Buyer Beware
Today we have a guest post from a RetireJapan reader, B. They have very kindly written up some details about an offshore insurance ‘investment’ they took out a few years ago.
Long term readers will know that this kind of investment (and the ‘advisors’ that sell them) are the reason I started RetireJapan. We have written about them many times over the years, including the very first post on this blog, Financial Advisors, and The Dark Side of Financial Advice. There are also whole sections of the forum about this.
Take it away, B.
Prologue
Scene 1. A circle of people sit, facing each other in a large basement room. All ages, races.
Leader: We have a new member. Could you please introduce yourself to the group?
B: My name is B and I…I..(quietly, almost in a whisper), I invested in an offshore insurance policy for my retirement.
Everyone: Hi B!
Leader: Thank you for coming B. I know that it took a lot of courage for you to come here today, and to share your story with us. Don’t worry. There are lots of others in the room just like you. There is nothing to be afraid of or embarrassed about. We are here to help you.
A Sad Story
To a certain extent, this is what Retire Japan feels a little like for me.
I found myself after a few years in Tokyo without a pension plan in either my home country or in Japan. I was one of those (I am sure not the only one…) who was told by their non-scrupulous employer that I did not need to join the Japanese national pension scheme. If anyone ever tells you this, don’t believe them and don’t trust them, even if they are from HR or seem to be running a successful business.
So, I took matters into my own hands and decided to start investing for my future. I was relatively young, and doing a smart, sensible thing. All good, so far… Alas, my choice was to invest in offshore investment products for the long term.
There have been a number of articles on RetireJapan and some very good conversations in the forum about these kinds of policies. I don’t intend to rehash those arguments here. I thought I would, instead, share my actual numbers. If this helps anyone who is unsure about exactly what returns they should expect, then I will consider that a small success.
So, here are the numbers for my policy, which matures after 15 years.
| Invested | 7.4m |
| Current value | 9.7m |
| Gain | 2.3m |
| Total Return | 31% |
Not so bad…I have, in fact, gained 2.3M yen! Over 30% return! In the Japanese context of bank returns of 0.002% (thank you for your generosity, SMBC), this seems like something to jump up and down about…
However, as all you smart people know, if we calculate this as a yearly return, we get just over….2%. Phew. Thank goodness there is no inflation in Japan.
Ouch Ouch
It is a little painful to compare this against say, the S&P 500. But I did it anyway, with a tear (or several) in my eye. For the same period, the same amount regularly invested in the S&P500 would have resulted in a portfolio value of 20M JPY with an annualized return of over 14% (dqydj.com). This is of course not 100% apples-to-apples, as this does not take into account the management fee of a mutual fund, but you get the picture.
Below, we can see the anaemic historic returns, and how long the policy takes to just get back to break-even. Only after 5 or 6 years of regular investments does the policy value exceed the amount invested.
Hopefully, this difference is clear and proves that the offshore insurance policy is not the best way to invest for your future. This is, of course, due to the nature of many of these policies and how they deal with ‘initial units’. As many readers will know, the first 18 months’ or 24 months’ or even 36 months’ premiums are taken to cover the management costs.
What this means is that the initial units, with the longest time to gain due to compound interest, are not invested for the customer. Anyone attempting to cancel one of these policies will be warned that to do so will result in them losing a certain amount of money as a cancellation charge, which is related to the cost of these initial units.
Here is a cancellation charge example after 20 years of payments into a 30-year scheme.
The Kicker
We can see, then, that the offshore policies described above underperform the market, and charge the customer if they are so audacious as to want to cut their losses and cancel.But of course, since we are paying tens of thousands of dollars in management fees, we will surely get the best advice from the financial services provider, right?
Below is an example of the support given by one of these institutions regarding a partial withdrawal and the associated tax implications:
We do not provide any tax advice. We recommend that you obtain independent advice in relation to the potential tax consequences for you in relation to this policy and related payments. We reject any responsibility or liability whatsoever for any adverse tax consequences that may arise in respect of your policy and/or any payments made under your policy as a result of you being a resident in a different country/region than the issuing insurer or its respective insurance branch.
