John Labunski Dallas - Comparison Between Fixed Income and Shares

With the basic interest rate (SELIC) in an upward cycle in Brazil since the beginning of 2021, many investors are reviewing their portfolios of financial assets in order to increase exposure to fixed income. We have also seen that the FED (US Central Bank) will not only start increasing the US basic interest rate, but will also reduce the purchase of assets in order to discourage economic activity there, and thus, contain inflation.

In this scenario, it is worth making a parallel between the two main financial assets available in the financial market and known to most investors, which are fixed income assets and shares.

Fixed income

 As a general rule, any financial investment with a determined term and profitability is classified as fixed income. Examples:

CDB (Bank Deposit Certificate, bank-issued security) maturing on 02/22/2024 and yielding 12.5% ​​pa;

LFT (Treasury Financial Bill or Selic Treasury) maturing on 03/01/2027 and yielding SELIC + 0.15% pa;

Debenture (security issued by a private company) with maturity 09/15/2031 and yield of IPC-A + 7% pa

The three examples above, although they seem different in terms of profitability, are subdivisions of fixed income, respectively, fixed-rate, floating-rate and inflation-linked (which is also floating-rate).

Another important feature of fixed income is that the relationship between the borrowing agent (the one who lends from someone) and the creditor (the one who lends to someone) is based on credit.

That is, given that the maturity (term of the fixed income security) and the profitability are already defined between the parties since the beginning of the relationship (in the purchase of the security), the creditor has no interest in the institution that lent it.

Internationally, there are fixed income securities such as bonds, debentures, treasuries.

In accounting terms, a fixed-income asset, from the borrower's point of view, enters the balance sheet either as a current liability or as a non-current liability, depending on the maturity term and coupons (interim payments, if any).

In terms of risk, the most obvious type of risk is the borrower's credit risk. Since the rate and term are already defined, the risk of non-payment (default) remains. However, also on the balance sheet, liabilities have priority over shareholders' equity.

Actions

According to the definition of fixed income, it is easy to verify that stocks do not have the two fundamental characteristics of fixed income (determined term and profitability). Therefore, the shares belong to the variable income classification.

Going a little further, a share is the smallest share of a company's society. Thus, the fact that an investor owns shares in a company constitutes a direct involvement with the business of that company. For this reason, the relationship with this type of investment becomes even stronger, since the owner of the share is listed in the company's equity. This relationship is also known as equity.

In the case of stocks, the risk that stands out is market risk, since stocks have high liquidity, price fluctuations can be quite expressive in one day, both higher and lower.

Primary and Secondary Markets

It is important to be clear that there are two types of markets for both of the above-mentioned securities, namely:

Primary Market: consists of the issuance of securities, whether fixed income or shares. As expected, naturally these are events that occur in a specific way. It consists of the essence of the capital market, that is, the intermediation between the investor (surplus agent) and the borrower (deficit agent). In other words, it is when the fundraising from the investor to the borrower actually takes place.

Secondary Market: once the asset has been issued, it is allowed to “change hands” between investors, and as in the primary market, it can be fixed income or a stock.

The secondary stock market is much more dynamic and more common to investors. The stock exchange is the environment that allows trading to take place at a high frequency, to the point that the same shareholder of the same company can buy and sell a stock several times a day, if he wants to. Or also that a significant part of members is changed several times during the day.

Fixed-income securities, on the other hand, can also be traded on the secondary side, but the frequency of trading, due to the nature of the price fluctuation of these securities, is lower than that of shares. For this reason, the stock exchange is no longer the environment for this. This is where the platforms of securities distributors (DTVM) come in, better known as brokers.

Summing Up

Although they have distinct characteristics, stocks and fixed income are essential assets in a portfolio with good diversification. As we have seen, having these two investments in their portfolio, the investor can combine predictability (in profitability and term) with high returns, have exposure to different types of risks, add or reduce liquidity in the portfolio.

Estate Succession Planning Includes Private Pension

Dream, save, plan. These ideas are part of a financial journey that ranges from the household budget to investments and retirement. What little is said is how this type of care is when it comes to protecting what has been conquered throughout life in the face of an absence. A small or large heritage requires planning so that it is preserved and destined according to the will of those who built it.

