New tax benefit for those who exchange wages for pension
In addition to the statutory pension, more than 3.1 million employees in Belgium have the prospect of a supplementary pension that the employer or the sector in which the employee is active co-finances.
It is impossible to say exactly how many employees cannot count on a company pension. Given the number of employees in the private sector in Belgium, there may be hundreds of thousands. If they do not set anything aside during their active career for later, they will have to get by on retirement with only a statutory pension.
The average employee’s pension is EUR 1,599, but this only applies to those who have completed a full career as an employee. The statutory pension is often lower and it is not enough to enjoy the pension without financial worries. That is why the Minister of Pensions Daniel Bacquelaine (MR) offers all employees the opportunity to build up a pension through the employer, ie in the second pillar.
1. How does it work?
Employees are completely free to decide whether they want a free supplementary pension for the employees (VAPW) and which insurer or fund manager they turn to to build up that extra.
The employer can conclude a framework agreement with a pension institution whereby the employee can conclude a VAPW. But the employee is not obliged to choose that pension institution.
In addition, employees themselves determine how much risk they take. They can opt for a branch 21 savings insurance with a capital guarantee or other formulas that may offer a higher return, but where they run the risk that part of the invested capital will go up in smoke.
2. How is it funded?
The VAPW is financed exclusively by the employee through deductions from the net salary. The employer must only guarantee that those deductions are passed on to the employee’s retirement plan. ‘The employer’s obligation ends there,’ says Andries. The employee also determines the amount of the deductions from the net salary. The employer is no more than a conduit.
Every year, employees can determine the amount they want to save via the VAPW. That amount is limited to 1,600 euros or 3 percent of the annual gross salary, whichever is the higher. If an employee earns 54,000 euros gross, he can have 3 percent or 1,620 euros paid into the pension plan by his employer.
Note that if he already saved for a supplementary pension through an employer two years ago, that amount will be deducted from the maximum allowed. If the previous employer deposited 250 euros in a group insurance policy two years ago, that amount will be deducted from the 1,620 euros that the employee wants to save for the VAPW in 2020. He can only have (1,620 – 250 euros) 1,370 euros withheld from his wages. For example, the VAPW is limited to employees with no or only a low supplementary pension.
3. What is the return?
The return depends on the formula. With a savings insurance policy with a capital guarantee, the return will be lower than with a branch 23 product or a pension fund. These usually offer a higher return, but also involve more risk.
The employer does not have to guarantee a return on deposits for the VAPW. This is an important difference with the supplementary pensions that employers offer. If an employer makes contributions to a group insurance policy or into a pension fund, then he must guarantee a minimum return on those deposits as long as an employee remains employed. On deposits made this and the two previous years, this is at least 1.75 percent. This obligation does not exist for savings within the framework of a VAPW.
4. Are there any costs?
An insurance tax of 4.4 percent is levied on deposits into a VAPW. It is also possible that insurers and pension funds charge entry or management costs. Anyone who calculates the real return on their contributions for a VAPW should take a close look at those costs.
5. What if someone stops working or changes employer?
If the employment contract ends, the deductions for financing the VAPW are automatically terminated. Employees can ask their new employer if he wants to withhold and transfer part of their net wages for the VAPW.
6. Is there a tax benefit?
The premiums that an employee pays for the VAPW provide a tax advantage of 30 percent. If an employer transfers 1,600 euros to a pension institution, this results in a tax reduction of 480 euros. This tax benefit also applies to those who contribute to the company pension offered by their employer. The employee can combine this 30 percent tax reduction with other tax benefits for pension savings, such as individual pension savings.
7. When can the capital be withdrawn?
Employees can only withdraw the saved capital if they actually take (early) retirement. The normal retirement age is now 65, but it will be raised to 67 from 2030. In principle, this limitation also applies to company or sector pensions.
8. Do social security contributions and taxes have to be paid on the benefit?
A contribution of 3.55 percent for the financing of the sickness and disability insurance and a solidarity contribution of 0 to 2 percent are due on the payment of the VAPW pension. In addition, 10 percent must be paid in personal income tax on the capital (to be increased with the municipal surcharges). The social and tax charges are exactly the same as for the payment of a company pension.
9. What is the difference with the employers’ supplementary pensions?
These pension plans are only created at the initiative of the employer (or the sector) to which an employee belongs. If the company (or the sector) for which he works does not provide a supplementary pension for his staff, then he cannot do anything about it.
Moreover, these supplementary pensions are partly financed with contributions from the employers. Those premiums are not part of the payroll statement. They may only be listed as a separate item on the pay slip. Employees do not feel the effect of those premiums in their wallets.
The new possibility to build up a VAPW is always entirely at the expense of the employees. It’s as if they would put some of their net wages aside to save. In addition, the employer does not have to guarantee a return on their contributions to the VAPW.
10. What is the difference with individual pension saving?
In the third pension pillar, everyone can make deposits on their own initiative for an insurance formula or into a pension fund. A tax advantage also applies to those contributions. Anyone who deposits a maximum of 990 euros in 2020 will receive a tax reduction of 30 percent (maximum 297 euros). Between 990 and 1,270 euros, a tax reduction of 25 percent applies (maximum 317.5 euros). Saving through the VAPW is fiscally more advantageous. Employees can save at least 1,600 euros, which results in a tax benefit of 480 euros.
Since the employee finances a VAPW himself, it is less interesting than a group insurance.
Those tax benefits can also be cumulated. This also applies to those who save in the context of long-term savings. Via this formula you can save a maximum of 2,390 euros this year, which also yields a tax benefit of 30 percent or 717 euros.
With regard to pension savings in the third pillar, it makes no difference who someone works for. He can continue the payments for individual pension savings if he changes employer.
11. Is the VAPW interesting?
The VAPW is a new tax incentive to save for a supplementary pension through the employer. Saving is done via deductions from the net salary, which can be a plus if someone shows little saving discipline themselves. For employees who are less financially educated, the danger lies mainly in the choice of the formula. If they choose a retirement plan that involves a lot of costs or risks, they risk being disappointed.
‘It remains to be seen whether the VAPW will seduce many employees. Since the employee finances a VAPW himself, it is less interesting for him than a group insurance (with even limited) employer contributions, ‘says Andries.