Private Pension: what is it and how does it work?

Did you know that there are retirement options beyond the one guaranteed by the federal government through the INSS? Did you also know that it will be difficult to maintain the same standard of living when you retire? Learn about Private Pensions and find out why they are becoming increasingly important.

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We tend to see retirement as something distant that will come “at the end of our lives” and trust that as long as we work as salaried employees and have our social security contributions deducted month after month, we are secure and it does not represent a problem. However, if we think this way, we are very mistaken.

Investing in Private Pensions has a complementary function in relation to Social Security, which, given the financial health problems faced in Brazil, is no longer the safest retirement option in the country, nor the most profitable.

In this article, we’ve put together all the details you need to know to have a more comfortable retirement. So, keep reading and find out exactly:

• What is private pension?
• How does it work?
• What are the types of private pension plans?
• Taxation on private pensions;
• What are the types of private pension funds?
• Difference between private pension and social security;
• Advantages;
• Disadvantages;
• I haven't saved anything for private pension, what should I do?
• How to join a private pension plan.

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What is Private Pension?

Private pension, also called private retirement, It is an investment for long-term retirement purposes with no connection to the INSS (Social Security).

The option for private pension plans appears as a complementary alternative to traditional retirement, which is often not sufficient to cover all of the elderly person's needs.

How does it work?

A private pension plan is made up of specific investment funds that can be offered to company employees, or directly by any person in authorized institutions.

In this way, the companies that support these investment funds undertake to remunerate the investor at the end of the contribution period.

Such remuneration will occur in the form of a monthly income for life, only for a certain period or in a single withdrawal of the accumulated money.

When signing up for a plan, you must choose the type of income you want, and you can also change it before leaving the plan. The most popular types of income in the plans are: Monthly Income for Life e Monthly Income by Term Sure.

In Monthly Income for Life, the taxpayer is paid a monthly income from the moment of his retirement. This payment is automatically cancelled upon his death. In this case, there is no possibility of returning the accumulated residual value.

A Monthly Income for a Fixed Term corresponds to a monthly income that will be paid upon the contributor's retirement over periods of 5, 10 or 20 years, regardless of the death or total disability of the plan holder.

There is no minimum age to start investing in Private Pension Plans. Parents often create a plan for their children to pay for their college education, among other goals.

Generally speaking, the sooner you invest in PGBL and VGBL, the better, as you will have more time to accumulate money.

What are the types of Private Pension plans?

Private Pension has two types of plans, PGBL (Free Benefits Generating Plan) and the VGBL (Life Generator of Free Benefits). In both modalities, the payment of Income Tax is postponed until the moment of redemption or monthly receipts by the taxpayer.

Let’s look at the characteristics of each type of Private Pension Plan below.

PGBL

Investing in PGBL is best suited for those who usually file their Income Tax return using the complete model to take advantage of tax benefits.

In this case, it is possible to deduct the contributions paid under the plan from the IR calculation base up to the limit of 12% of the annual taxable gross income.

This benefit is equivalent to deducting medical or education-related expenses on your tax return, meaning you will pay less Income Tax each year.

And if it is possible to take advantage of this difference by investing a little more in the PGBL, you will be able to accumulate an even larger amount until redemption.

However, when you redeem your resources from the plan, you will pay Income Tax on the total amount, equivalent to the principal of the contributions made plus the income obtained.

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VGBL

The VGBL does not have the tax benefits related to investment in the PGBL. Therefore, The application in VGBL is recommended for investors who declare Income Tax using the simplified model or are exempt.

Furthermore, investors who file their tax return using the full model and wish to invest more than 12% of their income in private pension plans can also invest in VGBL.

This is because above the aforementioned limit, a new investment in more VGBL plans is not worthwhile. The new contributions will not be deducted from the IR calculation base.

In this plan option, at the time of redemption, Income Tax is levied only on the income obtained and not on the principal amount of the contributions, as occurs in PGBL investment.

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Taxation in Private Pensions

When choosing the private pension plan in which you will invest, you must choose the type of taxation that will occur at the time of redemption. You can choose between Progressive Table and Regressive Table.

Progressive Private Pension Table

At the time of redemption, the IR rate at source corresponds to 15%, with adjustment at the time of the annual tax declaration.

