Peace of Mind Pensions
While many of us dream of retiring, most of us don't imagine the details of such a lifestyle. Who wants to think about bills and cost of living when you're daydreaming about the good life? The reality is you can have that dream retirement, but you have to be financially prepared for it first. Your standard pension won't put that umbrella in your imagined piña colada, so where do you begin?
When discussing pensions with Filipe Da Silva, private banker with BNP Paribas, it's easy to get overwhelmed. There are so many decisions to make and rules to consider, that the words start to blend: equities, bonds, insurance pension, pension plan systems. Da Silva quickly puts one at ease, “In charge of wealth structuring, a key component of Private Banking, I spend my days actively listening to each client and responding to financial and tax issues. I advise on their portfolio management.”
And with the help of Da Silva's experience, he quickly hones in on the starting point of the entire conversation – defining the term expat for the purposes of this article: "An expat is somebody with a foreign nationality who has come to Belgium to live and work here for a long time, and has established his/her permanent residence here."
Within this definition there are still two more possible subdivisions: expats that are subjected to the Belgian income tax, and EU-officials, officials working for certain international organisations as well as foreign diplomats, who may or may not be subjected to the 'exception of tax residence' and do not pay income tax in Belgium.
This distinction is very important because when it comes to pension plans in Belgium, there are four pillars, but only one, the fourth, is available to expats who don't pay taxes in Belgium. And to take advantage of certain tax breaks in Belgium, obviously, you have to pay taxes in Belgium. If you have your tax residence abroad, but your pension plan is from Belgium, you need to make sure you avoid double taxation – simply check in with an expert, such as Da Silva, on the rules of tax laws to see which country should be doing the taxing.
He explains the four pillars of the Belgian pension system, “The first of the pillars is the State pension. In Belgium, almost everyone who works in Belgium has a right to a State pension, even many expats. The Belgian government guarantees this, so be sure to check in with your private banker to see if this applies to your situation.
“The second pillar is supplementary occupational pension, which encompasses all the supplementary pension schemes linked to an occupational activity. There is preferential tax treatment for building up a supplementary pension. Under this pillar, the provisions for employees and the self-employed are different. I can explain that in more detail to anyone who is interested.
“Available to expats who pay income taxes in Belgium, there is the third pillar which is a personal pension savings. This option is enticing as it comes with a tax break. Finally the fourth pillar is a voluntary personal savings without a tax break.
These options are ways to give your pension a boost, or make up as much as possible for the shortfall, compared with your last professional income. Combined, pension savings and long-term savings in the third pillar can provide you with a potentially sizeable capital sum over time. Do note that the maximum amounts that allow you to benefit from tax reduction are relatively small.”
With a better understanding of the overall structure of the Belgium pension plan system he then explains the difference between pension fund savings and insurance pension savings in the third pillar, “The profile for pension funds is different from that for pension insurance. With an insurance policy, you know the minimum return from the outset. This is not the case with a fund. The pension funds invest in the financial markets. Their potential return is larger, as is the risk incurred.
“For both pension fund saving and pension insurance saving, you can benefit from a tax reduction of 30% for the payments. Payments are possible until the year of your 64th birthday. In the case of pension insurance, the saved capital will automatically be paid out once the contractual fixed term is expired. In the case of a pension fund, there is no fixed term; so you can wait until the markets are favourable before withdrawing your capital.”
He gets animated when asked about when one should start thinking about pension planning or additional pension efforts, “You should start planning at the beginning of your career; the sooner, the better!” When started before the age of 55, pension savings plans in the third pillar are taxed at 10% at the age of 60. Deposits after the tax withholding remain, benefiting the tax reduction, but are no longer taxed.
As an expat himself, he has taken his own advice, “I am involved in the third and fourth pillar as a Belgian resident. I'm originally from France. I met my Belgian girlfriend during an Erasmus in Madrid so I finished my studies here in Brussels, in International Law. Today we have a four-year-old boy Arthur, and a two-year-old girl Juliette, and are still living in Brussels. The Belgian pension system makes you responsible for your future. I took into consideration the fact that if I do nothing to supplement my pension, nobody will do it for me.”
Supplementing ones pension seems to be a pragmatic approach to retirement and Da Silva agrees, “The first and the second pillars of pensions are not necessarily sufficient to keep your standard of living. So you have to supplement through savings. In addition, it helps to be prepared for retirement, especially given the anticipated challenges for state pension plans.”
He explains, “We are living longer, which ultimately means we are enjoying retirement for a longer period of time. The bigger problem is that the state pension is based on a redistributive system. The working population pays the pensions of those currently retired, through the social security contributions payable on gross salaries. It is a good principle. However, this system is strained. The size of the working population that must pay future pensions is declining while the number of retirees is increasing.”
While this data is stark and disconcerting, Da Silva is quick to put you at ease, “If you are looking for security, you should look into supplementary ways of funding your retirement years. You need the best advice available regarding your pension: from a supplementary pension based on pension savings and long-term savings with a tax break, to voluntary savings plans.”
BNP Paribas has summarised the various options available for a pensions. If you want to know all the specific answers for your situation (and other more specific or technical details), you can find this at www.bnpparibasfortis.be or your local BNP Paribas Fortis branch.