Offshore investment account - surrender with massive penalty fee or keep it?

[duba]

hi all,

I need some advice from you all.

We were stupid enough to open an offshore account with ITA via Japan based IFA few years back and really would like an advice on what to do.

I know generally most of people here think it’s best to surrender ASAP and reinvest elsewhere but with penalties and tax implications on capital gain if we were to bring back money now with cheap yen (good and bad)…etc we are not sure what to do next.

Basically a huge chunk of our money is in ITA’s access portfolio 8000 about 1M USD. This account charges about 1.2% admin charges + $720 policy fee annually which is obviously a huge chunk of money each year. We have 2 years left on this policy until the surrender charges are waived. We fired the IFA 3 years ago so no longer pay the FA fee but obviously with these fees, our fund is only up about 8% since we started in 2017. Our option is either to keep this and enjoy the benefit of having an offshore account after 2 years with only the policy fees thereafter (or withdraw at no surrender charge in 2 years)or to pay 2.4% surrender fees now and re-invest elsewhere?

To make things worse, we also put about $2500 each month into S&P 500 15 Year Plan USD - Series III on ITA which I think is an even bigger rip off account with 1.5% structure fee annum and admin charges of 1.7%. We still have about 9 years left for this and pretty much stuck as the penalty of stopping this would be massive. The whole point of this plan was you receive 40% guarantee return at the end of 15 year plan, but given S&P’s annual average return, it just doesn’t make sense and the only selling point of this by FA was that if the market was down, we’d be walking away with 40%.

Given how much we are paying in the fees, we would literally break even if not lose money at the end of the plan either way. Anyhow, the penalty to surrender right now is about half of the total amount we’ve already contributed so far. (With the gain, about 40% of the total amount we’ve already contributed). So our dilemma is we’d end up paying the same kind of fees now even if we end up surrendering so may as well keep it and get the guaranteed 40% back when the policy ends?

We know how big of a mistake signing up for these plans were but we are really struggling to come up with how to move forward. Should we take it as a big lesson learned, and keep it or surrender immediately with a massive loss on the penalty charges now and reinvest?

I know we have a lot of smart people here, would be grateful for your advice and thoughts.

 

[sadmamacat]

@duba If its anything like what I signed up for years ago then I would go ahead and cut bait.

Story here: https://www.reddit.com/r/japanlife/comments/on5xxf/if\_youre\_interested\_in\_investing\_be\_wary\_of/?utm\_source=share&utm\_medium=web2x&context=3

 

[jandolphrohnson]

@duba Forget the sunk costs, look at what your outcomes are now. Take a guess at how much return you'd get from reinvesting that money in a better way, run the numbers, calculate whether you end up with more that way than waiting out the surrender fees. Most likely you're better off pulling it as soon as you can, but it all comes down to numbers.

 

[duba]

@jandolphrohnson Thanks. We’ve run the numbers on excel and for the S&P, the net cost is actually less if keeping the plan, rather than canceling it but it would have to perform over 2.9% to cover the cost each year which is ridiculous and I just don’t know if I want to continue to contribute to this BS.

As for the main one, if we just paid 1.2% for 2 more years, we don’t have to pay high fees after that, but we can still enjoy the benefit of the offshore account so we are considering to keep that one as we’ve already come so far.

 

[jandolphrohnson]

@duba

the net cost is actually less if keeping the plan, rather than canceling it but it would have to perform over 2.9% to cover the cost each year which is ridiculous and I just don’t know if I want to continue to contribute to this BS.

I can get with choosing a less financially effective approach out of spite, but if you cancel then you're paying them the fees, so it sounds like they win either way. (Indeed given that the cancellation fees are riskless income for them, cancelling probably helps rather than hurts them)

 

[j101814]

@duba Eww, 1.2% annual fee sucks.

For the main account, it's a simple math problem. 1.2% each year is mathematically better than 2.4% right now, although the flat fee slightly complicates the math. That said, the difference isn't really that huge and it's probably better to just bite the bullet now than to forget in two years.

For the 15 year plan, can you just stop contributing and call the rest of it a loss? You could probably still simulate the returns whether you surrender or not. 3.2% fees for 9 more years is ridiculous, but if my back of the napkin math is correct, it's better than taking a 40% loss right away (if you can stop contributing). Don't have a handle on which is better if you still have to contribute for the remainder, need to break out the spreadsheets for that.

 

[duba]

@j101814 Thanks, yea for the main one the surrender cost is exactly the same as the fees I’d be paying for 2 more years until I no longer will have to pay the fees so it may make sense to leave it. I also read that bringing that money back to Japan now would mean I’d have to pay a huge capital gain on the exchange rate even if I’m being back in USD.

