Are you counting on Social Security and a Government Pension?
Portable pension plans are a means for people working abroad to build up a lump sum for their retirement when their employment circumstances will not automatically provide them with a pension. This article looks at who such plans are suitable for and how they work. The following month’s linked article will look at the issue of rogue advisers and the questions you should ask when considering taking out a portable pension plan.Portable pension plans are pension plans for expatriates, i.e. people working abroad. They are suitable for:
They may not be suitable for:
They are particular suitable for people in their late twenties and early/mid thirties who have a career path in front of them but have not yet made any significant investments and do not want to spend much time on looking after and managing their investments. They work like this: This sum is best paid off using a credit card – this is convenient, is cheaper than using a bank to make transfers, and after a few months you don’t really notice the money going out. Your monthly contribution is then invested into a series of mutual funds. Doing things this way gives you four advantages:
As mentioned, these plans are portable. You can take them to where you live next, even if that is the country of your own nationality (there will be some restrictions for residence in the USA). As they are written technically as life insurance contracts the investments are held by an insurance company with whom you have a contract for the value of those investments. There are no dividends or distributions. The whole value sits in your plan. There are no taxes to diminish the power of compounding and therefore the full value of the plan until you take the benefits at the end of the plan. And don’t forget – all the money you put in is your money. Portable pensions plans – a means for people working abroad to build up a lump sum for their retirement when their employment circumstances will not automatically provide them with a pension. Such plans may form the backbone of an individual’s forward planning, as they confer a number of benefits:
However at the same time some members of the expatriate community have suffered problems with such plans. This article looks at two clumps of typical reasons for these problems. Firstly, a pension plan is a contract. If you take one out you should expect to fulfill its terms, which involve putting in a pre-agreed amount of money away on a regular basis for a pre-agreed number of years. (Remember, by the way, that this is still your money!) Such plans have flexibility, as they are designed for normal working people, who may from time to time lose their jobs, or decide on a change of career, or take further educational courses full-time – the plans can cope with periodic interruptions. But the more contributions that are missed, the less efficient a plan will be. It is highly inefficient and therefore inadvisable to take out a long-term plan and contribute only for the minimum period. You should be making as many contributions as you can, but should not be worried if life circumstances require you to cease contributions temporarily. You should also make sure that you set the amount you contribute at a level you can easily afford – allowing for realistic increases in your economic responsibilities or relocation to a lower-paying environment. Addressing your plan in this way will save you from over-extending yourself and allow you to reap its benefits. Therefore it is a good idea to beware high-pressure sales people who will assure you that the more you put into the plan the better, and that you should go for maximum plan length (irrespective of your circumstances) as ‘all you have to pay in is the first twelve or eighteen months’. Typically these people come from companies that have not been in town all that long, or have changed their name in the not too recent past. And they assuredly do not have your best interests in mind. Whereas your planning should be based on a thorough discussion of your circumstances, goals and responsibilities, not on the dictates of the salesperson. The second set of reasons why people get into trouble with these plans is unrealistic expectations about returns in the short term and the inability to cope with bad markets. In the life of a typical pension plan – say, 20 or 25 years – there will be a wide range of market conditions, unforeseeable except in their variability. Some of these years will be poor for a range of asset classes, and the value of a plan can fall in such years, especially if heavily exposed to the stock markets (where in general the greatest gains in value are to be had). A plan largely invested in stocks during the period 2000-2002 will have done very poorly. It would have rebounded steeply 2003-2004. However, inexperienced investors at the end of 2002 may have decided they were throwing good money after bad and ceased contributions for that reason (a mistake, as they were cutting themselves out of the averaging effect), or even decided to encash the plan. These plans have high penalties for early encashment, especially towards the beginning of the plan. There is nothing untoward about this as a pension plan should be there for your retirement; it is not a short-term savings vehicle and should not be seen as your source of instant cash. If you had a corporate pension in the country of your own nationality you would not in most cases be able to touch the money in it until you retired. Portable plans are more flexible, but the early encashment penalty is an advisable deterrent. Over time they make money, but they need time to make that money. The knee-jerk reaction of encashment because of (temporarily) poor performance is how people lose money big-time in these plans. Given these negatives, is it sensible to take out such a plan? The answer is overwhelmingly ‘Yes’, but keep in mind these dangers: that you may take on a plan that is longer than you expected or need and into which you are contributing too much; and that short-term poor performance may scare you into the penalties of early encashment. The morals here are caution, patience, and a modicum of education. These plans are very much worth having, provided you know what to expect, and the plan fits your life situation. Suggestions before starting such a plan:
In addition, shop around for the special offer that sometimes come with these plans for limited periods – with one currently available offer you can get as much as 7% added to all the money you put into your plan, have a look at the attached. All of us at Banner would be happy to discuss things further please get in touch. |