With the very high tax and social security rates on earned income it is refreshing to find an area which allows money to be invested to generate real security for the future on a very tax friendly basis.
The social security system in Belgium does not pretend to provide a sufficient income and this is particularly the case for higher earners. This makes the private pension plan doubly advantageous.
The owner of a company (who may also be a self employed consultant) may take a rather low monthly income from his/her company to take advantage of the lower tax rates, with the balance taken as expenses and/or dividends. As a result his social security pension is lower as it is based on the income taken over the years. While each individual’s situation would be different, the income taken would typically be €36,000.
A personal pension may be provided through insurance companies or pension funds, and this on a fixed guaranteed money basis, or on a unit linked basis using investment funds. The pension premiums are deductible from Company profits for tax purposes subject to a series of conditions and limitations. Specifically the total pension which may be provided taking State and “Employer” together is 80% of the salary actually paid monthly. Where (as is usually the case) the individual cannot complete forty years (considered to be a full career in Belgium) the maximum is reduced proportionately.
In addition, up to ten theoretical years before the individual joined the company may be taken into account, but any other benefits built up during that period must be included in the calculation. The effect of this is that a plan may be established at a monthly premium which the company feels able to support, and improved-perhaps by including an element of the previous “service” as and when profits become available.
Where the individual has other assets, we tend to prefer the guaranteed basis and regard this as (part of) the natural fixed income proportion of his or her assets. An interest rate is established at the start and the maturity value on the basis of the initial premium level is guaranteed by the insurance company. If there are profits on this type of business, bonuses may be added to the contract, and when paid out these bonuses are free of tax.
At retirement the proceeds of the plan will normally be paid out as a lump sum. This will be subject to various deductions depending on the age at retirement, on a scale from effectively about 21% at age sixty, to 15% at sixty five – and this to encourage later retirement, which is considered desirable on demographic grounds. Administration costs vary according to the amount of premium payable, from 4% down to 2%.
In the crudest of terms, the individual is exchanging tax at 50% plus, right now (a net of less than half) , for tax at 15% at age 65 (a net of 85%). If 50% can be changed into 85% this is a 70% improvement in net over the period.
There are many of these plans in Belgium, and it is important to talk to an independent Financial Advisor so as to evaluate the best plan for you! At Dunhill Financial, we offer complimentary workshops to help you understand all aspects of why financial planning is important.