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.