Pension plan is not retirement plan; understand – 04/10/2023 – From Grain to Grain

The name private pension is not suitable. He leads to a misunderstanding of what he promises and why. I explain the mistake, how you have to interpret it and what you shouldn’t look for in the market or you will be deceived.

In the minds of most individuals, pensions are associated with a plan to receive income upon retirement.

I receive several questions about how much to earn in retirement with the pension plan that the investor has.

Just yesterday, a question from a reader was about the type of pension that guarantees a lifetime income.

Almost all closed entity plans that promised to pay a defined lifetime income either broke or changed their systems to what are now known as “defined contribution” plans. Therefore, they became resource accumulation plans.

It couldn’t be otherwise. Everyone knows that it is not possible to guarantee profitability for years and as we are living longer, a plan that promises to pay you a fixed benefit until you die and also extends to your spouse cannot be sustainable. So if you have a defined benefit plan like these, beware.

Only the INSS does this, but the Brazilian people guarantee payment. Certainly, this product will also soon cease to be sustainable and those who did not take advantage of it will remember with nostalgia that they only paid for others.

The correct name for pension plans should be “accumulation plan”. As well as those of closed pension entities, that is, foundations. The name should be private accumulation plan.

Every pension plan is nothing more than a form of accumulation. They are not pension plans, nor for pensions.

In fact, the only reason to have a private pension is the tax benefits attached. Apart from that, it is just a product of resource accumulation, that is, a way of disciplining savings.

Don’t be fooled by the following point either.

If you have a private pension plan, as it is written there that there is the possibility of lifetime income. Do not fool yourself. Probably, if you take out this “benefit”, you will receive less income from this “benefit” than if you invest in almost any asset. Maybe even less than savings.

Therefore, never, I repeat, never exercise the “right” to convert your private pension without carefully reading what interest rate you will earn in the income period.

In almost 100% of cases, the interest rate is ZERO.

This means that if you have R$ 1.2 million invested and wish to receive the income for 20 years, the insurer will just divide the amount over 240 months. Therefore, BRL 1.2 million / 240 = BRL 5 thousand per month.

Therefore, this is not a benefit, but a penalty.

Therefore, do not look for a plan in the market that promises you lifetime income. Most likely, you’ll end up with the promise and less money.

Thus, private pension plans should be called “accumulation plans with penalties attached if you wish”. I’m sure the reader of this column has seen me write about it and will never exercise this penalty. But, believe me, many inadvertently do it.

Please don’t get me wrong. I love private pension plans. I think they are excellent products if you choose properly. They have excellent benefits, but these are linked only to the tax part. Which is already a tremendous benefit.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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