Over the course of this week, I have received several requests for information on regular investment plans. Whether it is retirement provision, savings for a child’s education or just general capital building the same products are generally recommended. So in my generic review of products available to U.A.E. residents, I thought this would be a good place to start…
Whilst there are a few investment companies would who are willing to accept applications for their savings plans directly from U.A.E. residents, there are still relatively few of them. Most investment companies are known for their expertise in a particular asset class or sector, they are rarely considered expert in all areas of investment. Consequently, a prudent investor typically spreads his investments between several fund managers and investment companies. Life assurance companies products give retail investors access to funds from many investment companies in one place.
Whilst there are savings when switching between fund ‘A’ and fund ‘B’ within the life assurance products, the life assurance company does charge for their product. Generically there are two types of charging structure offered by life assurance companies to residents of U.A.E. These types are known as: contractual and non-contractual and a summary of both plans follows.
Contractual plans are the most commonly sold. Here the investor agrees to pay a fixed amount for a fixed period e.g. $1,000 per month for 10 years. For these plans to provide the best value for money it is essential to make every contribution in full and on time. If you are in U.A.E. on a fixed term contract of a couple of years, you should think hard before taking out this type of plan. For example: you may find yourself in a taxed environment or unemployed at the end of your employment contract. This may seriously impact on your ability to continue to fund the plan especially if you are saving a large proportion of your income.
The charges you pay on contractual plans are based on the premium you have agreed to pay at the beginning of the plan, so whilst you may be able to reduce the contributions after a few years, the charges don’t go down. This makes it harder for your investment to make money for you. Most of these products take the majority of their charges up front, so the plan may not begin accruing any benefit for you for the first year or two. The easiest way to check this is to look at surrender value on the product illustration for years 1-3. (Never buy a product without seeing an illustration from the product provider.) So if you stop the plan during this time you will not get very much of your money back.
The longer the term of the plan, the greater the upfront charges. This is because the life assurance company and financial adviser will need to provide services for longer. Life is unpredictable, expat life more so and therefore it cannot come as a surprise that not many of these plans reach maturity, especially where they are for long terms and high premiums.
Non-Contractual plans have none of the restrictions of contractual plans. They have no fixed amount of contribution or term of investment. Charges are marginally higher than contractual plans but they are made on a ‘pay-as-you-go’ basis, so you only pay for the services you use. Generally there are no exit penalties. The majority of these plans are offered by investment companies and are exclusively investing in their own funds. However there are one or two life assurance companies providing non-contractual plans, these plans usually have the same investment options as the contractual plans.
Some people are savers and some are spenders. If most of us are honest with ourselves we know which camp we fall in. If you are a spender you may feel the need for the structure forced on you by a contractual plan.A financial adviser should discuss both these savings options with you highlighting the advantages and disadvantages of each before making a recommendation, which may be a combination of the two.
As always, if you have any questions, comments or concerns please let me know.