Article published by José Alberto León Alonso on 12/01/13 in Diario de Avisos.
When the end of each year approaches, financial institutions usually dedicate their efforts to attracting investments for their pension plans, shouting that “this way you will pay less taxes.” Their tax advantages are usually accompanied by gifts: televisions, cash bonuses, or various kitchen items.
These gifts are actually covered by high management fees, thus subtracting the potential for the revaluation of long-term portfolios, which is what is supposed to take precedence in a long-term savings plan. For those who have already received the call from their financial institution, some advice: Don't bite! With their advantageous taxation they are throwing a bait. Once you make your contribution, that money will remain unattainable until you retire, and then you will have to pay what you have not done today. And there are many cases in which more taxes end up being paid at the time of collection than were saved at the time of the contribution.
The only attraction of pension plans is their tax advantage: the deferral of taxes until retirement, since the taxpayer will not pay for the contributions made in their next income tax return. In exchange, you will invest in the financial product with the highest commissions on the market, the least liquid (you will not be able to recover it before you retire) and with the worst long-term returns. Only 2 of the 573 Spanish pension funds older than ten years exceed the profitability of the stock market, only 32 exceed the profitability of 10-year State bonds, and only 130 exceed inflation. That is, in 77% of cases when you retire your money will be worth less than when you saved it. So, after decades of giving up, when you want to enjoy your savings you will see that not only will they have barely grown but you will have to face paying substantial taxes, since your rescue is taxed at a tax rate that ranges between 25% and 53%. Is it an advantageous investment for the saver? In most cases, no. If you do not earn more than 50,000 euros per year, you should not even consider them as a savings alternative. If you have already contracted them, you will not be able to recover them until you retire, but you will be able to transfer them to the best managed ones, so transfer your plans to the other one with the highest historical profitability and lowest commissions and stop making contributions. But if this is so, what other savings alternatives are there for retirement?
Insurance companies market various savings products generically called retirement plans, although they take different names: Insured Provident Plans (PPA), Individual Systematic Savings Plans (PIAS) and retirement insurance.
PPAs work in the same way as pension plans, but they guarantee a minimum, although reduced, interest rate. Therefore, the risk of losing the invested capital is eliminated. Apart from that aspect, its defects are similar to those of Pension Plans and its profitability is even lower than that of the former, since the investment style is usually more conservative to ensure guaranteed interest. I don't recommend them either.
Regarding the PIAS, unlike the previous ones, the premiums paid do not have tax benefits during the savings stage. On the other hand, when the benefit is collected as an annuity, the profits generated are taxed at a tax rate ranging from 21% to 27% and, as long as at least ten years have passed since the first premium, the amount payable is reduced between an additional 40% and 92%, depending on the age of the investor. The vast majority of these products guarantee the recovery of the capital invested plus a minimum interest, and you can start collecting without retiring. Insurers usually request a reimbursement fee, although some do not charge anything. Unlike other similar products, the same person cannot have more than one PIAS. It is a product with a conservative profile, with moderate profitability, but normally equal to or higher than most PPAs. I recommend starting to consider it as a savings product from the age of 55-60, since the tax reductions with age are considerable and, for example, from the age of 70 the final tax on the profits obtained ranges between 1.5% and 2%.
The last of the products marketed by insurance companies is retirement insurance. It is life insurance, which covers the insured both in the event of death and retirement, and whose benefit can be received in the form of capital, temporary income or life annuity. It offers greater flexibility than a pension plan and a PPA, since the insured will be able to recover the money at any time, although they will have to bear a penalty for the process. If it is received in the form of a life annuity (the most recommended), its taxation is similar to that of the PIAS, and although its profitability is usually higher than that of pension plans and PPAs, it is lower than that of the PIAS, since they dedicate part of their benefits to their function as life insurance. For savings from 55-60 years old, I recommend the PIAS due to its greater profitability. An exception is the reverse mortgage, which is a variant of annuity insurance. The client mortgages his home after retiring until his death in exchange for receiving a life annuity. The financial institution or insurance company pays a monthly rent in exchange for a mortgage guarantee on the home, with the advantage that the owner retains ownership and usufruct of the property. The monthly income obtained is exempt from taxation, and once the holder of the reverse mortgage dies, his or her heirs have several options: sell the home, pay the debt and keep the difference; subrogating the mortgage to pay the debt; or simply let the financial institution foreclose the mortgage and keep the home. For those who have invested all their savings in their primary home, a mistake as I have once mentioned, it can be a good option once retirement arrives.
Already in the orbit of financial entities is my favorite product: investment funds. Although they lack the short-term tax deductions of pension plans, in the long term their returns are much higher, due to their lower costs and greater competition, since they must capture savings that could otherwise be directed to deposits, stocks and bonds; Their profits are taxed at a tax rate ranging from 21% to 27%, and only when they are reimbursed (not while the investment is maintained); and they are completely liquid, since they can be converted into cash at any time and, in many cases, without any commission. Your risk and management fees can be limited by investing in funds indexed to an index, such as the IBEX35, so with them, if you start saving early by periodically making small contributions, at the time of retirement (or whenever needed) you can enjoy a good income.
So now you know, when you receive the call from the salesperson on duty at the financial institution... don't knock! Save on index funds.
