How Belgian freelancers can retire on their own terms

Four pillars (options) for your retirement

There are four so-called “pillars” where you can contribute towards your nest egg for your retirement:

• Pillar 1: state pension
• Pillar 2: complementary pension plans (VAPZ/PLCI and IPT/EIP)
• Pillar 3: pension saving plans (épargne-pension/pensioensparen)
• Pillar 4: voluntary savings

Pillar 1: State pension

The government grants every Belgian worker a state pension, whether you're an employee, freelancer, or a public servant. The amount is dependent on the number of years that you’ve worked as well as the salaries that you’ve earned throughout your career. The higher your salary during your working life, the higher the state pension will be.

The state pension works differently for freelancers, employees and civil servants. The state pension is lowest for freelancers, while it's best for civil servants. The average state pension for freelancers is €1,212 per month. This is hardly sufficient for most people to live a comfortable post-retirement life, and it's risky relying upon state pensions alone.

1. The system of state pensions is under increasing pressure

The current state pensions are covered by active workers, but the number of retirees continues to increase while active workers decrease. It is expected that this evolution will continue for decades, putting the Belgian pension system under enormous stress. Reforms are necessary, but it remains unclear what those changes will be or how they will impact us.

2. Not enough money in the pot

Mark Scholliers, a leading Belgian expert on pensions, told us in an interview that “the pension crisis is actually just a crisis of the financing of pensions. There is simply not enough money in Belgium to continue to pay the rising pension burden.”

Pillar 2: Complementary pension plans for freelancers

Let's use Ben's case as an example to illustrate the different pension products available on top of the state pension. Ben is a 37-year old freelancer who is saving for his retirement. He started working at 24, and is now married with 3 kids.

When becoming a freelancer, Ben's bank recommended he set up several complementary pension plans. Unfortunately, these plans are complicated and nuanced. Let’s run through the options.

VAPZ/PLCI

The VAPZ (Vrij Aanvullend Pensioen voor Zelfstandigen), or PLCI in French (Pension Libre Complémentaire pour Indépendants), is a pension plan reserved for all self-employed individuals, allowing them to build up their retirement savings. Both sole proprietors as well as limited company owners can save through a VAPZ/PLIC. This pension plan is often sold as a life insurance that you claim at the age of retirement.

The greatest benefits of a VAPZ/PLCI are the fiscal advantages:

• Your contributions are fully deductible as professional expenses, meaning that you lower your taxable income.
• Your social security contributions are calculated based on your taxable income. Because your taxable income reduces, you will pay less social security contributions by contributing to a VAPZ/PLCI.
  

Due to the fiscal advantages, the Belgian state sets a maximum amount that you can contribute to your VAPZ/PLCI per year. It increases annually and in 2022, it was set at 8.17% of your income, with a maximum of €3,477.62. This is also the maximum amount that you can deduct from your income as professional expenses.

There are lots of providers of VAPZ/PLCI to choose from. Most traditional banks offer plans, as well as several insurance companies such as Baloise, Vivium or Liantis (we don't have any special recommendations for either of these).

A VAPZ/PLCI is most often implemented as:

• a savings product with a guaranteed return (branch 21). You earn a fixed interest rate every year. The return will be low but mostly predictable. On top of that, you earn a variable share of the profits (“participation bénéficiaire variable” / “variabele winstdeling”).
• a fund (branch 23). Some insurers offer the possibility of investing your contributions in a fund with a potentially higher return than branch 21, but it's a riskier option.

Taxes and fees

Throughout the duration of your VAPZ/PLCI, the provider will charge fees for its service:

• Entry fees. This is a fee on every contribution. Some charge up to 6% of your contribution. So if you contribute €1,000 towards your VAPZ/PLCI, the provider takes €60, meaning you save only €940.
• Management fees. Providers charge a fee for the ongoing management of the VAPZ/PLCI. Most branch 21 saving products with a guaranteed return have ongoing fees of less than 0.2% on your total savings. Branch 23 funds are more expensive, with an average of around 1% per year.
• Exit fees if you take the money out before retirement. This can amount to 5% of the saved capital.
  

It is important you understand the fees before you enter a VAPZ/PLCI so that you avoid suffering consequences on your return.

When you withdraw your funds, there are three types of taxes you will have to pay.

First, there's a social security tax of 3.55% on the total capital. This tax is commonly known as RIZIV (Dutch) or INAMI (French). Then, a solidary contribution tax of 2% is levied on the total amount.

Finally, there's a tax on the pension capital. It's not levied as a direct tax, but instead as additional income that you will have to declare for a certain number of years. The state earns the income tax through this additional income. It's a complicated system so an example will make it clearer. Imagine you retire at 65 with €100,000 saved up in your VAPZ/PLCI. The additional income you need to declare every year is set to 5% of 80% of the capital, which equals to 5% x 80% x (€100,000) = €4,000. For the next 10 years, you will have to add €4,000 to your income in your yearly tax declaration. The state will earn some of it as income tax. The rates are slightly different if you take the money out before the age of 65.

