“Épargne-pension” (or “pensioensparen” in Dutch), is a pension-saving scheme offered by the Belgian government. It lets you put away funds for your pension in addition to the state pension. It comes with a considerable tax break, making it an attractive option for those saving for retirement.
We’ve covered this topic extensively in our guide to Belgian pension saving. But how does it compare to saving for your pension through passive investing, by investing in ETFs and index funds? Which method leads to a higher outcome?
That is the question that Gary, co-founder and CEO of Marker.io, asked us on Twitter. We thought it was particularly relevant for the Belgian community. In fact, what we've discovered convinced Curvo co-founder Yoran to reconsider how he saves for his pension.
How does “épargne-pension” work?
First of all, we couldn’t find a good English translation of “épargne-pension". As far as we know, it’s a very Belgian concept. So we will continue to use this word throughout the article. We could have used the Dutch word “pensioensparen” but we chose to use Gary’s native language.
As we said in the introduction, “épargne-pension” is a way to put aside extra money for your pension, on top of the state pension that every Belgian worker starts receiving at the age of retirement. It's voluntary, so you can choose to contribute to an “épargne-pension” account if you want. Furthermore, it is done on an individual basis and not through your employer.
How do you decide how much to set aside for your "épargne-pension"? Every year, the Belgian state defines a maximum amount that you can contribute towards your “épargne-pension” account for that year. This amount was set to €1,270 for 2023 and grows slightly every year. To start contributing to your “épargne-pension”, you simply go to your bank and tell them that you want to set up an “épargne-pension” account.
This account will either be:
- an insurance. You earn a fixed interest rate every year. The return will be low but predictable.
- a fund. The bank invests your contributions in stocks and bonds through special funds. Compared to the insurance, you can potentially achieve a higher return. But the returns are riskier because of the unpredictable markets.
The great thing about “épargne-pension” is that it offers a tax break of 25% of your contribution. For example, if you contributed the maximum amount of €1,270 this year, you will earn €317.50 back through your tax returns. Essentially, this means that you contributed only €952.50 out of your own pocket and the state subsidises the rest. If you contributed less than €990 during the year, the tax break is 30% so it's even higher relative to your contribution. Free money, we like that!
But there's a twist. Indeed as soon as you break the limit of €990 and even if you don't put in the total €1270, you'll still get the 25% rebate on the total amount, meaning you should carefully consider your contribution. Here's an example: if you contribute €1100 a year, you get a tax rebate of 25%, or €275. This is less than the €297 tax rebate if you had put in only €990. So if you decide to contribute more than €990 and want to maximise your tax rebate, make sure the amount is higher than €1,188.
We previously explained why passive investing is a great way to save for retirement. Which one will yield a higher pension: passive investing or “épargne-pension”? Let’s find out!
Let us put our findings in a real case scenario. We'll start by using Nathan as an example. Ever since he started working at age 23, he contributed €1,270 every year towards his pension. He'll do this until he reaches 67 years of age, the official age of retirement.
Let's look at three scenarios:
- His contributions go towards an “épargne-pension” insurance. For the simulation, we chose the Belfius Life Plan. This account is offered by Belfius, a major Belgian bank (we don’t have any affiliation or connection to Belfius). It yields a yearly interest rate of 2.00% as of 2023.
- His contributions go towards an “épargne-pension” fund, namely the Belfius Pension Fund High Equities fund. Using historical data, we calculated that this fund yielded a yearly return of 5.74% between 1990 and 2023. We will use this return for the simulation.
- His contributions go towards IWDA, an ETF that tracks the MSCI World index (passive investing). To account for the tax break offered by “épargne-pension”, Nathan contributes only €952.50 every year in this scenario. Between 1990 and 2023, IWDA yielded an annual return of 7.81%.
ETFs win over the long term
How did Nathan's savings evolve across the three scenarios? Check out the chart below.
The first observation is that all three scenarios result in a bigger pension than the sum of Nathan’s yearly contributions if he had kept them in a savings account (purple line). So both “épargne-pension” and passive investing are a better option compared to a savings account.
Secondly, it shows that passive investing wins over “épargne-pension” in the long run. Up until the age of 35, the 25% tax break compensates for the lower return of the “épargne-pension” fund compared to that of passive investing through IWDA, so the yield between the two is roughly comparable. However, after age 36, the tax break is not enough to counter the much higher return achieved through passive investing.
