Opinion – Grain by Grain: In private pension, choosing the right tax regime is fundamental

Understanding the taxation of traditional financial investments is no longer simple, but in private pensions, the difficulty increases. There are only two private pension taxation regimes, but the choice between them is more complex than it seems. You can’t generalize and say that one of them is always better. I explain some criteria to help you decide.

The two tax regimes in private pensions are regressive (or definitive) and progressive (or compensable).

The regressive regime is simpler because its rate starts at 35% and drops by 5% every two years, reaching a minimum of 10% in 10 years.

The progressive regime follows the progressive IR table and taxation depends on the redeemed volume. At the time of redemption, pensions under this regime are taxed at the rate of 15%, but in the income tax return, you need to make compensation depending on the amount redeemed. Thus, the rate can reach 27.5%.

Usually, investors opt for the first, regressive taxation, as the minimum rate is already known to be 10%.

Normally, this choice only considers the criterion of the time between the contribution and the moment of redemption.

However, there are other criteria to be used and you may even be exempt from IR under some redemption conditions if your pension is of the progressive type. I mention two situations in which this is possible.

The first case would be if an investor has no other taxable income and redeems the limit of R$1,900 per month. With this volume of redemption, at first, he would be taxed at 15%, but in the IR declaration made at the beginning of the following year, he would be refunded this IR paid.

The second case is that he has a volume of deductions in his declaration that causes his taxable income to fall to the exemption limit.

For example, consider a retiree who has no other taxable income. Consider that he withdraws BRL 3,900 per month from his social security and has a monthly expense of BRL 2,000 on a health plan. This way, his taxable income drops to R$1,900 and he would receive a refund of all the IR paid over the previous year.

Therefore, choosing the regressive regime is not necessarily always the best. Other criteria such as withdrawal volume, other income and volume of deductible expenses in the income tax return are fundamental in the selection. The choice of tax regime in private pension should be well thought out so that you pay less income tax in the future.

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

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