Monday, March 14, 2011

Essential Savings Maintenance For Expats

As banks and economies worldwide continue to struggle with the fallout of the global downturn, it is more important than ever for expats to be diligent about finding the right home for your savings. This can be a daunting task if you are not that way inclined. So think of it as a prized garden - you need to tend it and look after it regularly if you don't want it to get so overgrown with weeds that your flowers wither and die. So put on your gardening gloves (metaphorically speaking!) and get to work on some essential savings maintenance.

Do your research. Look at a range of factors when looking for a home for your nest-egg. We all want the highest rate of interest, but you should also consider other factors such as who ultimately owns the bank? Where is the parent based? How financially strong are they? A good article on how to assess financial strength is A Test of Strength.

Limit your deposit. Don't deposit more than the depositor protection scheme's maximum payout with any individual bank. Yes, we know it is a nuisance to split up your nest-egg and, yes, you may earn less. But we guarantee you will sleep easier at night knowing you have all your compensation ducks in a row! Also, with an increasing number of mergers and acquisitions in this sector, all savers should check that their accounts are not spread amongst deposit-takers owned by the same parent institution. If so, it could be the case that only a portion of your overall savings nest-egg may qualify for compensation if a deposit-taker goes to the wall.

Stick to a bank you know. With the proliferation of rate comparison sites, there may be a temptation to jump ship to an unfamiliar bank paying higher rates. However, in the current economic climate you will ultimately feel more comfortable with a bank you know and trust.

Keep an eye on takeovers and mergers. If your bank has or is in line to get taken over, you need to look carefully at the new owner. If it is not a bank you are familiar with, then find a new home for your savings. Even if you have money in a fixed term account, you can generally withdraw your savings if you prefer, although you will be subject to early withdrawal penalties.

Onshore or offshore? While a local bank account is useful, as an expat there may be good reasons why you should base some of your money offshore, particularly if you have to up sticks and move every few years with your job. But how do you go about choosing an offshore bank? And in periods of economic uncertainty, just how safe is it? Below we have come up with a further checklist to help you choose a home for your savings offshore.

1.    Economic and Political Stability: How stable is the centre? You want to choose a centre that is going to be around and functioning for the long haul. Choose a centre with a long history of economic and political stability.
2.    Legal system: Are you comfortable with the legal system? Choosing a centre that has a familiar legal system is recommended in order to avoid complications should you encounter problems.
3.    Infrastructure: Does the centre have good telecommunications? If you are thousands of miles away you want to be sure you can keep in contact with your finances when and how you choose. Also look at what services the sector offers. For example, are there solicitors, accountants and trust company services available should you need them? Choose a centre that has a good cross section of financial services.
4.    Providers: Look at the quality of banks based in the centre. Are they household names? It is a good sign if a centre has attracted major financial institutions, but will you be comfortable with a bank that is not from your original country of residence?
5.    Supervision: Perhaps the most important consideration. Does the financial centre operate under strict regulatory laws? How are you protected should something go wrong? What redress do you have and is there a compensation scheme in place? Always check the small print of what the compensation scheme actually covers. In addition, while many of the banks and financial institutions say they have the 100% financial backing of their parent should something go wrong; this cannot always be relied upon. So, unless you have firm and legally binding proof that the parent would bail out an offshore subsidiary, work within the guidelines of any compensation scheme available in your chosen centre. A good place to find out information on deposit protection is the Offshore Group of Banking Supervisors', which lists the relevant financial supervision website details for its members.
6.    Any Disadvantages?: There are pros and cons to most decisions and choosing an offshore centre is no exception. The main disadvantage is that you are outside the regulatory boundaries of your original or current country of residence, which means you are often solely reliant on the quality of regulation in place in your chosen offshore centre. Bear in mind that such regulatory safety nets are not always as effective as their onshore counterparts, so there may be issues with, for example, funding compensation schemes or working within particular timescales when it comes to paying out compensation.

Deborah Benn is a financial journalist and managing editor of the personal finance site for expatriates

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