UAE expats warned over 25 year savings plans

Published:  5 Oct at 6 PM
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Tagged: Moving, Visas, UK, UAE, Money, England
Expats in the UAE are being warned yet again about the inadvisability of taking on 25 year savings plans.

The expat life is, by definition, a transient one, with the majority of expat professionals moving between assignments and rarely staying in one place for more than five years or so. Sadly, a good proportion find themselves locked into an all too common financial trap, the 25 year savings plan beloved by unregulated, commission-hungry independent financial advisers. The syndrome isn’t just a UAE problem, as dodgy salesmen all across the expat world are lying in wait for their less-than savvy expat victims.

Even so, it’s difficult to understand just how intelligent expat newbies can be coerced into committing themselves to as much as $1,000 a month investments when they don’t know exactly where they’ll be living and working a few years later. These horrendously complicated, outdated and toxic savings schemes are now banned in the UK, but are still being pushed in the UAE and elsewhere in the expat world. Once a duped expat signs the contract, he or she is literally locked in for the full period due to the massive benefits received by the IFA and the scheme’s insurance company.

The plans themselves are front-loaded, in that the IFA gets an immediate commission of four per cent or more of the total invested over the 25 year term. A plan requiring a monthly deposit of $2,000 over the full term will net the so-called advisor a massive $24,000 immediately after the contract has been signed and submitted. This amount will be recouped by the insurer from future premiums received, meaning that heavy penalties are imposed on savers wishing to withdraw from the contract before the full term is up.

Withdrawing early can mean that all the saver’s payments up to the withdrawal date may well be kept in penalties by the insurer. Analysts' reports reveal only one saver in 20 actually completes the 25 year course, with the rest pulling out and losing up to all their premiums. Even if a saver continues to term, maintenance and other product charges of four to six per cent annually and two to three per cent of underlying fund charges mean that, to make a profit, the money needs to grow at an average of seven percent a year to break even.

Nowadays, high returns are incredibly difficult to maintain, meaning that the majority of current 25 year plans will be in deficit by the term date, and cashing in earlier can lose most of the premiums paid. Setting up a low-cost, self-administered flexible portfolio or taking advice from a trustworthy, fully-registered advisor are the best ways to avoid a financial disaster whilst growing your savings.
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