Branch 23 funds are popular products that banks and insurers like to sell. They can help you achieve your long-term financial goals, while offering the protection of a life insurance. Yet, they are also complicated products that you need to understand carefully before you sign up. We dive deeper into branch 23 funds, highlighting what the bank or insurer may not tell you. We also introduce ETFs, a compelling alternative to grow your wealth.
What is a branch 23 fund?
A branch 23 fund is an investment fund that is wrapped in a life insurance. What does this mean?
Because it's an investment fund, your contributions (also called premiums in the context of an insurance) are invested in financial instruments like stocks, bonds or real estate. This means you can expect a higher return than through for instance a branch 21 product, which has a guaranteed return. But it comes at the cost of volatility, meaning that the value of your investments will fluctuate over time.
It's also a life insurance, which is an insurance contract in which the insurer promises to pay you the value of your investments at a specific point in time, for instance when you reach retirement at the age of 65. Many also come with an insurance were you to pass away before the end of the contract. In that case, you can name a beneficiary, for instance a family member, who will receive the payout.
There are many choices of branch 23 funds, offered by many banks and insurers. You can also invest in a branch 23 fund through the Belgian pension saving scheme, where you can earn a tax break.
The pros of a branch 23 fund
Before we dive into the downsides, a branch 23 fund does provide some positives:
- Peace of mind through the life insurance
- No transaction tax (TOB)
- No dividend tax
The insurance provides peace of mind
Just like you're happy to have a car insurance if you get into a car accident, a life insurance can provide peace of mind were something happen to you (sorry, I know it sounds morbid).
No transaction tax (TOB)
If you've invested before, you may be familiar with the Belgian transaction tax (TOB). Contributions to a branch 23 fund are exempt from the tax.
No dividend tax
Any dividends you earn through a branch 23 fund are exempt from the dividend tax. However, when investing in traditional funds and ETFs, there's an easy workaround for this: invest in accumulating funds.
The downsides of a branch 23 fund
There are quite a few downsides to branch 23 funds:
- Complicated product
- Insurance has a cost (that you pay for)
- 2% premium tax on each contribution
- Entry fee for each contribution
- High ongoing costs that eat your return
- Penalty when getting your money out early
- Minimum starting investment amount
- Daunting to choose the right funds that match your goals
Complicated product
The life insurance makes a branch 23 fund much more complicated than a traditional investment fund or ETF. Each bank and insurer puts different clauses in the contract which you ideally should understand before signing up. And because of the uncertainty of the future, it can be hard to assess the importance of a particular clause.
Even the key information documents of branch 23 funds explicitly say that it's a complicated product!
Insurance has a cost (that you pay for)
The life insurance wrapper does not come for free. You pay for it through additional entry fees and ongoing costs to the insurer. This is fine if you're consciously choosing for the insurance. But it's money wasted if you don't need or want the life insurance. In that case, you're likely better off contributing to a pension saving fund without a life insurance. Alternatively, investing in ETFs may be an even better option, as we will see below.
2% premium tax on each contribution
The Belgian state levies a 2% premium tax on life insurances. So for every €100 that you contribute, the state will take €2 and only €98 will be invested in the branch 23 fund.
Entry fee for each contribution
Almost all branch 23 funds charge an entry fee, some of up to 5%. So of the €98 remaining after the premium tax, €5 will go to the provider and only €93 will be invested for you.
High ongoing costs that eat your return
Because of the life insurance, branch 23 funds have higher ongoing costs than the average investment fund. But most branch 23 funds are also actively managed. This means that the fund is managed by investment managers that try to be "smarter" than the market, by choosing certain stocks and dismissing others, or buying and selling at the "right" time. This sounds great on paper. But unfortunately, this style of investing, called active investing, usually doesn't work. You end up paying a higher cost, for a lower return. Instead, a passive approach based on index investing, usually through ETFs, works better. Passive funds and ETFs offer a higher return, and are significantly cheaper.
Penalty when getting your money out early
When you sign up to a branch 23 fund, you sign a contract with the insurer that they'll pay you the value of the investment at a certain date. This also means that if you take out your money early, you will have to pay a penalty. This is typically a percentage of the payout.
For example, with a branch 23 fund offered by Belfius, you have to pay an exit fee if you get your money out within five years of subscribing to a plan. The withdrawal fee starts at 5% and drops one percent yearly down to 1% if you exit on the 5th year of subscribing to the plan. Starting from the 6th year, there are no exit fees.
Minimum starting investment amount
Most branch 23 products have a minimum initial contribution, for instance €1,000. Depending on your situation, this may be too much. In contrast, you can buy a share of the IWDA ETF for less than €100, and open a portfolio through Curvo with €50.
