Camille Van Vyve
09 Apr 2024
Pension savings: necessary but not sufficient
Pension savings is the “must have” product according to your banker. All you have to do is fill in your annual envelope, get the resulting tax advantage, and you will benefit from a nice pension supplement when the time comes. Although it is an essential part of the Belgian saver's arsenal, pension savings cannot in any way be considered a panacea for the future pensioner. Here's why.
What is pension savings?
Pension savings is a long-term savings plan that allows you to build up a supplementary pension to the legal pension, and, under certain conditions, to benefit from a tax advantage. In Belgium, this is called the “3rd pillar” of the pension, after the legal pension and group insurance or supplementary insurance for the self-employed. It is possible to take out pension savings with most banks and insurance companies active on the Belgian market.
What type of product is it?
There are three ways to take out pension savings. The most common is to opt for a pension savings fund, marketed by your bank, made up of stocks and bonds, with no guarantee of return. There is also a pension savings insurance formula, sold by insurers, with a guaranteed return. Finally, it is possible to individually open a securities account whose allocation respects the pension savings legal framework (see below), but very few venture into this path.
How much is the tax benefit?
The calculation is not simple and differs according to the amount of the payments. In 2024 (tax return 2025), you have the choice between:
- the “classic” regime: maximum 1.020€ with a tax reduction corresponding to 30% of the amount paid (i.e. maximum3067€)
- the new regime: maximum 1.310€ with a tax reduction corresponding to 25% of the amount paid (i.e. maximum 327,50€)
It is not possible to make payments for a higher amount; however, there is no minimum amount to pay. Please note: if you exceed the ceiling of 1.020€, the tax reduction therefore automatically increases from 30% to 25%. This excess is only advantageous if you pay an amount greater than 1.225€.
When can I get my pension savings?
In addition, it should be noted that pension savings contracts must be taken out for at least 10 years and that the amounts can only be released at the age of 60 minimum, subject to the payment of an exit tax currently set at 8%. The amounts saved between your 60th and 65th birthday are no longer taxed, but if you continue to save beyond the age of 65, the tax advantage will not be maintained.
What is the expected return on pension savings?
The guaranteed return of the insurance framework has only declined in recent years, to be reduced to almost zero today. We will therefore retain in the context of this blog the framework of pension savings fund, offering a more attractive potential return in the long term. Among the funds offered by the main retail banks in Belgium, we have chosen the ones with the most dynamic allocation, i.e. with the highest share of equities. The infographic above shows the annualized performance of the main pension savings funds marketed in Belgium over the past 10 years, compared to the MSCI World All Country IMI index which tracks the world stock market.
| Argenta | Belfius | BNP | KBC | ING | MSCI WORLD ACWI IMI |
|---|---|---|---|---|---|
| 8,03% | 8,13% | 8,43% | 8,06% | 6,85% | 10,9% |
Very attractive returns
What emerges mainly from this table is the general attractiveness of pension savings funds, whose returns observed over the last 10 years are mostly around 8%! These are outstanding performances without compared with pension insurance and rarely equaled elsewhere… Except by the world stock market, which is still doing better with a 10,9% return over 10 years.
A strict regulation that limits the potential return
Why do pension savings funds perform significantly worse than the global stock market? Because pension savings are subject to a strict legal framework, which severely limits the composition of the funds and the allocation for the saver. For example, the allocation cannot exceed 75% equities or 20% non-European equities. These restrictions, which were intended to limit the volatility for the investor, tend to strongly reduce the potential long-term return of pension savings funds.
Pay attention to fees
You should also pay attention to the fees applied by the managers of these funds: entry fees on premiums (high, between 2% and 3% for the most part), and management fees (1.2% on average according to a study led by the Belgian financial market regulator). These costs reduce the net return for the investor.
What overall long-term performance?
Fortunately, the yield limits of pension savings are partially offset by the tax advantage. Ultimately, for equivalent amounts of investment, and considering that the tax savings are also reinvested in a global equity tracker, this is only in the very long term (>20 years), that passive investing will be significantly more profitable than pension savings. A significant part of the difference is to be attributed to the 8% exit tax. This is what the graph below shows, based on conservative assumptions: 7% average annual return for global stocks and 4,5% for a retirement savings fund, over a 35-year horizon.
A 4th pension pillar is necessary
The tax advantage that results from pension savings is, for the vast majority of taxpayers, a sufficient reason to subscribe, which is a good thing. In the long term, however, given the various restrictions and the heavy exit tax, it will not be the miracle product that will allow you to live comfortably in retirement. Complementing pension savings with personal savings – a "4th pension pillar" – invested in a global equity ETF will provide you with superior returns and should be part of your investment arsenal.
Tax diversification
Finally, since taxation is a changing matter, no one can predict the future taxation of pension savings or investment products in general. For this reason too, it is wise to prepare your pension using all the tools available, treated differently from a tax point of view: pillars 1 to 4 without exception.
*Pension savings funds analyzed between closing prices of 30/12/2011 and 31/12/2021
Argenta Pensioenspaarfonds, ISIN BE0172903495
Belfius Pension Fund High Equities, ISIN BE0159537696
BNP Paribas B Pension Sustainable Growth Classic, ISIN BE0946411791
Crelan Pension Fund Sustainable Growth, ISIN BE6280095249
Pricos (KBC), ISIN BE0026535543
Star Fund (ING), ISIN BE0026510298