So there it is. The final nail in the coffin. Regarding tax payments due, good luck to you, B, you are on your own.
I hope this is useful for anyone considering one of these plans. For many members of this community, I am of course preaching to the converted. Be smart. Read a bit. Ask questions. Take control of your own financial future.
Don’t be like B.
Thank you so much for taking the time to write this up, B. If we can save just one person by sharing this it will have been worth it.
You will be glad to hear that B. has recovered from this initial minor hiccup and is now investing in low-cost index funds and on track for a very comfortable retirement.
Remember, any time you are thinking about an investment (particularly if someone is actively trying to sell it to you) you can always drop by the forum and ask people what they think about it. Just a few minutes’ work could save you a fortune.
Excellent advice.
I think many people intimidated by Japanese brokers and their language requirements, or Americans frustrated with their limited options, fall victim to these companies.
* FYI two images are not loading.
Thanks! Images should be okay now 🙂
Actually your annual rate of return is more than 2% because you started with nothing and added to it monthly. Let’s say you had contributed 7.4m after 13 years and your policy was worth 9.7m. This works out at 47000 yen per month, which sounds about right as you were probably contributing USD, not JPY.
If so, then after 13 years your annual rate of return is just over 4%, not 2% as you stated. It’s still not brilliant, but it depends on what you were invested in. I doubt it was 100% stocks all of the time. If it was more diversified – say a mixture of stocks, bonds and gold – then it’s not such a bad yield.
I’m not trying to defend these schemes because their expenses are way too high, and it’s ridiculous that you can’t withdraw early without a penalty. But in some ways they’re better than nothing, and at least force you to contribute regularly and keep your money invested for a long time!
Perhaps I got the calculation wrong, but mine comes out at 2.1% for 13 years.
invested 7,400,000
value 9,700,000
gain 2,300,000
period 13
period divided 0.08
calculation 0.31
cal step 2 1.31
cal step 3 1.02
cal step 4 0.02
cal step 5 2.10
I used this simple savings calculator to derive the yield:
http://www.math.com/students/calculators/source/compound.htm
If you input these figures:
Years: 13
Percent Yield: 4.1
Initial Balance: 0
Monthly Contribution: 47000 (this is my estimate and could be wrong)
… then you get a final balance of about 9.7 million. If the yield is 2.1% then the final balance is 8.4 million. The key point is that you’re starting from nothing and building the account slowly. I think your calculation assumes that you are starting with 7.4m and not adding anything else for 13 years. In fact if you input this in the above calculator with a yield of 2.1% you get a final balance of 9.7m.
The upshot is that you need a higher yield if your contributions are built slowly over time, compared to investing it all at the beginning, in order to achieve the same end result.
Fair enough. I think my calculation is indeed wrong. Apologies! (Ben, please feel to update if you like.)
The amount paid in was not fixed for the whole time, which makes it a little difficult to estimate the yearly return, but I think about 4% is correct.
You have to list all the contributions; date, amount in a spreadsheet, with the last entry being today’s date and negative actual value, and use the XIRR function to determine the Internal Rate of Return for the investment
Each installment payed in (positive value) grows for a different number of months, over the total number of months of the investment n, so the first installment grows by ((1+ Annual Rate r)^1/12)^n, the next by ((1+ r)^1/12)^(n-1), the next by ((1+ r)^1/12)^(n-2), and so on to the last installment which didn’t grow at all, i.e. ((1+ r)^1/12)^(n-n) = ((1+ r)^1/12)^0 = 1 … (anything to the power 0 = 1) This rate r that would cause all these payments to yield the actual payout (negative value) of the current value of the fund is called the Internal Rate of Return.
The simple IRR function is for when all the payments are for the same amount at regular intervals over the investment period.
