Savings Plans vs Investment Platforms: What’s the Difference?
When it comes to investing, there are two main approaches: investing in a savings plan product or investing directly on a platform. Here’s what you need to know about each approach:
Savings Plans
- A savings plan product is an investment vehicle that allows investors to save money regularly and consistently by making periodic contributions to the plan. These plans are structured as a life insurance policy or annuity contract and typically offer a limited range of investment options, such as mutual funds or exchange-traded funds (ETFs).
- One key advantage of a savings plan is tax efficiency. In an offshore regular savings plan, for example, investment returns grow tax-free through a process known as “gross roll-up.” This means that returns are not subject to taxation until withdrawn from the plan, allowing them to compound over time and potentially generate significant growth.
- However, savings plans may have higher fees than investing directly on a platform due to the additional costs associated with the insurance or annuity component of the plan. They may also have restrictions on when investors can withdraw their funds and may charge penalties or fees for early withdrawals.
Investment Platforms
Investing directly on a platform involves buying and selling securities (such as stocks, bonds, or ETFs) through an online investment platform or brokerage account. With this approach, investors have more direct control over their investment choices and can typically choose from a wider range of investment options than those offered by a savings plan product.
- One advantage of investing on a platform is lower fees.
- Many online investment platforms offer low or zero commissions on trades, making it more cost-effective for investors to invest directly.
- Additionally, investors have more flexibility regarding when they can buy or sell their securities and can typically access their funds more easily.
However, investing on a platform may require more knowledge and expertise than a savings plan product, and investors may need to manage their own tax reporting and compliance.
Choosing between a savings plan product and investing directly on a platform will depend on an investor’s individual goals, risk tolerance, and preferences. Before deciding, investors should carefully consider each approach’s costs, investment options, liquidity, and tax implications. A financial adviser can provide guidance and help investors evaluate their options.
Tax Efficiency of Offshore Savings Plans: Gross Roll-Up
In an offshore regular savings plan, investment returns grow tax-free through a process known as “gross roll-up.” Here’s how it works:
- When an investor contributes money to an offshore regular savings plan, the funds are typically invested in a range of investment products, such as mutual funds or ETFs. As these investments generate returns, such as dividends, interest, or capital gains, the returns are reinvested back into the plan.
- Because the plan is based on an offshore authority with favourable tax laws, the returns are not subject to taxation in the investor’s home country, allowing them to grow tax-free. Over time, the investment returns are compounded, meaning that they are reinvested and generate additional returns. This can result in significant growth over the long term.
- When the investor eventually withdraws funds from the plan, they will be subject to taxation according to the tax laws of their home country at the time of withdrawal.
It’s important to note that gross roll-up is a tax-efficient strategy that can help investors maximise their long-term returns. However, investors should also be aware of the risks associated with offshore investing, including potential regulatory and compliance issues and currency and market risks. As with any investment strategy, working with a trusted financial adviser and carefully evaluating the risks and benefits before making any investment decisions is important.
Overall
Overall, an offshore savings plan can provide several benefits that appeal to clients looking to save money regularly and consistently, especially those seeking tax-efficient, diverse, and internationally oriented-investments. However, it’s crucial to note that offshore savings plans can come with risks. Therefore, investors need to work with a trusted financial adviser to assess their situation and determine if an offshore savings plan is the right choice.