Benefits

• Advantageous for taxes and social contributions. Your contributions are fully tax-deductible as professional expenses. Depending on your income, you may also pay less in social security contributions.
• Life insurance. A VAPZ/PLCI is a life insurance, meaning that your family and relatives earn a payout if you passed before reaching the age of retirement.
• Optional insurance if you're unable to work. There's a variant of the VAPZ/PLCI called a "sociaal VAPZ", or "PLCI sociale". It comes with an additional insurance that covers you in case you become incapacitated for work. Naturally, the insurance comes at a cost so it's more expensive than a regular VAPZ/PLCI.
• Only 80% of the capital is taxed if you take it out at age 65.
• Use your capital to invest in real estate. You can use part of your VAPZ/PLCI to buy property. You have one of two options; use 60-90% of your savings, or take an advance of 60-90% of what you planned to contribute during the next years. The latter is riskier, because you are taking a loan on money you don't have.

Drawbacks

• There’s a limit to your contributions in a year, which in 2022 is €3,477.62.
• Providers charge high fees.
• The exit taxes are substantial.

IPT/EIP: group insurance plan for limited company owners

If you set up your own management company, your company can set aside an amount every year in an IPT/EIP, which stand for respectively "Individuele Pensioentoezegging"/"Engagement Individuel de Pension". Through an IPT/EIP, your contributions will accumulate in a tax-efficient manner. Your company pays the contribution for your individual pension commitment and declares it in your company’s tax bill. At the end of the plan you, as an individual, are the beneficiary. This is why IPT/EIP is sometimes compared to the group insurance system that exists for employees. Note that the IPT/EIP is available only to limited company owners. Sole proprietors ("zelfstandige als natuurlijk persoon" or "indépendant en personne physique") cannot subscribe to one.

Each year, you can contribute up to 80% of your last gross annual income to an IPT/EIP.

Taxes and fees

The provider of the IPT/EIP charges entry fees, management fees and exit fees for their service. Depending on the provider, these can be as high as 6%. It's important you understand the full breakdown of fees before your own company enters an IPT/EIP plan, as they can have a significant impact on your returns and your retirement fund.

In terms of taxation, you are taxed a 4.4% insurance tax on every contribution your company makes. Additionally, there are 3 types of taxes you will have to pay upon withdrawal, which we've mentioned before: the social security tax (3.55% of the total capital), the solidarity contribution tax (2% of total capital), and the final taxation of between 10% and 20%, depending on when you take the money out. The state penalises people who want to take their savings out earlier, so over time the tax rate decreases. The rate is 10% if you take out your IPT/EIP after the age of 65 but reaches 20% if you take it out even five years earlier at the age of 60.

Benefits

• Your company can deduct contributions for professional expenses.
• Fiscal advantages. Your company pays the IPT/EIP contributions and you, as a private individual, are the beneficiary. It’s a way to allocate a company’s profits to the owner.
• Financial protection for your family. The IPT/EIP is a life insurance, meaning your family will earn a payout were you to pass away before reaching retirement age.
• Optional insurance. You can opt for additional insurance that protects you in case you become incapacitated for work.
• Invest in real estate through a “bullet loan”. You can preemptively use some of the capital in your IPT/EIP plan to acquire property.
• Catch up on past contributions. If you were an employee before becoming self-employed, you can pay catch-up contributions for previous years. You can go back as far as 10 years, as long as you satisfy the 80% rule. These contributions are fully deductible.

Drawbacks

• It is available only to management companies. So you can't set up an EIP/IPT if you're a sole proprietor.
• Your capital is highly taxed when reaching retirement, depending on the age at which you decide to benefit from it.
• Your capital is blocked until the age of 60, unless it's used to invest in real estate.
• As you can tell from our explanations above, the whole scheme is hard to grasp.

Pillar 3: Pension saving plans

Pension saving ("épargne-pension" in French or "pensioensparen" in Dutch) is a pension saving scheme offered by the Belgian government. As opposed to the self-employment reliant pension plans offered in pillar 2, those of pillar 3 are completely personal. Whether you're self-employed, an employee or a civil servant, every Belgian has access to the same pillar 3 options. The main attraction of this pension saving scheme is the tax break.

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 €1,310 for 2024 and grows slightly every year.

To start with pension saving, you simply go to a bank or insurance provider and tell them that you want to start contributing to a pension saving account. There are two types of pension saving plans:

• a savings product with a guaranteed return (branch 21). You earn a fixed interest rate every year. The return will be low but mostly predictable.
• a fund (branch 23). The bank invests your contributions in stocks and bonds through special funds. Compared to insurance plans, you can potentially achieve a higher return, but these carry more risk because of the unpredictability of the markets.

Taxes and fees

Providers charge entry fees, exit fees and management fees. The exact fees depend on the provider. Additionally, there’s an 8% tax that you must pay when you reach the age of 60. This allows the government to be partially compensated for the tax breaks.

