Private pension products of the VGBL type have three advantages over traditional fixed income applications such as investment funds. I will address two of these advantages that are related to the tax aspect.
Investors are often disappointed with their pension products. This is because they are applied to old and bad products.
If that’s the case, you should urgently port to a better product. That way, you can really take advantage of the advantages I’m going to mention.
The private pension option Vida Gerador de Benefites is better known by its acronym VGBL. What differentiates a VGBL from a PGBL is how taxation takes place.
Both in VGBL and in an investment fund, taxation occurs only on the gains and not on the amount invested. Therefore, the comparison of the two investments is very suitable.
As I mentioned, VGBL has two tax advantages over fixed income investment funds.
The first is the possibility of the income tax rate being only 10%. In fixed income funds, the lowest possible income tax rate is 15% on earnings.
This lower rate only occurs if the investor opted for the definitive or regressive tax regime.
For short to medium term investments, that is, up to six years, the investment fund vehicle is taxed higher than the private pension.
In fact, while in an investment fund the income tax rate starts at 22.5%, in VGBL the initial rate is 35% on earnings.
In VGBL, the IR rate drops by 5% every 2 years.
Thus, after two years of investment, the rate is 30%, after 4 years, it drops to 25%, after six years, it drops to 20% and so on until reaching 10%.
Although the minimum rate of VGBL can reach 10% per year, this level only occurs after 10 years of investment.
However, given the second tax advantage of pension plans, they are already more advantageous than funds from the sixth year of investment.
This is due to the absence of “quota eats” in pension products.
The “come quotas” is the semi-annual anticipation of tax that occurs in fixed income and multimarket funds. Every six months, the investor already pays the IR on the gains, even though he has not redeemed it.
In VGBL, there is no such anticipation. Therefore, you earn income on the IR due.
To understand when VGBL becomes better, I simulated an investment of BRL 10,000 in a fixed income fund and a fixed income VGBL. I assumed that both would yield 100% of the CDI, which today is at 13.65% per year.
The chart above shows the evolution of this investment, already net of income tax.
After six years of investments, the VGBL has an income tax rate of 20% on gains and the fixed income fund of 15%.
However, as it does not have the “come quotas”, the net value of IR redeemed in VGBL is higher than that of a fund.
After 30 years, the investment in VGBL net of IR will be more than 50% higher when the average investment yield is greater than 12% per year. This difference will be critical to your retirement.
Therefore, the VGBL type pension product, when well selected, can promote gains much higher than investments in fixed income funds in the long term.
So, if you’re disappointed in your foresight, don’t bail. Port to a better product and you will get much better results in the future.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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