The XIRR function is for when the payments are for varying amounts and/or varying intervals over the investment period.
They both calculate the rate that makes the total equation work.
At least you did not lose money, some people here in Japan lost money with the LM management fund that was sold here… Such Financial Advisors made large commissions selling this fund at the expense of investors…
https://therapeofhongkong.com/tag/fraser-jamieson/
By lost money I mean lose their original investment
Understood. And I am thankful for that.
The only thing I would say is that the fund you mentioned seems to be quite an ‘exotic’ investment. The people investing in that presumably knew (?) that this was a high-risk, high-return play.
The policy I invested in was sold for retirement purposes. As Ian says, the ‘forced savings’ nature of these things is one positive feature. If the choice was only between doing nothing at all and using one of these offshore investment policies, I would definitely suggest investing in Jersey, Cayman Islands, Isle of Man etc.
But, with a little bit more knowledge, and faith in yourself to be disciplined, it is possible to keep your costs much lower so therefore generate greater returns for you and your family/
The guy mentioned in that link (Jamieson) was my advisor. He was friendly and helpful for a few of the investments I made. He moved his company to HongKong and told me my investments would have to move to HK also. I checked with the fund managers directly. Turns out he was bullshitting me, so I switched from Magellan to another advisor here in Tokyo (who also used to sell the LM fund — it wasnt “exotic”, and seemed to be low/medium risk).
BTW: other advisors in Tokyo are now pushing another Australian property fund. Be careful.
Why not just go for an online broker like InteractiveBrokers, open up an account in Prestia or some bank that will deal with them, and choose your own funds. No management fees; no early withdrawal penalties; cash available anytime.
(With funds in tax-havens like Isle of Man, Jersey, you have to go through all sorts of bureaucracy every time you invest or withdraw – no need for all that, and no need for the “management” fees).
“The only thing I would say is that the fund you mentioned seems to be quite an ‘exotic’ investment. The people investing in that presumably knew (?) that this was a high-risk, high-return play.”
The site I provided does indeed give that impression when looking at it now. At the time though it seemed safe enough, was hosted by Friends Provident Isle Of Man/Jersey. The advisor I consulted with , told me it was solid; was property invested in Auz. We did not have a Site like Retire Japan at the time, the advisor company that was selling it was recommended to me by a Friend and was well known among the expat company here at the time… they seemed respectable..
Ah, I see. Yep, as you said, there was not much information available at that time in English. iDeCo and NISA also did not exist.
Hopefully this community can keep helping to educate people to invest in low-cost options as much as possible…
Very informative article! One of my close friend has been investing in Investors Trust S&P 500 Index Composition plan (https://www.investors-trust.com/products/product-family/sp500/) for last 10 years and whenever he gets the chance, he tries to convince me to invest in this plan.
I never listened to him not because of the high expense ratio but because I don’t believe in such tax heaven offshore investments due to the lack of regulations and safety of investment.
Is this also the similar insurance investment that you have experienced or is it different? If it is same then I will forward all these information to my friend asap and try to convince him to bail out.
Seems similar.
Look at this:
Annual Administration Charge 10 Year Term: 2.0% per annum
15 Year Term: 1.7% per annum
20 Year Term: 1.1% per annum
Policy Fee USD 10 monthly
Structure Fee 0.125% monthly of account balance
That policy also talks about an initial period…DANGER SIGN!
Your friend should be asking himself, what is he or she paying these fees for? An S&P 500 equity index fund is available without paying these charges. So why pay extra to an ‘expert’ or ‘advisor’ who then invests your money in something available at low cost…
Thank you, I also thought so when I read your experience. I’ll try to convince him to stop putting additional contributions to this scheme. Anyway he has past his lock in period so no cancellation charges and he’s already up substantially in his investments.
I don’t know about all this investing but do wonder if I have done the right things after all these years. How much do you think is a reasonable amount to have saved by the time you are 65? I turned 65 last year and retired two months ago. I still work part time but worry about running out of money. My wife also has her pension.
