How does private pension work?

Are you worried about your retirement? Then find out how private pension plans work through this guide!

As the name suggests, private pension plans include retirement plans that are not linked to the INSS (National Social Security Institute).

But contrary to what many people think, you don't have to choose between social security and the INSS. We are talking about complementary models that can be adopted at the same time when retirement arrives.

But is private pension a good option to guarantee your financial security in retirement? How does taxation work?

That’s what you’ll discover in this guide! Keep reading to learn more about the subject.

What is private pension?

Private pension plans are a traditional way of saving and investing money for the future.

It's a type of contracted pension by the people's own will.

Furthermore, as you already know, it complements the social security offered by the government through the INSS.

Through this method, the contractor makes periodic payments during the accumulation period. Whenever he wishes, he can withdraw the money.

Both the way of applying and withdrawing pension funds change depending on the plan chosen.

For example, you can make a single deposit of a higher amount and withdraw it after a while. Alternatively, you can make monthly contributions and, after the contribution period, withdraw the investment.

Due to Pension Reform, This type of investment has caught the attention of Brazilians who do not feel safe depending solely on the INSS.

This means that securing another source of income is an interesting way to ensure that you can maintain your standard of living in old age.

If this is your goal, you need to start preparing as soon as possible.

Remember that money invested in retirement plans will yield returns. And the good news is that the power of compound interest is one of the greatest benefits that any long-term investor has in their favor.

How does private pension work?

A private pension plan works like a financial investment.

When you sign up, you decide how much you want to invest per month (if you want to make monthly contributions), how long you want to invest for and after how many years you will make the withdrawal.

Of course, your plans can change. Fortunately, you can withdraw your investment (or just a portion of it) early, in case you need to deal with an eventuality.

The main objective of private pension plans is to make the investor contribute a periodic amount over time so that in the future, he or she can redeem the amount invested and the income obtained.

You can choose between receiving the entire amount, a portion of it, or converting it into a monthly income.

The calculation of private pension plans takes into account the rate of return, investment time and application.

What are the main differences between private pension plans and INSS?

At INSS, the monthly contribution is not optional.

Furthermore, it is proportional to the work regime.

Private pension plans are a free form of investment. In other words, you choose whether you want to invest, the period in which you intend to make contributions and how much you can invest.

Pension is optional and you pay for the duration of the chosen plan.

Another big difference is that you can sign up for the plan whenever you want.

This means that even a child can have a private pension plan taken out by their parents.

Or, a 45-year-old adult who has just started thinking about retirement can sign up for a pension plan.

How to choose private pension?

As you already know, the investor can apply an amount every month and withdraw the accumulated capital in the form of a scheduled withdrawal or income.

To understand how private pension plans work, it is important to know that there are two types of investment.

Both have their advantages. The best option is the one that most closely matches your needs. investor profile and your lifestyle. Just look:

PGBL (Free Benefits Generating Plan)

PGBL type plans are recommended for those who submit their Income Tax return using the complete model.

Those who sign up to this plan have the benefit of reducing up to 12% of their taxable income per year.

In this case, IR is charged on the entire amount that was in the fund at the time of redemption.

For example, if you withdraw R$50,000 from the fund, you will have to pay income tax on that entire amount.

VGBL (Free Benefit Generating Life)

VGBL-type plans do not include the tax benefit provided by PGBL.

They are recommended for those who file their Income Tax return using the simplified model.

In the VGBL fund, taxation is only charged on the pension income value, that is, the difference between the total amount invested and the redemption value.

Progressive or regressive taxation?

In addition to choosing between PGBL or VGBL, you must choose how the pension plan will be taxed at the time you make the withdrawal (whether partial or total).

Progressive

In this private pension model, income tax rates range from 0% to 27.5%, depending on the amount redeemed.

It is recommended for those who prefer to receive the amount in installments and not all at once.

Furthermore, when the contractor withdraws the pension balance, 15% of IR is collected at source.

It is important to remember that the discount amount can be offset in the declaration.

Regressive

In this case, income tax rates decrease over time.

Income tax varies from 35% to 10%, depending on the application time.

In other words, this tax regime is usually much more advantageous for those who are investing with the long term in mind.

Conclusion

Now you know how private pensions work, what pension plans are available and how they are taxed.

If you are thinking about having financial security in your retirement, private pension plans are a great option to supplement your income in old age.