For many years pensions saving funds and policies have been a popular means by which people can build up a financial buffer that will ensure that they have a comfortable life after they retire. However, many younger people are now questioning they are still relevant in a world full of new investment options. The financial expert Chris Sugira reviews the investment options for your retirement nest egg.
There are several ways in which you can build up financial reserves for your old age. One popular way is a retirement savings fund.
“The pension system in Belgium consists of three pillars. The first pillar is the state pension. This is built up through the social security contributions that you pay during your working life. Unfortunately, the level of the state pension is often considerably lower than the income you were used to when you were working. This is why many people consider a second or third pension pillar”, Chris Sugira told VRT News.
“The second pillar, a group insurance policy, is offered by employers. It provides a supplementary pension when you retire. An employer is not obliged to offer a company pension, but it is increasingly common. The third pillar is a retirement savings. Here you decide to build up extra savings for when you retire. This form of saving is completely voluntary and can be done mainly in two ways: through a pension savings fund or pension savings insurance.”
Two options
If you wish to save for after your retirement, you can choose between a fund or an insurance policy. What you choose depends on your preferences and the risk you are willing to take. “A retirement savings fund is an investment managed by the bank. The fund invests in stocks and bonds, so returns depend on stock market performance. This brings some uncertainty, but also offers the possibility of higher returns. For young people that have a longer investment horizon this can be an interesting option”, Chris Sugira says.
“Pension savings insurance is managed by an insurer and, in the case of a Tak 21 product, offers more security. Tak 21 is the safest variant, with a guaranteed return and chance of an additional profit share depending on the insurer's performance. Tak 23 offers no capital guarantee, but works through investments like an investment fund. As a result, the risk is higher, but the potential return is also higher. This choice is especially interesting for people who are willing to take greater risk in the long term”.
Is it still worthwhile?
Although these days there are many other investment options, pension savings remains a low-threshold way to save for your retirement. “The system is also attractive when it comes to tax: those that save up to 1,020 euro a year get a 30% tax break, amounting to 306 euros a year. If you choose to save up to 1,310 euros, you get 25% tax relief. This makes retirement savings accessible to people with a range of income levels.”
Those that opt for the higher amount often have to make their choice known to their bank each year. If you do opt to save more than 1,020 euro/year it is best to save as near as possible to the maximum figure of 1,310 euro on order to avoid getting less back in tax relief.
If, for example, you only deposit 1,200 euros, you will only get 300 euro in tax relief. (25% of 1,200 euro). In this case it would have been better to have saved 1,020 euro as this would have given your tax relief amounting to 306 euro (30% of 1,020).
“Another major concern is that retirement savings fund/policies lack flexibility. Withdrawing money before retirement is strongly discouraged because of high taxes or penalties you would have to pay. Moreover, at 60, you pay a one-off final tax of 8% on what you have saved. After that, you can continue saving tax-free until you turn 64.”
Who are pension saving funds and policies suitable for?
“This depends on your personal situation, financial goals and appetite for (financial) risk. Banks and insurers offer different formulas, making it important to compare before you choose. Consider factors such as costs, returns and the level of security you are looking for. For young people, the earlier you start, the better your chances of building up a substantial amount of capital.”
“Retirement savings is not the only option to save for your future, but it offers tax breaks and stability. Combined with other investments, it can form a valuable part to your financial planning for later life”, Chris Sugira told VRT News.