, if you are invested in x fund through the Vision policy, and that fund grows by 7.5% in a year, 7.5% growth will be allocated to your policy; not 6% or 6.3% as there may be with some of the other policies mentioned.

Consequently, it is not enough to simply view the illustrations and chose the policy which shows the highest returns. Speak to a financial adviser who looks at the larger picture and bases their recommendation on transparency of the product; and therefore the truly best return.

Thankfully, there are now several policy providers who offer direct investment into the parent fund but these still remain the exception to the rule.

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