Let's Talk about Initial Periods

An Initial Period (IP) in offshore investing is a period at the beginning of a regular savings contract (USD, GBP or EUR). The fund units bought during the IP are charged throughout the term of the plan and at a higher level than charges levied on fund units bought after the IP is complete. These higher-charged fund units are the major source of income on the plan for the product provider, and in brief pay the commission to the Advisory company.

The length of the IP is shorter or longer depending (i) on the product provider; (ii) on the term chosen. The maximum IP you will see is two years, significantly less than some Kwacha insurance products available on the Zambian market.

These plans, as I have explained before in another article, are very cost-effective IF the regular payments are continued until maturity (which means the end of the chosen term), but the Advisor MUST make you, the investor, aware of the following:

ONE: If you take out an offshore regular savings plan which has an IP and stop saving during it (job loss, divorce, other crisis) you are in danger, if the plan lapses, of losing the entire amount that you've invested up to that date. Therefore, you MUST be informed by your Advisor about what is the Initial Period in your case and about your responsibility to reach the end of it. Now, the provider does not want your plan to lapse or for you to lose that money. You will be given time and opportunity to at least pay until the end of the IP, but if you do not, then eventually the provider will have no choice but to determine that your plan has lapsed. At that point, the investment made to date is lost.

Once the IP is complete, then even if you stop saving, the plan remains alive. This does sometimes happen but try your hardest not to do this, because the money within the plan will continue to be charged each year until maturity. If you do stop contributions after the IP, without the intention to re-start, then the status of the plan will be changed from "Live" to "Paid Up".

TWO: As noted above, the fund units bought during the IP are charged throughout the term of the plan, and at a higher level than fund units bought after the IP. This will potentially impact you in another way even with the IP out of the way.

1. In the event that you need to take some money out of your plan, you can do, and without penalty - but usually only from monies that have been invested after the IP has been completed. This is called a "partial withdrawal".
2. The real potential impact is seen when you want to make a "Full Surrender", that is, close the account fully before the maturity date. At this point, the amount you will get back will NOT be the actual market value of the investment, but the "Redemption Value". If we refer to the graphic at the top of this article, we can see that the investor has taken out a $250 per month savings plan over 15 years. In Year Ten he decides his objectives have changed and he wants to cash in (fully surrender) the whole account. The Account Value is $40,518: the Redemption Value is $38,967 and this is what he will receive. What is the difference? It is the remainder of the IP fund unit charges that were due from the plan up to maturity, which is fifteen years, i.e., in five years' time. The crucial thing to bear in mind is that the difference between Account Value and Redemption Value in percentage terms is, in the very early years of a plan, a punch in the face; towards the end of the plan it's more like a slap on the wrist.

My strong advice to all regular plan investors:

INSIST that your Advisor:

• takes you through the Account Value and Redemption Value columns on your plan illustration.
• confirms the IP for your plan and explains the options once the IP is completed (stopping temprarily; re-starting, increasing contributions, decreasing contributions (possible down to the minimum for the plan); making partial withdrawals.

For the rest, these USD savings plans will help you achieve your family and personal financial goals by growing a capital sum for you. But use them wisely! Ensure you do not over-commit. Start low, build up as you grow in confidence and your income grows. As one wise colleague said to me many years ago, "Don't let a savings plan take too many beers out of a client's fridge".

And a note to the Advisor: ensure you have explained these crucial elements. Insist that you yourself are fully signed up to full disclosure and transparency. Not only are you doing your regulatory duty, you will have happy clients. And isn't that the point?

Ben Carter August 2024