ETFs vs Belgian pension saving: which gives a better retirement (pensioensparen / épargne-pension)

How Belgian pension saving works

The Belgian pension saving scheme lets you save extra money for your pension. This is on top of the state pension that you get when you retire. It's voluntary, so you're not required to contribute to a pension saving account. Furthermore, you do it on your own rather than through your employer.

It comes with a tax break

The Belgian state incentivises you to contribute to a pension saving plan through a tax break. Every year, depending on your contribution, you get 25% or 30% of your contribution back as a tax rebate. For 2024, the tax rebates are:

So if you contribute €1,020 in 2024, you will get €306 back when you fill in your tax declaration in 2025 (30%). But if you contribute the maximum of €1,310, you will get €327.50 back (25%). This means you paid only €982.50 out of your own pocket. The state pays the rest. Free money, we like that!

There's a limit on your yearly contribution

In 2024, you can contribute up to €1,310. The amount increases most years. For instance, in 2023 the maximum was €1,270.

The low cap is one of the main limitations of pension saving. The simulation below will show that even if you contribute the maximum each year, it's unlikely to boost your retirement income by much.

Branch 21 vs branch 23 vs pension saving fund

There are three types of pension saving products:

1. branch 21 insurances
2. branch 23 insurances
3. pension saving funds

A branch 21 insurance is a life insurance where you earn an interest each year. Like a savings account, it guarantees your capital. The amount can never go down. But to achieve this, the provider has to invest in very safe assets, like government bonds. Your return will be predictable, but very low.

A branch 23 insurance is also a life insurance. But your money is also invested in assets like stocks or corporate bonds. These types of investments are more volatile, but earn a higher expected return on the long term.

Finally, there are also pension saving funds. They invest in financial markets like branch 23 products, minus life insurance. For instance, your beneficiaries will have less protection when you pass away. The advantage is that they're cheaper. They'll earn you a higher return than an equivalent branch 23 product. After all, insurance has a cost.

What are ETFs

ETFs (Exchange-Traded Funds) are investment funds. They invest in hundreds, or even thousands, of stocks, bonds, or other types of investments. This diversification is a big benefit of ETFs. It makes them more attractive than an individual stock. Instead of investing in one company, you invest in an entire market through an 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.

Most ETFs aim to track a market index. That's why they're also called trackers. The style of investing based on indexes is called index investing, also called passive investing because you hold your investments over the long-term. When you passively invest, you choose to ignore daily price changes. You do this knowing that the market will keep growing long-term. Data shows that this strategy gives the highest return in most cases.

We compare ETFs to Belgian pension saving because ETFs are a great instrument to grow your long-term wealth. And as we'll see from our simulation, they may be better than pension saving to prepare for your retirement.

ETFs vs pension saving: which is better for your pension?

Let's look at the case of Nathan. Ever since he started working at age 23, he contributed €1,310 every year towards his pension. He'll do this until he turns 65, the year where the pension saving scheme stops.

We are comparing three scenarios:

1. He contributes to a branch 21 insurance. We chose the Argenta-Flexx plan, offered by Argenta (we don’t have any affiliation or connection to Argenta). It has returned an average 1.40% to 1.95% per year between 2017 and 2022.
2. He contributes to a pension saving fund. We chose the highest performing fund of the last years, namely the Argenta Pension Fund. It returned an average 4.06% per year between September 2006 and April 2024.
3. He invests in an ETF. We chose IWDA, a globally diversified ETF that tracks the MSCI World index. Because of its diversification and tax efficiency, it's a popular ETF among Belgians. Between September 2006 and April 2024, it returned an average 7.98% per year.

In the case of pension saving, we've assumed that Nathan puts the tax break on a savings account. So each year, we add the tax break to our total savings. We don't do this for the ETF scenario, as ETF investing doesn't provide any tax breaks.

We used our pension saving tool to perform the simulation. Let's look at the results!

Greater wealth with ETFs

The most important result of the simulation is that investing in the ETF yielded a much higher nest egg at the end:

The pension saving fund comes second. With the branch 21 insurance, Nathan ends up with only a fifth of the savings of the ETF.

Pension saving probably won't provide enough income

By using the life expectancy of the average Belgian, we can calculate the total savings into a monthly income during retirement:

It's clear that the pension saving scheme alone does not constitute enough for a pension. It adds a little extra, at best. The Argenta Pension Fund adds €398 per month. The branch 21 insurance adds only €270. On top of this, inflation will cause everything to cost more when Nathan retires. So, the actual picture will be even grimmer.

This is a direct consequence of the €1,310 limit imposed by the government. The limit is very low compared to those in other countries. For instance, the limits for the French plan d'épargne retraite (PER) are several multiples higher.

This is a very unfortunate situation, and even quite risky for some people. After all, many think that they save enough if they max out their contribution to their pension saving each year. The Belgian state wouldn't put a maximum that is too low, would it? But few realize that it's far from enough. They need to save a lot more on top of their contributions to their pension saving plan. When they do realise at retirement, it might be too late to save enough.

