Why tax efficient retirement savings is bad in Belgium?
For those who don’t know Belgium’s way of saving for retirement, we currently have 3 pillars:
- 1st pillar: Government: If you’re an employee, your gross salary will contribute to this.
- 2nd pillar: Employer’s group insurance, or equivalent for those self-employed
- 3rd pillar: Pension saving funds (‘pensioenspaarfonds’) & pension saving insurance (‘pensioenspaarverzekering’)
Tax efficient retirement savings are a trap in Belgium. Many people don’t realize how much money they are losing on fees and taxes. So I decided to clear a few things up. We have two types of retirement savings accounts of the third pillar: pension saving funds and pension saving insurance. The pension savings insurance is like a bank account with a guaranteed interest rate, but much much lower. Read 1-2% per annum. Pension Saving Funds is basically investing in funds, however, it’s managed by your bank. So you have no control whatsoever over what they are doing with it.
When creating the account or when you visit the bank you can still select the amount of risk you want to take, based on a stupid set of questions. You can’t set it manually. But even when you look at the numbers, ING Belgium was recently averaging returns of 3.1% to 3.8% over the last 10 years. Do note, that this includes the 2008 crash. Other banks average around 5% at most. This still still very low, assuming other parts of the world like the U.S. assume a conservative 5% growth of their portfolio.
But regardless of their nationality, as people get closer to retirement, they blame immigrants for taking away their retirement savings. In my opinion, you’re stupid to just assume the government will take care of your retirement. That should be your back-up plan, and not your priority.
- Average Interest: 3.8% (10 year average)
- Virtual Balance Increase: 4.75% (They assume 4.75% growth on your contributions, and will tax you based on the end balance of what we will call from this point the virtual balance.)
- Withdrawal Tax: 8%
- Tax Refund: 25% if > 960 EUR or 30% if <= 960 EUR
- Annual contribution: 1200 EUR
- Annual Administration Fee: 1.13%
After 30 years, the result is rather shocking assuming the above values are constant.
- Contributions: 36000 EUR
- Contribution Fees: -1080 EUR
- Tax Refund Total: 9000 EUR
- Administration Fees: -8037.85 EUR
- Actual Balance: 52510.07 EUR
- Virtual Balance: 74095.51 EUR
- Withdrawal Tax: -5927.64 EUR
This brings us to a net balance of 52510.07 EUR + (-5927.64 EUR) = 46582.43 EUR
So on a total contribution of 36000 EUR, we will have 46582.43 EUR in our hands 30 years later based on the above numbers. This is rather shocking right? In total we paid 15045.49 EUR in fees or taxes. The banks here were the biggest takers.
Let me be clear, avoiding to pay taxes and just focusing on obtaining a tax return is not smart. Specially when you realize that these pension saving accounts have administration fees of 1-2%, these are your biggest foes as shown above. They can account for nearly 25% of your total contributions over a period of 30 years.
You can either go invest yourself and be in control of the administration fees to keep them as low as possible, choose the stocks, bonds, funds all you want, and on top of that, you can withdraw and stop whenever you want.
Alternatively, there is also the peer to peer lending industry. Banks traditionally earn money too from their customers through issuing loans. But what if I told you that you can invest in these loans too. Sometimes this goes by the name crowdfunding, but you get the idea. Now this is not entirely a new investment type, it has been there for decades, just not for us, the people.
This is where companies like Mintos come in. After a tax rate of 30%, you’ll still end up with a net yield of least 8%. And this is still a relatively conservative number. But I would personally at least aim for 5% net if you want to get a healthy capital increase.
On Mintos, there is no annual fee, and assuming a 3% net return, you will have a balance of 49451.50 EUR. If your portfolio performs like the average Mintos investor, you will have 146327.19 EUR. This is nearly 3 times as much if you were to use the tax efficient retirement saving options from any bank institution in Belgium.
Now is there any risk involved? Yes, you’re investing money. But Mintos allows you to diversify money among as many loan originators as you desire, meaning if one goes bankrupt, you may lose only up to 5% of your portfolio. If the stock market is to crash, you could lose as much as 50% or 80% of your portfolio. If your bank goes bankrupt like BNP Paribas without any help from the government? Your retirement savings should still be backed by the fact that you own the funds, as funds are being stored at a separate entity. Believe me when I say banks will start going bankrupt very soon. It is no coincidence that ING fired nearly 4000 employees this year. There are a lot of fintechs showing up left and right taking away the very much needed income sources of banks. It’s time to open your eyes and start looking for other sources to save for your retirement.
Also, Mintos allows you to diversify your portfolio in different economic regions, different currencies. So your retirement is safe against currency fluctuations or a local economic crisis in Europe.