I would aim for 100 million yen if you live in Tokyo.
There is no answer that will fit everyone. I would think about it in terms of ‘do you have enough money to realistically fund the lifestyle you want for the rest of your life?’.
If you and your wife have pensions they will provide an income floor. If you have other sources of income (part-time work, dividends, interest, royalties, rent) that will also help.
And if you have savings you can spend them.
But it’s not so much ‘how much should I have’ but ‘how can I best manage what I have’.
Good luck!
There are several ways to calculate this, but it really depends on how much you need to cover your monthly expenses for the rest of your life, how long you expect to live, and the yield return you could reasonably expect on yout investment. You really need to understand your budget requirements depending on your standard of living, and make an allowance for healthcare, taxes, unexpected expenses, and so on. If you own your own home, and have paid off the mortgage, so that you have no monthly rent payment, it will be less than if you have to continue paying rent for the rest of your life. However, there are three levels that you may consider to be ‘sufficient’, depending on your expectations:
Level 1 – You can calculate using the standard Home Loan Mortgage formula.
If you expect to live for 20 years (240 months), and your nest egg is reasonably expected to yield 5% per year (minus 5% in the formula), then you can calculate the monthly payment (you would receive), comprised of the 5% yield and some draw down of the principal. If you withdraw this amount every month, your nest egg will decline over the years, like the outstanding balance on a mortgage loan, until the last day in 20 years time when you withdraw the last yen… If you shorten the duration, you can withdraw more each month, or if you have supplemental income such as a pension, you can increase your monthly income, or reduce your withdrawals to extend the life of the fund. You could also extend the life of the fund if the yield turns out to be higher than expected, but the fund would run out sooner if the yield turns out to be lower than expected over the years.
Lets say total taxes run at 30%… (Capital Gains, Resident’s, Property, and Healthcare Taxes)
If you had a fund of $500k and it grew at 5% per year and you wanted it to last 20 years, you would be able to withdraw $2k per month, or just under $25k per year before taxes… Probably $19k per year, or $1,600 per month after taxes…
If $1M, then $4,145 per month, or just under $50k per year before taxes… Probably $38k per year, or $3,180 per month after taxes…
Level 2 – If your nest egg is larger, you may be able to get to the point where you can cover your expenses from the Yield (say 5%). In this case the Value of the fund would not go down, but would stay constant, continuing to deliver that 5% every year for the rest of your life, and leaving the balance (after estate taxes) to your heirs. This does not keep pace with inflation, so in real terms the value of your fund and the income derived from it are declining at the rate of inflation. You may also have to take some draw-downs in the future.
You would need your Monthly Expenses x 12 Months x 1.3 for Taxes / 0.05 Interest = Lump Sum required…
If you needed $4k per month or $48k per year, you would need to withdraw $62,400 per year before taxes, so in order for this to be delivered by the 5% yield on your investment, the fund would have to be worth $1.25M…
Level 3 – If your nest egg is larger still, you may be able to cover your expenses from a portion of the Yield (say 3% out of the 5%) with the remainder reinvested. In this case the Value of the fund would go up by 2% per year, continuing to deliver a growing 5% every year, from which you continue to withdraw a growing 3%, the fund value grows in line with inflation, and the value of the fund in real terms will be the same or greater in the future then it is in real terms today. I would call this having achieved critical mass. The fund will continue to fund itself for the rest of your life.
Lump sum x 0.03 Interest annual withdrawl and Lump sum x 0.02 Interest annual reinvestment, so the fund would grow by (1.02)^n over n years…
If you needed $2k per month or $24k from the fund for the first year, you would need to withdraw $31,200 per year before taxes, so in order for this to be 3%, the fund would have to be worth 31,200 / 0.03 = just over $1M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year for the rest of your life, and leaving the index linked value of the fund (after estate taxes) to your heirs…
If you needed $4k per month or $48k from the fund for the first year, you would need to withdraw $62,400 per year before taxes, so in order for this to be 3%, the fund would have to be worth 62,400 / 0.03 = just over $2M… The fund would also increase by 2% per year in line with inflation, so you could withdraw 2% more every year, and leaving the index linked value of the fund (after estate taxes) to your heirs…
Level 3 is the stated goal of the Moustachians… Withdraw no more than 3% of the fund per year, so even if yield rates rise or fall, the fund will not decline too much and will continue to support you throughout your life.
