Understand whether it’s better to have a fixed-income, multimarket or stock private pension plan – 07/06/2023 – From Grain to Grain

I am often asked if it is better to have fixed income or variable income in the private pension plan. The question is pertinent, as pension plans are intended to be applied in the long term. Therefore, there would be a bias towards greater risk, that is, stocks. However, the best answer is not necessarily that.

I’ll ask a question to test your knowledge first.

Suppose you have a portfolio that has 60% in securities and fixed income funds, 20% in multimarket funds, 10% in national and international equity funds and 10% in real estate funds.

If you have 10% of your entire portfolio in private pensions, which asset class would it make more sense for you to have private pensions?
a) fixed income funds;
b) hedge funds;
c) equity funds;
d) real estate funds.

Many financial planners and digital influencers argue that the most appropriate thing is to allocate the share of risk to pensions, i.e. stocks.

Failure in this selection usually occurs, as most investors evaluate the portfolio in a segmented way. That is, think of the pension “box” as something segregated from your total portfolio.

Also, there is a lack of understanding of what the private pension product is and how it fits into your total portfolio. Let’s start with this clarification.

Private pension is not a product to enjoy retirement. It is just a vehicle for accumulating assets that has tax benefits. Traditional applications do not have the tax benefits of social security, but they are also a way for you to save for retirement.

Therefore, you always need to think about your portfolio as a whole. Your entire portfolio is the accumulation vehicle for retirement and not just the part you invested in private pension.

In this way, the choice is not related to the term and the vehicle, but in how you save more IR.

The tax benefit is exactly the justification for selecting the most suitable asset class.

Income tax on equity funds is withheld only upon redemption. Therefore, you do not have the anticipation of IR, called “eat quotas”.

This anticipation of IR reduces the potential for gains in the long term and it only occurs in fixed income funds and multimarket funds.

However, in private pension, you don’t have any quotas, even if you invest in fixed income and multimarket within it.

Therefore, the most appropriate thing would be to allocate exactly those asset classes to the pension plan that are subject to quotas, that is, fixed income and multimarket funds.

Thus, you are free from anticipating income tax on them.

The difference is considerable when we evaluate over a period of 20 years.

For example, consider that you invested BRL 50,000 in a multimarket fund with an expectation of yielding 12% per year for the next 20 years. After this period, you will have accumulated BRL 346.1 thousand.

However, if you invest in the same product through a VGBL, you will have a value of R$ 439.1 thousand at the end of the 20 years. Almost a third more than in the previous case.

I’m not saying that you shouldn’t have a pension product in stocks, nor that fixed income or hedge funds will yield more than stocks. I myself had at times pensions in stocks. However, the greatest benefit is captured if the pension is applied in the multimarket or fixed income class.

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

Talk directly to me via email.

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