Why Belgian pension saving underperforms compared to ETFs

There are a couple of reasons why ETFs will likely result in higher savings than a pension saving product:

• the returns of pension saving products are too low
• the tax break isn't enough to compensate for the low return
• you pay back much of the tax break through the end tax
• pension saving products are expensive

The returns of pension saving products are too low

The main reason why pension saving underperforms compared to ETFs is the much lower return of the average pension saving product.

For branch 21 insurances, the low return is inherent to the product. They choose predictability over performance by investing in very safe assets. For instance, the return of the Argenta-Flexx insurance did not go above 2% since 2017. Assuming an inflation of 2%, this means the real return is actually slightly negative.

But also pension saving funds and branch 23 insurances lag behind, even if they invest in the financial markets like ETFs. One reason is that pension saving funds are actively managed. ETFs, in contrast, simply track an index. Active funds aim to beat the market. They do this by choosing select investments and timing trades well. They deliberately focus on specific market areas and make smart buy and sell decisions. But, this approach rarely works. And it actually makes the funds more expensive because the active managers need to be paid. So in most cases, you'll pay more for a lower return on your investment.

Additionally, pension saving funds don't have total freedom in their investment strategy. The Belgian state imposes protectionist rules. For instance, funds must allocate 80% of the portfolio to EU companies and bonds. These regulations limit the maximum return that these funds can achieve.

The tax break isn't enough to compensate for the low return

Pension saving products have one advantage that ETFs don't: it's the tax break. But, the simulation shows the tax break is not enough. It can't compensate for the vast differences in return.

There's one situation where the tax break beats a higher return. That's when you're close to retirement. If you only contribute for a couple of years, there's not enough time for a higher return to compound. In that case, you will earn more with pension saving thanks to the tax break.

You pay back much of the tax break through the end tax

When you reach the age of 60, you have to pay an end tax of 8% on your total savings. In our simulation, Nathan had accumulated a large amount by the time he turned 60. Throughout his career, he had received a total tax break of €14,787 while contributing to his Argenta Pension Fund. But, he had to give back €10,078 to the Belgian taxman due to the end tax. This is more than 2/3 of the tax break! It's then not that surprising that while banks and insurers who sell pension saving plans often highlight the tax break, they talk much less about the resulting end tax.

Pension saving products are expensive

Pension saving plans are generally expensive compared to ETFs. Branch 23 insurances and pension saving funds have high ongoing fees, whereas branch 21 insurances have high entry fees. Let's compare:

Fees are great for the bank and insurer, but not for your return.

Other limitations of pension saving

Pension saving has a few other constraints compared to ETFs.

Maximum of €1,310 per year

We already talked about the maximum contribution that the Belgian state imposes on pension saving. It contributes to pension saving being only a small addition to your pension. On the other hand, ETFs have no limits. This frees up the path to contribute to a pension saving plan, but invest any excess in a portfolio of ETFs.

Your savings are locked until the age of 60

You can withdraw the funds at an earlier age, but you'll suffer a severe 33% tax penalty. So, this option isn't recommended. Again, ETFs give you total freedom to withdraw whenever you need, however much you need.

The performance between pension saving funds varies significantly

There's a wide range in the returns of pension saving funds. We compared the historical performance of three funds from different providers. We looked at the 20 years between 2004 and 2024:

The average annual return varies between 3.1% and 6.4%. That makes a huge difference in the long term. €1,000 invested in Argenta Pension Fund results in almost twice the value of €1,000 invested in KBC Pricos Defensive Responsible Investing.

ETFs vs pension saving: the key differences

Let's summarise the differences between investing in ETFs and contributing to a pension saving plan.

Learning more about ETFs

We have a few resources for you in case you want to get started with ETFs:

• Buying your first ETF
• Building the right portfolio of ETFs
• How investing is taxed in Belgium
• Why invest regularly

The book De hangmatbelegger, co-written by Curvo founder Yoran, is a great introduction to ETF investing.

Summary

We compared contributing to a pension saving plan with investing in an ETF. The historical data shows that you're more likely to grow a bigger nest egg with ETFs. There are a couple of reasons for this. But, it's mainly because pension saving products have much lower returns. The tax break, which you pay back partially through the end tax, isn't enough to compensate.

Questions you may have

Is fiscal pension saving still useful?

Pension saving beats ETF investing when you're close to retirement. On the short term, the tax break outweighs the higher return of ETFs. Also, you cannot access your savings until you reach age 60. This can be an advantage if it stops you from spending your pension money.

We personally don't contribute to a pension saving plan as a consequence of the results in this article. But we understand if some people still want to.

What will 25 years of pension savings bring?

We can see the result if we use the pension saving tool and start investing at age 40. Contributing €1,310 every year to the Argenta Pension Fund yields a total of €61,000 (or €287 per month). A branch 21 insurance like Argenta-Flexx yields €47,000 (or €220 per month).

What are the drawbacks of pension saving?

The main drawbacks of pension saving are the low returns and high fees. Also, the end tax undoes part of the tax break. You also face a low yearly contribution limit. And, the funds are inaccessible until age 60.