There are two formulas for saving for pensions: through the bank or through insurance. Each formula has its assets and pitfalls.
Supplementary pension savings is an important instrument with which people can close the gap between the pension they will receive later and their final salary. “You can only save for pensions if you have sufficient liquidity and you can afford to miss the money you invest in your third pension pillar. Because if you withdraw your saved capital before the age of 60, you will be taxed at a rate of 33 percent,” says John Romain, the founder of the financial consultancy firm Immotheker-Finotheker.
The tax advantage is an important reason for individual pension savings. “You currently get a 30 percent tax benefit if you pay a maximum of 990 euros per year into your third pillar. This means you pay 297 euros less tax, to be increased by the municipal tax,” Romain calculates. That tax benefit drops to 25 percent for those who pay 1,270 euros per year, increasing the tax benefit to 317.5 euros.
The saver must make a choice between a pension savings fund with a bank or a pension savings insurance with a bank-insurer or a broker.
Funds
offer
Pension savings funds are comparable to regular investment funds. “You buy units in such a fund,” says Erik Weekers, CEO of the Federation for Insurance Brokers (FVF). “The supply of bank funds is limited. Banks usually only offer a few funds that match certain risk profiles.” Bank pension savings funds must adhere to specific rules. For example, they may invest a maximum of 75 percent of their portfolio in shares. This means they will never achieve the returns of pension savings insurance, which can invest 100 percent in shares.
Bank funds can continue to run after the saver’s retirement age. “If the financial markets are not in good shape when the saver retires, he or she can leave the money for a while until things improve,” says Weekers.
Cost
Just like other investment funds, banking pension funds charge costs. The annual management costs fluctuate between 1 and 2 percent. In addition, all banks, except Argenta, deduct entry fees of 2 to 3 percent. The bank therefore skims off 2 to 3 euros from every 100 euros that is deposited into a pension savings fund.
“Some banks charge exit fees if you withdraw your capital early,” adds John Romain. These costs are in addition to the 33 percent tax plus municipal tax that the saver pays if he or she withdraws the savings capital before his or her 60th birthday.
Practical
The major commercial banks offer a number of pension savings funds. Depending on their risk profile, pension savers can choose from a defensive, neutral or dynamic fund. There are several comparison websites that compare the performance, costs and other features of these bank funds. Morningstar.be, a specialist in fund data, is one of the most important.
Insurances
Branch 21 or branch 23
“If you save for a pension through an insurance contract, you pay a premium to the insurer and in return you receive an investment performance in the future,” Erik Weekers explains. There are two options within this insurance formula: branch 21 and branch 23. A branch 21 offers a capital guarantee and an annual guaranteed minimum return of between 0.5 and 2 percent. In addition, a profit share may be added, depending on the insurer’s performance. “Due to the capital protection, this formula is especially suitable for conservative savers or pension savers who want to safeguard their accrued capital from a certain age,” says Weekers.
There is a wide range of funds behind insurance formulas, allowing for more customized solutions.
Erik Weekers, Federation for Insurance Brokers
The premiums you pay into a branch23 are invested in an investment fund. “With a branch 23, you will receive an amount at your retirement age that corresponds to the return of the investment fund you have chosen with that insurance formula. You are not the owner of the shares in that fund, the insurer holds them for your contract,” Weekers knows.
offer
The wide range is the great asset of the branch23 formula. The possibilities are much wider than with bank funds. “Those who want to keep it simple can opt for profile funds from the bank. If you want more customization, you can contact an insurance broker,” says Weekers. “There is a wide range of funds behind branch 23 insurance formulas, which allows for more customization and allows savers to weigh more on their investment strategy. These monthly or annual deposits may seem small amounts, but in the long run they become large sums that you can manage in different ways. So sound advice is really important.” John Romain confirms this: “Very few people like to focus on their personal finances, so let yourself be guided.”
Very few people like to be concerned with their personal finances, so let yourself be guided’
John Romain, Real Estate Agent-Finotheker
In addition, additional coverage is possible with a small part of the premium, such as a premium waiver in the event of inability to work. “This ensures that the premiums continue to be paid if you become unable to work,” Weekers explains. “With death cover you can ensure that the intended savings capital is still paid out to your surviving relatives if you die prematurely.”
Savers who opt for insurance will always receive the final capital on the due date. Therefore, the broker will ensure that the fund is invested more defensively or even conservatively against the insured’s pension.
Cost
There are also costs associated with pension savings insurance. “You have entry costs, the management costs of the underlying fund and the costs of the insurance jacket in which the product is packaged. That is why insurance formulas are usually slightly more expensive. Most insurers also charge exit costs if you withdraw your capital before the age of 60. In addition, contractual exit costs usually apply to pension savings insurance policies. These decrease in the last five years of the contract,” says John Romain.
“These costs can vary greatly depending on the insurer or fund,” he adds. “The cost structures are often so complicated that few can figure it out.”
Practical
If you want to take out pension savings insurance, you can contact a bank that also offers insurance services or an insurance broker. Given the wide range, sound advice is needed. To compare the guaranteed returns of branch 21 formulas, you can consult the financial information sheets of the insurers, but that requires some searching.
The same applies to the cost structures and returns of the branch23 products. In the financial information sheets you will find the funds in which you can invest via a branch23. You can compare these funds, for example, via the Morningstar website. That’s a good start to choosing a fund that’s right for you.
One final tax is not the same as the other
The tax authorities levies a one-off tax of 8 percent on the saved capital when the pension saver turns 60 – the so-called anticipatory tax. How this is calculated depends on the pension savings product. For bank funds, the tax authorities assume a fictitious annual return of 4.75 percent. Even if your pension fund has only achieved an average return of 2 percent, you will be taxed on the final capital as if you had received a return of 4.75 percent per year every year. If your fund has achieved a higher average return, this is a windfall, because all profits above 4.75 percent are not taxed.
For branch 21 contracts, the tax authorities assume the minimum guaranteed return of the contract. For branch 23 contracts, pension savers are taxed on the actual return of the fund in which they are invested through their contract. There the tax will therefore correspond most closely to the final amount.
“You can continue to pay your annual premium even after you turn 60,” says John Romain of Immotheker-Finotheker. “You still get the tax benefit, but the capital you build up between the ages of 60 and 65 is no longer taxed.”