What is Private Pension and how does it work?

What is private pension?

To know what is private pension and how does it work, It is necessary to understand that it is a product designed for the medium or long term.

Basically, it is an investment model that allows the individual to build up assets during their active life, but which will be used in their old age.

The main focus of this investment model is retirement.

In other words, you invest your money from your youth until you retire, and what you invest will serve as a supplement to your social security pension.

There are already many people who are replacing social security retirement with private pension plans. However, it is important to evaluate the risks, pros and cons before making this decision.

Although it is focused on retirement, this investment can be used for different purposes as well.

In fact, many people do this thinking about the advantages of the tax benefits that private pension plans provide.

How does Private Pension work?

The money you invest in private pension plans is invested in funds; these plans are normally set up for this very purpose.

After a certain period of contribution, you can receive the amount in the form of a pension, redeeming the total or partial balance.

Private pension plans are divided into two main categories: PGBL and VGBL.

To understand better What is Private Pension and how does it work?, it is necessary to know what these two categories represent.

So, keep reading and find out more details.

What is VGBL?

The acronym VGBL stands for Vida Gerador de Benefícios Livres (Free Benefit Generator Life). This is the most recommended plan for those who file a simplified Income Tax return or are exempt.

Furthermore, it is also more suitable for those who make a full declaration, but wish to invest more than 12% of their annual taxable gross income by investing in private pension plans.

A characteristic of the VGBL is that it has no tax benefit, that is, it has no income tax deduction.

Other than that, Income Tax in this category is charged on the income.

What is PGBL?

The PGBL is the Free Benefits Generating Plan, this private pension plan is ideal for those who file a full Income Tax return and contribute to the INSS.

One of the main features of the PGBL is that you can deduct from your Income Tax what you invested during the year in this private pension plan up to the limit of 12% of your annual gross income.

In the PGBL, the IR charge is on the total amount, unlike the VGBL.

Private pension risks

One of the main risks or disadvantages to highlight about private pension plans is that they It is not covered by the FGC (Credit Guarantee Fund).

This means that if the institution goes bankrupt, you will lose all of your investment. Therefore, it is important to closely monitor the movement and thus be able to transfer the money in time.

Furthermore, to give you peace of mind, you can use private pension plans to supplement your INSS retirement.

Therefore, if the institution happens to go bankrupt, you have your social security pension to support you.

Disadvantages

The main disadvantage of this investment model is the fees, which end up reducing the value of the money and the income.

Among the main rates, we find, for example:

Loading rate;
Administrative;
Exit rate.

Each institution has its own percentage, and some do not charge all of these fees. Therefore, it is important to research and evaluate before choosing.

Taxation can also be a disadvantage if not chosen correctly. There are two tables: progressive and regressive.

In the regressive table, there is a decrease in the IR rate over time, which is ideal for those who are going to invest thinking long term.

The progressive table involves an increase in the IR rate as the value increases.

In other words, the higher the redemption value, the higher the income tax you will pay. Therefore, this table is recommended for those who will invest in the short or medium term.

Positive points

Among the positive points to highlight, we find, for example, that it is not exposed to the well-known “quota-eating”.

The come-cotas is an advance payment that occurs every six months in the collection of IR. This event is common in other investment funds.

Fees are discounted in the form of fund shares and the percentage can reach up to 20%.

Another positive point is that you can choose which tax table will apply to your investment. And thus, choose the most economical option. Progressive or regressive?

Another advantage we would like to highlight about private pension plans is that they are not included in the inventory.

If you want to carry out estate planning, the VGBL is the best option, as it is treated as life insurance.

Therefore, it is not taxed in the division of assets, so the legitimate heirs or legal beneficiaries of the plan will be able to withdraw the money without bureaucracy.

The PGBL can also escape taxation, but, as it is seen as a supplementary pension, there are exceptions.

Therefore, it can be more complicated, depending on each state. That's why it's important to get the right information before choosing a plan.

Finally, a positive point is freedom, you can transfer your plan whenever you want, without paying, redeeming or investing again.

So, did you enjoy learning about what private pensions are and how they work?

Conclusion

Everything that involves investing or investing your money must be evaluated and researched beforehand. You need to understand everything about the world you are getting involved in.

However, this is not always possible, so the ideal is to seek professional help from someone you trust.

Before choosing a private pension plan, think, evaluate and compare, to make the ideal choice and enjoy it in the future.

Take the opportunity to also read everything about how loans for retirees work!

By: Nara updated ago 2 years back

What is Private Pension and how does it work?