Pension plans are the star product to prepare for retirement. It is the first that comes to the mind of most people. However, the market offers long-term savings alternatives with equal or better returns.
And it is that pension plans are not the only product with which to plan retirement, nor does it have to be the ideal one for the average citizen. Its relative success is based on the tax advantage that allow you to pay less income taxes. Of course, in exchange for a worse taxation than other products at the time of recovering the money. That’s why it’s important to know the pension plan options for your money.
Alternatives to pension plans
The investment world is vast and there are a multitude of savings alternatives that can replace or complement a pension plan. These are five available to every saver.
Invest in mutual funds
Mutual funds are the most affordable alternative to pension plans and about which you will find more information. The operation of an investment fund is not that different from that of a pension plan. In both cases, a manager will be in charge of investing their savings in a basket of selected products based on their investor profile and investment horizon.
From there the differences between a pension plan and an investment fund begin. The first has to do with the liquidity of the product. Pension plans are a 100% liquid product in which you can get your money back whenever you want, with few exceptions.
The second is fiscal. With the plans you will save by making the rent for your contributions. In return, you will pay more taxes to the rescue. With the funds there are no benefits in personal income tax for the money you invest, but there is a more advantageous taxation when recovering the money.
In addition, the funds have a tax advantage over other options for your savings. Earnings you make are exempt from paying income tax as long as you reinvest them in another fund. This tax deferral can make a long-term difference compared to alternatives such as stocks, for example.
Invest directly in the stock market
If you build your own stock portfolio, you’ll pay taxes every time whenever you undo a position. In other words, every time you sell a share, you will have to go through the treasury box, which will take between 19% and 23% of your profit.
In spite of everything, investing in the stock market is a viable alternative to contracting a pension plan or investing in investment funds. Its advantage is that it is you who controls at all times what you are investing in, the stocks that make up your portfolio. With a fund, you leave this decision in the manager hands, although you will receive information from the fund promptly, indicating you its investment politics.
This is one of the insurance industry’s solutions for planning retirement. Unit linked is life insurance that also serves to save and invest, hence it falls into the category of life-savings insurance.
A unit linked invests in a basket of products, usually made up of mutual funds, which is structured around life insurance. That is, most of your money goes to long-term investment and a small part to pay the premium for life insurance. This life insurance can be personalized like any such policy by adding or removing coverage.
The difference between unit linked and investment plans and funds is that you can deduce the composition of the portfolio. In other words, if you want, you can choose in which funds the unit linked invests within those offered by the insurer. Its taxation also changes, since they are taxed as income from movable capital instead of as income from work.
Systematic Individual Savings Plan (PIAS)
The second insurance alternative to pension plans is PIAS. It is a long-term savings product designed to receive periodic contributions. For this reason it is very useful for those who want to save month after month instead of investing large sums at once.
Like unit linked, PIAS are actually life insurance that is used to channel savings. There are several types of PIAS, from guaranteed ones to those that work the same as a unit linked and invest in baskets of products. The difference in this case is that you will not be able to decide what your money is invested in.
The great asset of PIAS is its tax advantages if you recover the money in the form of an annuity.
Index Funds and ETFs
To finish with the savings alternatives to pension plans, we return to the field of funds to talk about index funds and ETFs or exchange-traded funds. Although these are two different products, both are used in passive investment portfolios.
This investment philosophy is based on replicating what indexes do rather than following active investment strategies to overcome them as most funds do. Their big difference is that the commissions they charge are lower and the consideration is that their volatility may be higher.
It is a product that gets good results if it is invested for the long term.
Any of these five alternatives can replace a pension plan. The advantage of all of them is that it is not necessary. All products can be combined to form your investment portfolio depending on your goals and needs.