Opinion – Grain in Grain: This is the advantage I most appreciate in private pensions

Private pension products have a series of tax and inheritance benefits. Among them, there is one whose value is little understood and explored. The same benefit it provides is shared only in another vehicle that only those who can enjoy it are those who have many millions.

Imagine a benefit that is only enjoyed by investors who have many millions. If it’s aimed at large investors, it could only be an exclusive benefit, do you agree? To have an exclusive closed fund, a minimum capital of R$ 20 million is required.

In addition to private pensions, only closed-end exclusive funds have the feature of deferring income tax. It occurs because these vehicles do not have “quotas eaters”, nor do they pay IR with the rebalancing between the various assets. They only pay IR upon redemption.

The “come quotas” is the semi-annual advance of income tax that occurs in fixed income, multimarket and foreign exchange investment funds.

I will exemplify how the benefit of postponing the IR is extraordinary in the long term.

This feature is capable of providing a 70% higher result in 30 years for investments that yield only the CDI.

Additionally, the greater the return on investments and the term, the greater this advantage becomes.

See the simulation below. Consider an investment of BRL 100,000 in a VGBL and a fixed income fund. Assume that both have a return of 100% of the current CDI, which is 13.15% per year.

At the end of 30 years, despite both having the same CDI yield, you will have BRL 4.1 million in VGBL and only BRL 2.4 million in the fixed income fund.

The difference between the two is the benefit of IR deferral.

The postponement occurs not only in the case of “come quotas”. It also happens when you trade your investments between asset classes, for example equities and fixed income.

Imagine that you invest in a stock product and redeem it to rebalance, then invest it in fixed income. When you make this move, you need to pay IR on the income and you only apply the net amount to the fixed income.

In the case of private pension products, you do not have this IR anticipation. Therefore, it carries the amount to be paid in tax and earns profitability on top of it.

This return on the tax payable is the leverage element in the results of pension vehicles. Its effect is only noticed in the long term and when compared to the alternative of a traditional fund.

I have had pension products for almost 20 years and I understand this advantage. I emphasize that this positive feature does not exempt you from having the trouble of choosing the best products to apply.

For the long term, the IR payment postponement feature is one of the best advantages of VGBL and PGBL type private pension products.

Today’s Lessons:

1 – The postponement of IR payment increases the results of a product;

2 – The longer the time and the return, the greater the advantage of postponing the IR over the result;

3 – Only closed-end exclusive funds and pension funds have the advantage of postponing income tax on all investment classes.

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

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