Depositing in January produces the largest pension savings bank
Many Belgians wait until the end of December to arrange their retirement savings for that year. But if you want to maximize your retirement savings, you should review that timing. January is the best month for both the pension savings insurance and the pension savings fund.
Since 1989, in 22 of the 31 years, the price of the pension savings funds at the end of December was higher than at the beginning of January.
With a pension savings insurance policy, in which 1.5 million Belgians make a deposit, you enjoy a guaranteed interest rate, which may be increased by a profit share. That interest starts to accrue at the time of the deposit. The earlier you deposit, the greater the capital you will build up. If you want to maximize your pension capital, it is best to systematically deposit the full amount in January. That means that you have to remove the money from the savings account earlier, but at the current interest rate of 0.11 percent, that is no loss. Total returns on pension savings insurance increased to 2.3 percent in 2018.
With pension savings funds, in which more than 1.6 million Belgians deposit, the ideal timing of the deposit cannot be determined in a straightforward manner. Unlike insurance, the funds do not offer a guaranteed return that is always greater than or equal to 0.
Because the funds also invest in shares, they are susceptible to the whims of the stock exchange and their value can (temporarily) fall. The best time to deposit in a pension savings fund is therefore when the fund reaches its lowest price of the year. At that time, you will receive the largest number of shares for the same amount deposited and you will build up a larger pension savings bank. In 2018, pension savings funds reached their lowest price at the end of December, in 2016 it was at the end of February, when fears of a slowdown in growth had sent deeper into the stock markets.
Suppose you had a crystal ball for the past 31 years, so that you could deposit into a fund at the ideal time every year, then today you would have collected an average capital of 60,468 euros. The amount represents the average for the eight pension savings funds that have been in existence since 1989.
However, finding the ideal timing every year is a hopeless task, so it is better to opt for a systematic approach that eliminates the happiness factor as much as possible. For example, you can choose to deposit the full amount each year at the beginning of January, each time at the end of December, or to divide the amount between monthly deposits.
We did the exercise for the eight pension savings funds. This shows that the systematic payment in December yielded an average pension capital of 53,475 euros. That is 6,993 euros, or 11.6 percent, less than with perfect timing. In other words, with a systematic deposit in December, you built up capital that was 88.4 percent of the maximum amount feasible in the best scenario.
What if you opted for monthly deposits instead of a one-time deposit in December? In that case you built up more capital, 54,898 euros, or 90.8 percent of the maximum possible capital. With a monthly deposit you spread the entry moment over the whole year and prevent you from depositing the full amount at the highest point.
However, it can be even better. A systematic payment in January generated an average capital of EUR 57,050 over the past 31 years, which is 94.3 percent of the amount in the best scenario. The capital you raised with deposits in January is 3.9 percent higher than what you realized with monthly deposits and 6.7 percent higher than what you raised with December deposits.
22 out of 31
The reason January is showing the best results has to do with the behavior of the stock markets. These may show large price fluctuations, but in the majority of cases shares close the year with a positive return. This is reflected in the figures. In 22 of the 31 years, the price of the pension savings funds was higher at the end of December than at the beginning of January. That means that in the majority of cases it was more advantageous to deposit in early January.
However, be aware. The fact that there were nine years, such as 2008 and 2018, in which it was more advantageous to deposit in December, proves that a deposit in January is only effective if it is applied systematically.
990 or 1,270 euros in 2020
The pension will also have a pension in 2020 saver the choice between two maximum amounts. Either you opt for a deposit of up to 990 euro. In that case you will receive a tax reduction of 30 percent and so you recover 297 euros via the 2021 tax return. Or you opt for a deposit between 990 and 1,270 euros and enjoy a tax reduction of 25 percent. Then you will recover a maximum of 317.5 euros. Those who opt for the second system must explicitly report this to their bank or insurer. Otherwise, he will assume that it is a mistake and will refund the balance above 990 euros.
Beware of the tax pitfall. If you deposit between 990 and 1,188 euros, your tax credit will be smaller in absolute figures than if you made a deposit of990 euros does. So if you opt for the second system, deposit at least 1,188 euros.
Incidentally, the moment of the deposit has no impact on the 8 percent tax that you pay at the age of 60. You pay this tax on an amount that is established by assuming that deposits only yield a return in the year following the deposit. So whether you deposit in January or December makes no difference to the tax.
The foregoing amounts take into account the annual management fee, but not the one-off entry fee. Some funds, such as Argenta Pension Savings Fund, Belfius Pension Fund Balanced Plus and Interbeurs Hermes Pensioenfonds, do not charge entry fees.
So an easy way to increase your retirement savings is to review the timing of your deposits. Although we have to put that extra capital in the right perspective. More important than timing is the right choice of the fund. The difference in capital accrued between the best and worst performing fund for annual deposits in January is 26,700 euros, significantly more than the extra benefit you get by adjusting the timing. In contrast to the correct choice of a fund, an adjustment of the timing does produce a predictable result.