By age 67, Nathan can retire with:
- “épargne-pension” insurance: €78,000
- “épargne-pension” fund: €233,000
- passive investing: €347,000
Those are considerable differences!
Why "épargne-pension" funds underperform ETFs
One reason why the “épargne-pension” fund underperforms against the MSCI World index is regulations. The Belgian state imposes rules so that “épargne-pension” funds do not have total freedom in their investment strategy. For instance, 80% of the entire portfolio must be invested in companies and bonds from within the European Union. Such regulations reduce the possibility for diversification and therefore put a limit on the yearly return that can be achieved for these funds.
A second reason are costs. Pension saving funds, which are actively managed, are a lot more expensive than index-based ETFs like IWDA. Whereas IWDA costs 0.20% per year and no entry fees, the pension saving fund costs 1.05% per year with an entry fee of 3%.
Finally, you can notice a sudden decrease at age 60 in the evolution of the “épargne-pension” graphs. This is due to a 8% tax that you must pay when you reach the age of 60 for the government to be partially compensated for the yearly tax breaks (nothing comes for free 😏). In the case of the “épargne-pension” fund, this is strangely calculated on a fictional annual return of 4.75% instead of on the actual return of the fund. This resulted in a €9,478 loss at age 60. In our case, this rule is advantageous because the return of the fund was 5.74%. But many pension saving funds have yielded a yearly return less than 4.75%, so you end up paying more than if the end tax was calculated on the actual return.
To help you understand, we built a simulator through which you can find out:
- How much you’re actually saving, and if it’s enough to sustain your life past retirement.
- You pay a tax at age 60 that reduces much of the tax break.
- You pay hefty fees to the banks (which is probably why they like to sell these funds so much).
Other disadvantages of “épargne-pension”
The smaller pension isn't the only thing to make “épargne-pension” less desirable. There are other constraints to consider as well:
- Your savings are locked up until the age of 60. You can withdraw the funds at an earlier age, but you'll suffer a severe 33% tax penalty. Therefore, this option is not recommended. When passively investing, you’re free to withdraw funds at any time, no matter the reason. Maybe you're buying a house, or suffer a health crisis.
- “Épargne-pension” insurances and funds have an entrance fee. For instance, the Belfius Pension Fund High Equities fund has an entrance fee of 3%. This means that you have to pay the bank €38.10 every time you make a €1,270 contribution. In contrast, there are no entrance fees when passively investing.
- “Épargne-pension” funds are expensive. They're actively managed, which means there are higher ongoing fees. The Belfius Pension Fund High Equities fund has ongoing costs of 1.35%. Passive investment products like index funds and ETFs are significantly cheaper.
- You cannot save more than the maximum imposed by the state. If you want to save more than €1,270 every year, you have to figure out a way to invest the excess amount through another way.
Nathan's simulation showed that passive investing yields a higher pension than that of the “épargne-pension” scheme offered by the Belgian state. Furthermore, it’s flexible. You’re not bound to the yearly limit set by the Belgian government and you can withdraw your funds at any time.
What we've discovered in this article convinced Curvo co-founder Yoran to reconsider how he saves for his pension. His bank had previously sold him an “épargne-pension” insurance. He's since cancelled it and set up a passive investment portfolio through Curvo. This is where he makes all of his current contributions.
Questions you may have
Does it still make sense to do Belgian pension saving?
If you're approaching retirement, the tax break is very attractive and an investment without a tax advantage will most likely not beat that. But if you're young and have several decades ahead of you before retiring, it makes sense to look into other investment options. The hefty end tax and high fees charged by the banks nullify many benefits of the pension saving scheme. In particular, we think that index investing is the best way for young Belgians to save for their financial future.
Why shouldn't you do Belgian pension saving?
The main reason not to do pension saving is if you earn a higher return through another means of investing. Also, pension saving may not be the best option if you need your savings before the age of 60, as your money is locked unless you pay a hefty 33% penalty.
Passive investing (IWDA)
The average annual return rate of IWDA (ISIN code IE00B4L5Y983) was calculated with Backtest.
We ran the simulations with the Belfius Pension Fund High Equities fund (ISIN code BE0159537696), which is their most offensive fund and therefore will earn the highest potential return in the long run. The average annual return rate was calculated using the data from De Tijd.
We ran the simulations with the Belfius Life Plan, which has a fixed interest rate of 2.00% as of 2023.
We built a Google Sheets spreadsheet to run the simulations. It takes into account the entrance fees, ongoing fees and taxes that are relevant for each scenario.