The truth is that all the assets acquired during life will belong to someone when we are no longer here. Succession planning is nothing more than a way to facilitate the succession of assets so that it is less bureaucratic and financially advantageous. This agreement makes it possible to establish prior understandings between the beneficiaries and even demand roles and attributions so that the business or assets are managed in the best possible way.

This is the best alternative to reduce bureaucracy at a delicate time. Many inventories take years to be resolved, either due to legal issues between the heirs or due to difficulties in carrying out the division of assets and assignments. With a legal and effectively structured succession planning, these problems are reduced: assets and responsibilities are distributed in common agreement between those involved in the division and the owner of the assets.

How it works

Taxes accompany us from an early age and this does not change at the time of sharing goods. Tax life ends on average 12 months after death. During this period, the inventory is opened, the heirs are determined, the sharing of assets is presented, taxes are paid and, finally, the bank and, if necessary, other bodies such as Detran and Real Estate Registry Office ( this depends on the assets that the person owned) will be informed about the outcome of the probate. All this can be resolved in advance and with legal certainty.

According to the law, it is possible to leave half of the assets to whoever wants and half to necessary heirs (descendants, ascendants and spouse). These halves can be “Legitimate” or “Available”. The legitimate part, as the name implies, is the right of the necessary heirs. There is an order: first children, in competition with spouses, second parents in competition with spouses, third only the spouse, fourth collaterals (siblings, cousins ​​and others) and finally the state.

One eliminates the other as these people do not exist. The “available” part can be left to whoever is indicated in the so-called “Testament”, duly formalized in accordance with the law. If you do not want to leave a part to someone who is not a necessary heir, the normal succession proceeds.

The inheritance that goes to probate is taxed by the ITCMD (transmission tax cause mortis and donation), state tax and can vary from 1% to 8% depending on the state. In order for the heirs to have access to the assets (car, property, financial investments, etc.), they must be listed in the inventory.

As the name of the tax already says, cause mortis and donation, it is possible to donate your heritage while still alive. In the donation, the donee pays the ITCMD, the good is transferred to the name of the donee and it is possible to define how and when the donee will use this good. Usually, the donee are the heirs. For example: an apartment can be donated to his heirs with a usufruct clause. These will only be able to use or dispose of the good after the donor's death.

 

About private pension

In addition to donation, a form of succession widely used today is private pension. Private pension plans, when transformed into a benefit, aim at supplementing retirement income. It is possible to hire them in different modalities and through a single contribution or monthly contributions, for example. It is also possible to make spontaneous contributions, according to the rules of each plan.

During the contribution period, or while it is not transformed into a benefit, in the absence of the contributor, the resource is released to the indicated beneficiaries, and normally, without passing through the inventory. Some States do not tax this payment with ITCMD and it is usually made within 30 days after delivery of all necessary documentation to the entity that administers the plan. This is a simple and easy way of planning that has been gaining ground over the years.

Wealth Planning: Private Pension

Private Pension is a type of long-term investment, whether it is aimed at supplementing income at the time of retirement , in the succession of assets or even aiming at the tax benefit that this modality offers. In this post we will detail a little about the possibilities that this instrument can provide in your Wealth Planning.

Retirement

Private Pension, being an investment for the long term, is an alternative for those who want to supplement their income at the time of their retirement. There are several ways to enjoy the accumulated amount, we will mention just three main modalities:

One-time payment: you receive your entire amount at once, when you retire, in order to maintain your standard of living;

Fixed term income: you determine how many years you will receive the accumulated amount monthly. Income is adjusted annually by the contracted inflation rate;

Life annuity: here you guarantee a monthly income for the rest of your life and the amount is annually corrected for the inflation index.

Equity Succession

Private Welfare presents itself as an advantage for those who want to make estate succession for their beneficiaries without bureaucracy. When hiring Social Security, it is necessary to indicate the beneficiaries, that is, people who will have the right to receive the plan's resources after the participant's death. Basically, anyone can be nominated as a beneficiary. You don't have to be a relative, dependent or heir, but the recommendation is to follow the legislation regarding succession, respecting the limitation of the legitimate ( to learn more about the legitimate, read our post on Will ).