This table option is recommended for taxpayers who cannot go without making withdrawals for a period of up to 10 years. Depending on the total amount received, taxation under the progressive table may be interesting for smaller amounts.

Gross monthly income	IR rate
Up to 1,903.98	Free
From 1,903.99 to 2,826.65	7,5 %
From 2,826.66 to 3,751.05	15 %
From 3,751.06 to 4,664.68	22,5 %
Above 4,664.68	27,5 %

Regressive Table

In this table, the IR rates are reduced over time, starting with 35% and reaching 10% for terms longer than 10 years.

It is recommended for investors who can leave their money invested for the long term. The longer their funds are invested, the lower the tax they will pay.

Gross monthly income	IR rate
Up to 2 years	35%
Between 2 and 4 years	30%
Between 4 and 6 years old	25%
Between 6 and 8 years old	20%
Between 8 and 10 years old	15%
Over 10 years	10%

What are the types of Private Pension funds?

Private pension funds are considered to have a conservative profile, and therefore fixed income investment funds are very common, especially bonds. Treasury Direct.

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There are also fund options for a more moderate investor profile, with returns linked to the interest rate or inflation.

On the other hand, investors with an aggressive profile can opt for a private pension plan that invests in multimarket funds, where a good part of their resources is invested in variable income.

These pension plans are not covered by the Credit Guarantee Fund – FGC and their funds are monitored by Susep (Superintendence of Private Insurance).

Therefore, investments can only be made through solid institutions that use strict rules capable of guaranteeing the security of taxpayers' investments.

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Differences between Private Pension and Social Security

Social Security is that guaranteed when working with a signed contract, who upon retirement begins to receive a monthly income for life through the Federal Government.

For each month worked, a percentage of the worker's salary is collected to be returned in the form of payment towards his/her retirement. When the worker is no longer working for reasons such as having reached the maximum service time, illness, etc.

In this system, the government pays the benefit not only to those who contributed, but also to their dependents, such as spouses and children, when the contributor dies. However, the ones who will be paying this benefit will be the active workers, who in reality finance the inactive ones.

Nowadays, this mechanism creates an impasse regarding its sustainability, since people's longevity continues to increase, and with that, the number of active people compared to the number of inactive people is growing.

Furthermore, it is not new that the retirement paid by Social Security has not been able to ensure the continuity of the citizen's standard of living, and the increase in illnesses with the arrival of old age is a very common reality.

This is where the need for Private Pensions comes in, as an additional investment for those who do not want to rely solely on the retirement provided by the government.

With the Private Pension supplement, it is possible to guarantee a more comfortable retirement and even finance new projects with the amount withdrawn from this investment. Such as opening a new business after retirement or buying a new property, among other goals.

Given the instability regarding the continuity of the Social Security system in the long term, the federal government itself encourages investments in Private Pensions through tax benefits.

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Advantages

The advantages of investing in Private Pensions are:

• They have the lowest income tax, which can reach up to 10% in regressive taxation;
• When applying for PGBL, you can count on tax deferral of up to 12% of IR;
• Possibility of portability between plans, without the incidence of IR;
• Opportunity for financial discipline;
• They offer succession planning, as they do not involve probate, are exempt from ITCMD (depending on the State) and provide quick payment to beneficiaries.
• They do not have come-cotas. The term come-cotas refers to the advance collection of a portion of the IR on their income, which occurs in the months of May and November.

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Disadvantages

Investing in Private Pensions basically offers two benefits.

• Low Liquidity. This investment is not recommended for the short or medium term, with withdrawals only occurring every 60 days. Withdrawals before the agreed term may lead to losses.

• Limits for application. These funds have lower volatility, i.e. lower risk. This makes it possible to find more profitable investment options on the market. Investing in private pension funds is recommended for those seeking security above all else..

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I haven't saved anything for private retirement until I'm 50, what should I do?

Although we know that time is synonymous with money, we cannot say when it is too early or too late to start investing, since the investment decision is subject to the taxpayer's objective. It is also necessary to take into account the amount that will be invested monthly.

If you are 50 years old and want to start investing in a private pension plan with retirement goals, you can consider a 15-year investment, for example, to retire at 65 years old..

