We write this so you can have things clear. Saving for retirement is one thing, one goal. But the goal can be reached by different paths. If there are different paths, it is because there are different types of walkers, that is, different savers. Each product, whether it is an insured pension plan or a pension plan, has specific characteristics that are adapted to one or another saver. It is important not to buy a product that does not suit what you want, and that is why it is important to understand the differences.
The two main ways to save individually are through an individual pension plan and an Insured Pension Plan or PPA. Here we will explain each of them.
The main difference between a PPA and an individual pension plan is insecurity. The PPA will always guarantee that when you go to retire, you at least get back the money you have invested in the product, no matter what happened to the financial markets. In the case of the individual pension plan, the plan itself cannot offer any guarantee, so it is not possible to ensure that the client will recover the contributions made at the time of retirement.
This can be a very important nuance when we’re talking about retirement savings. There are many people with a conservative investment profile who do not want their retirement savings to be exposed to the volatility of the markets. Therefore, it gives them great peace of mind to know, whatever happens in the financial markets, all the money they have invested is safe from fluctuations.
Difference between PPA and pension plan: Myths and legends
When defining the differences between a PPA and a pension plan, it is necessary to combat some beliefs installed in the common images that are not true. One of the most common is the following: “I have a plan that I invest in fixed income, and therefore I cannot lose.” Fake. The value of fixed income fluctuates in markets such as variable income, depending on factors such as, for example, the evolution of interest rates and the famous risk premium. So many people have been surprised that, for example, if they saved 10,000 euros on a product of this type, when they reach retirement it turns out that they only recover 9,500 euros.
Another very common belief is that “in the long run, saving inequities in a product that does not offer any guarantee is always going to be much more profitable than investing in a guaranteed product.” Well, it depends. Many factors must be evaluated. It depends, for example, on your risk profile. It also depends on how much time you have left for retirement. The most important thing is to find out, get advice and, based on that information, analyze which retirement product is best for you.
The most important thing is to get informed advice and analyze which product for retirement is best for you.
Someone may also wonder, “how is it that individual pension plans cannot offer guarantees? And the guaranteed pension plans?”. Here it is necessary to clarify that the guarantee of a guaranteed individual pension plan is always external.
It is the financial entity that sells it (usually a bank) and not the management entity of the plan that assumes the commitment to contribute the amount necessary for the client to keep their initial investment on a certain predetermined date. In addition, the guarantee only operates on a certain date and not on any other.
Are PPAs and pension plans compatible?
The good news for savers is that insured pension plans and pension plans are perfectly compatible and are in continuous competition, being able to transfer from one to another as many times as they want without incurring any tax cost.
In other words, you can invest part of your retirement money in a pension plan and another part in a PPA and thus diversify the risk. Or, if you still have enough time to retire, you can adopt a strategy of investing in pension plans when the financial markets are up and transfer your money to an insurance companies pension plan when you anticipate that the market will go down and you need to protect my savings for retirement.
You can also invest more in a PPA when interest rates are high, like a few years ago, and less when interest rates are lower.
You can invest more in a PPA when interest rates are high and less when interest rates are lower.
Where there is no difference between a PPA and an individual pension plan is in the tax advantage (tax deferral) that they enjoy. When you contribute up to a maximum of 8,000 euros per year (with a limit of 30% of net income from work), you do not pay taxes on that amount (reduction in tax base), but then when you retire, you have to pay for it, although assumed to be at a lower marginal rate.
