We all know what makes goulash, it is a stew with a mix of vegetables and meat. Often, people make it out of leftovers in the fridge to make a cost effective meal.
In the Czech Republic, it is also used in a phrase “Mám guláš v hlavě“, which translates as “ I have goulash in my head’’. In other words I am confused”.
So, what am I confused about?
It is the goulash of insurance and investment products that are sold as a package for savings. These are contractual savings plans that would not be allowed to be sold in places with high regulatory controls, the UK and Australia come to mind.
Can anyone, hand on heart, in the modern working environment state that they can continue to put large fixed sums of money on a monthly basis into a savings plan for 15 to 25 years? We all have situations where there is a need to rethink our monthly outgoings; loss of job, lower salary, university fees, new mortgage and so on.
These long term savings plans all have initial and accumulation units which, to the public, is as easy to understand as the theory of General Relativity. And we have all heard of black holes!
The initial period refers to the number of months the investor’s money is allocated to initial units. This period can be up to 28 months for longer term plans. To quote from one of the brochures“The first 100% of regular premium unit allocations during the initial period are set aside in order to fund the administration fees over the duration of the premium payment term.”
I have seen many websites that suggest that the average time for which contributions are maintained is 7.2 years. That means that every time a client is persuaded to sign up for 10, 15, 20, 25 years or whatever, the strong probability is that the payments will be maintained for little longer than 7 years.
The penalties for cashing in a long term savings plan are high and often people only get a fraction of what they put into the contract.
So, the answer is to avoid the goulash. If you need life cover, ask your independent adviser to go into the market to get the best deal. Pure life cover is far cheaper than a policy, with savings included, that has high surrender penalties.
For savings, there are now many transparent and low cost options that allow full access to world markets in many currencies ( far more than the savings plans) without encashment penalties and with the ability to stop and start monthly savings without additonal cost.
Taxation
Often these goulash plans are sold as tax efficient ways to save. Well, I guess we only pay tax if we actually make a profit and a local accountant (in your jurisdiction) should be consulted first to ensure that the product in that country is not taxed- Australia ( mentioned before) is an example where the gains must be taxed as they accrue.
Also, there is an issue with personalised insurance products for returing UK expats- but that is for another blog.
Conclusion?
Don’t cook an investment goulash. Keep your savings and investment apart. It is far more cost effective, and provides a far better and more cost effective package than the supposed cheap investment goulash.
When times get tough, it is easier to maintain the relatively inexpensive life policy to protect the family and continue with the savings later when things improve.
Thus endeth the cookery lesson for today and steer clear of black holes.