x Abu Dhabi, UAEFriday 21 July 2017

Wise investors can help kids with tuition, if not their homework

Fiscal View If your objectives are long term, then you can afford to ride out the current market volatility.

I am writing this column from the UK, where I have come for a short break to ostensibly assist my son in his preparations for his final A-level exams. In practice, however, I am here to monitor the growth of my wisteria and to attend a fancy picnic with a spot of opera.

I am pleased to report that the wisteria is flourishing and, miraculously, for such a short time in situ has produced several magnificent blooms, of which I am justifiably proud. The opera was in Russian, or it might have been Czech because it was written by Antonin Dvorak, and told the unlikely story of a water nymph, Rusalka, who was given human form by a witch. As usual, it ended in tragedy.

But back to the A-levels. I came to the UK, confident that maths had not changed much since Isaac Newton invented calculus more than 300 years ago to help solve a thorny problem that had been bothering him.

The truth is that while calculus has not changed and I was able to impress my son with my "integration by parts" technique, there is a whole bunch of other new stuff that was way beyond me. I was reduced to sharpening his pencils and driving him to the examination hall - and integrating by parts whenever the opportunity presented itself.

Where am I going with all this? Well, it's all about wisteria, water nymphs, opera, and the last of my brood who will soon (despite my tuition) be going to university. It's about the expectation of the good life during retirement and the provision for your children's education costs.

Saving for these goals is best started as early as possible so that your money is given a good opportunity to grow. The best performing asset class over the past 60 or 70 years has been equities (company shares) - not property, as most amateur investors would have you believe. They come with high volatility, which means that there will be periods when your investment will lose value. But if your objectives are long term, such as preparing for retirement in 30 years' time, then you can afford to ride out this volatility and profit from the long-term upwards trend.

Many of my clients have offshore savings plans that are maturing this year but, for various reasons, they have decided not to retire just yet. When an offshore policy matures, you are not obliged to surrender the policy and take the money out.

If you have no special need for the money, it is often a good idea to leave it invested while you remain offshore. Long-term savings plans attract various administrative costs that are charged over the life of the policy. When the policy matures, all these costs have been paid and you are left with an investment vehicle that is cheap to administer.

Costs associated with the management of the underlying funds will still be present, but the costs associated with the administration of the investment vehicle (sometimes called the "wrapper") will be reduced to a minimum.

And, importantly, there will be no penalties for making a withdrawal or, indeed, for surrendering the whole policy if you wish. This means that you have the perfect investment vehicle - low costs, instant liquidity, free switching between funds and no charges for withdrawals. This is a deal that is hard to beat. So why do investors rush to take their money out?

One of the reasons is because they can. They have been saving for years and when given the opportunity to touch and smell their hard-earned money for the first time, they cannot resist. One of my clients, for instance, wanted to buy herself the latest Jaguar - because she was worth it. And I tend to agree.

Another reason is because the word "maturity" encourages the view that it's all over. But it almost certainly isn't. You may have another five years to go before you retire. And even during retirement, you still need to manage your investments sensibly - in fact, more sensibly or, to be more accurate, more cautiously.

There are circumstances when the money should be taken at maturity, for example, to buy a retirement home or to put into trust to reduce inheritance liability, or to invest in asset types that are not available to you within the savings plan (like the Jaguar).

These could include investment property, low-risk student accommodation funds, low-risk multi-asset funds, high-interest deposit funds, guaranteed funds, hedge funds and structured notes, each of which could form part of an appropriate investment portfolio for someone approaching retirement.

But, unless you have a mind to invest in such asset classes, or simply want to spend the money, it would be a good idea to leave it invested appropriately in your matured policy where you can get at it whenever you want it.

Ensure that your product provider knows of your intentions because some of them, such as Zurich and Hansard, seem anxious to convert your money to cash, or near-cash, at maturity, where its purchasing power will erode due to the effects of inflation. If you tell them before maturity, they will keep it invested for you in the funds of your choice.


Bill Davey is a wealth manager at Mondial-Dubai. If you have any questions about this column or any other financial matter, e-mail him at bill.davey@mondialdubai.com