Beneficiaries of Private Pension Plans are entitled to receive the balance accumulated in the plan (if the death occurred during the accumulation phase) or the income that they had been receiving in life (if the death occurred during the usufruct phase of the plan, and the participant has converted its balance into an income reversible to the beneficiaries).

Let's see what happens to the plan if the participant dies in each of these two phases.

Death during the accumulation phase

During this phase, the pension plan still functions as a normal financial investment, with the advantage that it does not need to go through an inventory when transmitting to the beneficiaries. Thus, if the participant dies at this stage, the resources accumulated in the plan are transferred to the beneficiaries and/or heirs without much bureaucracy. Just present the death certificate of the holder.

That's why pension plans are often used for succession planning, especially VGBL, which are subject to income tax only and should not be subject to ITCMD, the state tax on inheritances and donations. If this charge is made, the beneficiaries can appeal in court and gain the right to exemption.

 

On the other hand, the PGBL usually applies to ITCMD (read more about the rates here ). In addition, income tax is levied not only on profitability, but also on the principal amount. If the participant has chosen the regressive income tax table, the maximum Income Tax rate in the transfer of funds to beneficiaries is 25%. However, the longer the funds have remained in the plan, the lower the rate.

Death during the usufruct phase

If the participant dies after having started to receive one of the types of income offered by the Private Pension Plans, the beneficiaries will not necessarily receive something after their death. Everything will depend on the modality contracted by the participant in life. If it provides for reversibility to beneficiaries and/or spouses, they will be entitled to receive the income due to the participant, without the need for inventory and without charging ITCMD.

Tax Benefit

To obtain the best tax planning with the Private Pension instrument, it is important to choose the most appropriate modality, as well as the best Income Tax taxation table. In addition, it is important to remember that Private Pension investment funds have income tax withholding upon redemption and do not have semiannual quotas, that is, the investor still has the income on the IR not withheld.

The Tax Benefit can be given in two ways, through the right choice of modality (PGBL or VGLB) and type of taxation (Progressive or Regressive). Let's see:

PGBL (Free Benefits Generating Plan)

Private Pension Plan, classified as a supplementary pension plan, is more suitable for those who file a complete Income Tax return, which allows the participant the tax benefit of being able to deduct from the Income Tax what they invested during the year in the pension plan, with a limit of up to 12% of your gross annual taxable income on your income tax return. In order to use the tax benefit, the participant must contribute to the official social security system.

VGBL (Free Benefit Generator Life)

Private Pension Plan, classified as personal insurance, is more suitable for those who make a simplified income tax return, are exempt or for those who make a complete declaration and wish to invest more than 12% of their annual gross taxable income invested in social security .

In addition to the benefits mentioned above, it is worth noting that the participant can choose the type of taxation that best suits them: Progressive Taxation or Regressive Taxation. See tables below.

Progressive Taxation

Progressive Taxation is ideal for those who are thinking about social security to have a source of monthly income up front. In practice, what determines the rate on the pension plan is the amount to be redeemed or transformed into income (remember that 15% is already withheld at source). It is important to know that, when choosing this taxation, you have one month from the hiring date to switch to regressive taxation.

We can also mention portability, which consists of migrating the Open Private Pension plan quickly and safely, ideal for those who are dissatisfied with current conditions. This is a process that can only be carried out in the accumulation phase of the plan, that is, you still need to be investing money.

 

Migration is allowed between plans of the same modality, that is, from PGBL to PGBL and VGBL to VGBL. In compliance with this rule, the investor can carry out a portability externally, between different financial institutions, or internally, between assets of the same investment house. You can therefore choose to remain with your bank, insurance company or cooperative, or move to another institution.

The Private Pension instrument can present itself as an advantage in several ways, either during the taxpayer's life in retirement planning, or after his death in succession planning and use of tax benefits. In either case, it is important to evaluate the available options before joining. We at John Labunski Multi-Family Office can help you choose the best option that matches your goals and assets.