The time it takes to accumulate savings is relative and depends on when the taxpayer will start receiving the benefit. Experts recommend an average period of 15 years to ensure additional income. However, an administrator or lawyer, for example, may want to work until the age of 70 or 75. Therefore, if he starts contributing at the age of 50, he will have 25 years to invest.

What should be taken into consideration when choosing a plan is the amount you have available to save each month and the final amount you want to obtain. In fact, you are not prevented from starting the payment of the plan with an amount greater than the following monthly contributions, thus compensating for a retroactive period.

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How to join a Private Pension Plan?

1. Choose the PGBL or VGBL plan type, according to its characteristics as we saw in What are the types of Private Pension plans? e What are the types of Private Pension funds?

2. Choose the type of taxation that suits your profile, i.e. Progressive Table x Regressive Table;

3. Define a beneficiary;

4. Determine the type of retirement income, Monthly Income for Life or Monthly Income by Term Right, and your retirement age.

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Best Private Pension Funds

Let's now look at the Private Pension Funds that achieved the best profitability in 2020, by investor profile.

Conservative profile funds for Private Pensions

MONGERAL AEGON SOVEREIGN FI FIXED INCOME	11,45%
EMB IV FI FIXED INCOME PRIVATE CREDIT	9,29%
BB PREV PUBLIC RF II TR FI FIXED INCOME	8,98%
4LIFE PENSION FI FIXED INCOME	8,96%
KINEA PREV APOLO XP FIC MULTIMERCADO	4,59%
IRIDIUM APOLLO ADVISORY XP INSURANCE PREV FIC FIXED INCOME PRIVATE CREDIT	4,19%
ICATU VANGUARDA PLUS FIFE FI FIXED INCOME PENSION	4,15%
ICATU VANGUARDA ABSOLUTE FIFE FI FIXED INCOME PENSION PRIVATE CREDIT	4,03%
KINEA XP INSURANCE PREV II ADVISORY FIC MULTIMARKET	4,00%
CAIXA BRASIL IRF-M 1 PUBLIC SECURITIES FI FIXED INCOME	3,63%

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Moderate profile funds

SULAPREVI INDIVIDUAL FI FIXED INCOME	31,34%
SOUTH AMERICA SPECIAL FI FIXED INCOME	30,82%
SULAPREVI GRANTED FI FIXED INCOME	30,54%
PORTO SEGURO GRANTED TRADITIONAL FI FIXED INCOME	25,60%
BB PREV PUBLIC IGP-M I FI FIXED INCOME	25,19%
ICATU VANGUARD SOVEREIGN SECURITY FI FIXED INCOME	14,58%
EMB V FI FIXED INCOME PRIVATE CREDIT	14,50%
FP GÁVEA FOF MACRO FIC MULTIMARKET	11,37%
PORTO SEGURO GRANTED FI FIXED INCOME PENSIONS	10,59%
JGP SULAMERICA SOCIAL SECURITY FIC MULTIMARKET PRIVATE CREDIT	9,65%

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Bold profile fund for Private Pensions

BB NORDEA GLOBAL CLIMATE AND ENVIRONMENT INVESTMENT ABROAD FI SHARES	65,17%
BRADESCO INSTITUTIONAL FI SHARES BDR LEVEL I	50,01%
WESTERN ASSET MULTIPREV GLOBAL EQUITIES INVESTMENT ABROAD FI SHARES	47,35%
MAPFRE HEDGE IGP-M PREV FIC FIXED INCOME	43,25%
M SQUARE SERINGUEIRA INVESTMENT ABROAD FI MULTIMERCADO	40,48%
VEXTY GLOBAL OVERSEAS INVESTMENT FI MULTIMERCADO	38,65%
BB SHARES ALLOCATION ETF INVESTMENT ABROAD FI SHARES	37,99%
BNY MELLON FIC FIXED INCOME EXTERNAL DEBT	35,86%
MAPFRE TR SOVEREIGN FI FIXED INCOME	33,51%
TRUXT CSHG PENSION FIC SHARES	24,37%

Don't forget that there are several rules in Private Pension Plans and carefully evaluate the options. investment funds to join the best plans available.