Daunting to choose the right funds that match your goals
Each bank and insurer offers several tens of branch 23 funds. Yet, building the right portfolio of funds that matches you and your goals is one of the hardest parts of investing. A good bank or insurer will guide you in your choice. But some advisors are better than others. And the interests aren't always aligned with yours. They may "recommend" certain funds over others (meaning, the bank earns a higher commission for those funds).
Investing in ETFs as a better option than a branch 23 fund
We mentioned ETFs when discussing the drawbacks of branch 23 fund. An ETF is an investment fund without a life insurance wrapper. But unlike a traditional mutual fund, an ETF typically invests in a stock market index. For example, you can invest in a BEL 20 ETF and benefit from the performance of all the largest Belgian stocks. Or, you can invest in a global index like the MSCI World, which consists of hundreds of stocks from many different countries. This diversification is a big benefit of ETFs. And because it's easy to track an index, ETFs are a lot cheaper than branch 23 funds and mutual funds.
ETFs have higher returns than branch 23 funds
One reason is the cost. Because ETFs simply track an index (which is why they're also called "trackers"), they're cheaper. You get to keep more of the return of the underlying assets.
But also, globally diversified ETFs invest in the world economy, which has grown tremendously over the last decades because of continued innovation. The IWDA ETF, which tracks the MSCI World index, returned an average 10.2% per year since 1980.
ETFs are tax efficient
Branch 23 products are tax advantageous as there is no dividend tax or transaction tax (TOB). However, there is the 2% premium tax.
As they're not insurances, ETFs don't have the 2% premium tax. Instead, they have the TOB, which is only between 0.12% and 1.32% depending on the ETF. And the 30% dividend tax can be avoided by investing in accumulating ETFs rather than distributing ETFs. Accumulating funds reinvest the dividends rather than paying them out to you.
Furthermore, capital gains aren't taxed in the case of stock ETFs. This is a huge advantage for Belgian investors!
Differences between ETFs and branch 23 funds
Let's summarise the differences between ETFs and branch 23 funds:
Learn more about ETF investing
We have written a bunch of resources that can help you to start investing in ETFs:
- Build the portfolio that's right for you.
- Choose the best ETFs to set up the portfolio.
- Select the best broker for you.
- Buy your first ETF.
- Set up monthly investing, which is one of the best financial habits you can adopt.
- Learn about Belgian taxes when investing.
Curvo: the easiest way to invest in ETFs
Choosing the right ETFs to invest in can be a challenge. But that's not all. You have to understand the intricacies of investing, comprehend the impact of taxes on your portfolio, learning how to use your broker, and know when to rebalance your portfolio. That's why we built Curvo. To make things easy so you can spend your free time on the things that matter most to you.
Get the best portfolio tailored to you and your goals
Invest in one of five portfolios, each optimised for a particular financial goal and appetite for risk. When you sign up, you're asked a series of questions to get to know you and learn what type of investor you are. Based on your answers, you are matched with the best portfolio. Your financial situation and goals (and even your attitude to risk) may change over time. That's why this process is repeated regularly to make sure that your investment strategy always remains aligned to you and your needs.
Diversification at its core
Each portfolio is globally diversified and invests in over 7,500 companies.
All your money is invested
Your investments work with fractional shares. This means that all your money is put to work. There will never be cash sitting on your account doing nothing.
No transaction tax
There is a way to passively invest in ETFs while not having to worry about the transaction tax. At Curvo, all taxes are taken care of.
Invest sustainably
Sustainable investing is challenging because everyone has different beliefs and values. That's why your investments focus on one guiding principle: none of the portfolios invest in companies that are considered destructive to the planet.
Built for monthly investing
You can set up a monthly savings plan where your selected amount is automatically debited from your bank account and invested in your portfolio at the start of each month. This way, it's easy to adopt the best saving habits. Also, Curvo does not charge any transaction fees. And your investments support fractional shares meaning all your money is invested. So Curvo is ideal for monthly investing.
Discover how Curvo's app works.
Summary
In summary, while branch 23 life insurance funds offer certain tax advantages and estate planning flexibility, they have significant drawbacks that can reduce your overall returns. High entry fees, ongoing management costs and potential surrender charges make them a costly option compared to alternatives such as ETFs.
ETFs, on the other hand, offer a more cost-effective and tax-efficient investment approach, with the potential for higher returns over the long term due to their passive management and lower fees. ETFs offer a compelling alternative to branch 23 funds. By focusing on diversification, long-term growth and cost efficiency, ETFs offer a simpler and potentially more profitable investment strategy. Apps such as Curvo can further simplify the process and help you build and manage portfolios that match your financial goals for the future.