As for the 15 year plan, I think I can stop contributing but then I’d lose the privilege to 40% guarantee at the end of the term, and still have to keep paying the 2.9% fees on the remaining amount which seems silly.

I did the excel on the 15year plan and the net cost is actually less if keeping the plan, but at the end of the policy, I’d only be better off around 10-20k in return if I cancelled now with massive surrender fees assuming the fund continues to make 7% average return (based on the FA’s calculations)

I’m really torn.

 

[j101814]

@duba

I also read that bringing that money back to Japan now would mean I’d have to pay a huge capital gain on the exchange rate even if I’m being back in USD.

Can you park it overseas in a regular US brokerage account to avoid capital gains? You'll be running into this problem with the 15 year plan so you'll want to know how you're going to exit that plan as well.

I did the excel on the 15year plan and the net cost is actually less if keeping the plan, but at the end of the policy, I’d only be better off around 10-20k in return if I cancelled now with massive surrender fees assuming the fund continues to make 7% average return (based on the FA’s calculations)

How much is in the plan right now? I ask because it seems like the difference would be a lot more than 10-20k. Assuming the nominal return of the S&P 500 is 7%, and the plan would be 4.1% after fees:

• The return of keeping the plan for 9 more years would be ~43.5%
• The return of surrendering and losing 40% now and investing in S&P500 for 9 more years would be ~10%

Given your rate of $2500 a month for the last 6 years, the difference should be more like 50-60k.

Historical return of the S&P500 is more closer to 10% than 7% as well, so the difference may be larger.

 

[duba]

@j101814 So I actually have two plans, plan1 is $1000 contribution each month that was stated in 2020 and plan 2 is $1500 contribution that was started in 2017.

Plan 2 net contribution amount is 115,000 and account value 138,000. I can close the account with 51,000 surrender value now.

Basically my FA did a simple excel adding the total fee amount I’d be paying if I kept the plan subtracted by the total projected growth and compared that to the current surrender charge and obviously keeping the account had a better result that way, but didn’t necessarily taken account for the gain realized by the reinvested S&P with cheaper fee.

 

[nicoleqdp]

@duba Your fund is only up 8% since 2017? A simple worldwide index fund would have returned ~50% in USD in the same period. I would take a hard look at what you’re actually invested in, too.

 

[duba]

@nicoleqdp Yes, I know. But it’s also the high fee that’s eaten up the gain for the last 3 years and we’ve also been very conservative in what we’ve invested. I was paying the policy fee + FA fee until recently about 2% each year for nothing, but even then, the fund has not performed well at all.

 

[gracia1]

@duba

1. The one with two years left cut
2. Sp500 contribute the minimum or 0 going forward and invest like a normie, stop trying to get fancy. I don't understand the way they worded the surrender charge" the value of the remaining initial units"...but that sounds like the fee would be larger than current value because you're not half way through yet. I'd never look at it again until maturity, and act like it's all gone.
   

Wow, talk about predatory disguised as safety. Website says "no downside risk", "flexible solutions".

 

[duba]

@gracia1 Thank you, so the main one, since the surrender cost is only the same as the fees I’d be paying for the next 2 years, u think I should just cut now and run?

For the s&P, that’s a good point I guess I won’t need a guarantee of 40% anyway since it’ll likely outperform the 40% average in 10+ years even though the fees alone I’d have paid about 2.9% * 15 years by then…. Hmmm

 

[amincitia]

@duba Too many acronyms.

 

[kristhuy]

@amincitia In case it helps, ITA is a reference to Investors Trust, a Cayman-Island-based hybrid brokerage/life-insurance company that offers investment products that are especially targeted towards people who move countries often or who find brokerages in the country they live in unattractive/unavailable.

The colloquial term for it is "offshore investing" because the assets are typically purchased within a life insurance wrapper maintained by an insurance company domiciled in a tax haven, theoretically enabling the investor to defer capital gains until retirement, etc., and avoid paying tax in their country of residence while in the accumulation stage of investing (even if they move around a lot). In practice, the uncertainty regarding the potential tax treatment of such products, combined with the high fees, tends to mean they are perceived as a bad option for most people.

 

[duba]

@kristhuy Thank you!!

 

[even_stranger_things]

@amincitia Yeah it’s tiring.

 

[donkennedy005]

@duba Why do many funds in Japan have insane fees?

 

[kristhuy]

@donkennedy005 FWIW, the funds OP is talking about aren't Japanese. They're based in the Cayman Islands.

 

[j101814]

@donkennedy005 US isn't much different. The popularity of index funds brought fees down, but high fee financial planners are still very much a thing.