If the monthly amount calculated for Level 1 along with any pension, income from employment or other amounts is not enough to cover your monthly living expenses at your desired standard of living, you have some options; either reduce your monthly outgoings and your standard of living, and/or continue to work to supplement your income and reduce the drain rate on your fund, find investments with a better rate of return, or shorten your expectation for the number of years you expect to support yourself…
You could downsize, or move to a cheaper location or country, especially if you no longer need to commute to work, either reducing your monthly rent or taking equity out of your home, and making the same or less monthly allowance stretch further.
Thanks Don, this is really helpful.
I’m starting to work through my retirement portfolio, and these three scenarios are great frameworks for me to build on. Much appreciated!
Thanks for sharing B! I’m in an almost identical situation to you (13 years in, similar amount invested and current value). I was wondering if anyone could advise me about what taxes I am due to pay in such a scheme? My term is up in two years and I was wondering what happens when a lump sum of 10 million yen or so drops into my bank account. I have no idea about my liabilities. Any ideas or advise? Many thanks in advance!
You will be liable for capital gains tax on the gains made. Prepare the paperwork proving how much you have invested yourself over the years and submit with 確定申告 in March/April after you get the payout.
The Japanese tax regulation has provisions for one-off income, which includes life insurance policies. The rate is a bit complicated , but something like this:
The gain – 500,000 yen is the taxable amount, let’s call it TA.
Tax rate is your standard tax rate (of your regular income; salary for most people) x 50% of TA.
So if you make 3M JPY gain, the TA would be 2.5M.
You would be taxed at your standard tax rate for half of this amount, 1.25M. So if your tax rate is 20%, for example, you will be required to pay 250,000 yen of tax. If your regular tax rate is more, the tax due is obviously higher.
That is my understanding…it is well worth checking with your local tax office to be 100% sure. You can call them or visit as long as you or someone close to you can explain it to them.
One other thing. That amount may raise a flag with your bank too. So be prepared to prove to them that the money is yours, otherwise they will not release it to you after it is transferred!
Thanks for the very useful information B. This is very helpful for me. I wasn’t sure if I should’ve been filing a return every year of the investment period. (Or perhaps I should have but it’s a bit late now…)
By the way, you don’t happen to know the specific Japanese term, for tax purposes, for “one-off income”?
Thanks again.
It was covered in the forums, I think.
一時所得 , ichiji shotoku.
I moved to Japan just before the Global Financial Crisis in 2008. My contact details were leaked/sold by my investment bank. (Scummy, I know.) I was contacted by multiple investment product sales people. It was very much this same scam. I enquired about tax implications and each and all was so dodgy. “Oh! You’ll need to ask your tax accountant. We don’t provide tax advice. ” The worst was a foreigner who used to play football in a league one step below the pros. I was stunned: How was this person selling me complex financial products without a university degree ? Comical! To be 100% honest, I was initially tempted by greed. Later, I changed my mind after a few clear days of thinking. Phew. I dodged that bullet. I have genuine empathy for anyone caught in that incredible racket. It is a shame that Japan financial regulators does not ban this type of product and these people who probably work under the radar without a proper visa. In retrospect, I assume they are rotating in and out of Japan on 30/60/90 day temporary (non-business) visas.
If you want revenge, I would recommend to try to book and expensive lunch or dinner — at their expense — to discuss the financial product… well knowing you will decline! A nice way to decline their offer (later, by email): Tell them another firm offered a similar product with lower rates. “Better luck next time, mate.”