Benefits

The tax break amounts to either 25% or 30%, depending on your contribution. If you contributed less than €990 during the year, you get a 30% tax break. It's reduced to 25% if you contribute between €991 and the maximum of €1,310.

Drawbacks

There are several drawbacks to the pillar 3 pension saving scheme:

• Your savings are locked up until the age of 60. You can withdraw the funds at an earlier age but it comes at a severe 33% tax penalty.
• Funds are expensive. They're actively managed, which results in high ongoing fees. For instance, the ING Star Fund has yearly ongoing costs of 1.17% as well as 3% entry fees for every contribution you make. 
• You cannot save more than the maximum imposed by the state. If you want to save more than €1,310 every year, you have to figure out a way to invest the excess amount through other means.

We wrote a guide if you want to learn more about this option but also developed a tool to help you compare different funds.

How much will Ben retire with?

This is the most important question. We are going to calculate how much Ben will retire with when taking into account his state pension and the contributions he's making to the three pension products we covered: VAPZ/PLCI, IPT/EIP and pillar 3 pension saving. We are making the following assumptions:

• Ben wants to retire by age 67. He's 37 today, meaning he'll retire in 2052.
• He contributes €3,477.62 per year into his VAPZ/PLCI (the maximum for 2022).
• He contributes €3,477.62 per year into his IPT/EIP.
• He contributes €1,310 per year into his pillar 3 pension saving plan (the maximum for 2024).
• Altogether, this means he contributes €8,265 per year across the various pension products available to him.

Ben calculated that he needs a gross retirement income of €4,000 per month to afford the life that he wants post-retirement. For instance, he and his wife want to travel more, and want to provide for their children and potentially grandchildren. Because of inflation, he'll need about €7,250 in 2052 to maintain the same purchasing power as €4,000 today. The average life expectancy for Belgian men is 78.5, which means Ben needs a retirement fund of almost €1 million.

€1,212 per month will be covered by his state pension, or €2,195 in 2052 because of indexation. Will Ben have enough to retire on his own terms?

Unfortunately, the answer is no:

His state pension and the contributions to the different pension plans add up to only €618,000. He's missing €381,000, which is Ben's retirement gap.

What options does Ben have to close the gap?

Pillar 4: Closing the gap with index investing

As we learned from the simulation, it’s unlikely that the three pillars will get Ben to his desired retirement goal. Unfortunately, most people don't realise this until it’s too late. So it's important you take matters into your own hands and start taking action as early as possible.

Options to close the gap include the following:

Savings account

Savings accounts are the easiest way to save money. Every bank offers one, usually for free. But we don't think it's actually suited to build your retirement fund.

For many years, the inflation rate has been higher than the interest rate you earn on your savings account. This means that every year, you're basically losing purchasing power by keeping money in your savings account. That's why we don't think savings accounts are suitable on their own to set you up for retirement. Instead, they are a good home for your emergency fund, or "rainy day fund". This is money you tap into for instance when you lose your source of income.

Fortunately, there are better ways to save for retirement so that you don't lose your savings to inflation.

Real estate

While many Belgians consider real estate a safe and sound investment, we realised that it isn’t easy to be successful at it. It can be a good way to build your nest egg, but it's hard to do well and has many pitfalls. For instance:

• Choosing the wrong location can greatly impact your return, but it's very hard to pick the right location when considering budget.
• Your savings are concentrated in one property. It's a big risk in case something bad happens to the property or the area around it.
• A property needs constant maintenance: the heating breaks, or the walls need fresh paint, or the roof needs to be cleaned. This requires both time and money.
• The different taxes applicable to property can be significant.
  

We discussed the complexities of investing in property in depth if you wish to learn more. Alternatively, a real estate ETF may provide a more accessible option, allowing you to invest in real estate without facing some of its drawbacks.

Index investing

Finally, we think that investing in the global economy through index investing is the best way for most people to save for their future. As you'll see, it's more effective than a savings account, and it's free of the complex factors associated with real estate investing.

Index funds are ideal for the long-term

In Belgium, index investing is most commonly done through ETFs. An ETF is a collection of hundreds, or sometimes thousands of stocks or bonds. Diversification is one of the most attractive aspects of owning an ETF compared to individual stocks. By investing in a single ETF, you become invested in thousands of companies in one go. Through one share of an ETF, you essentially own a small piece of the global economy.

Because they're passive, ETFs are perfect for the person who doesn't want to spend their time trading and making sure they buy and sell their stocks at the right time. And it turns out that ETFs yield a better return than those who are trying to beat the market, as the European finance regulator found out. Find out more about passive investing as an alternative to stock picking.

‍History also corroborates this. The global economy has grown tremendously over the past 100 years. And index investing through ETFs is a way for all of us to benefit from this growth. For instance, IWDA, a popular ETF that consists of thousands of companies in "developed" countries, has yielded an average 11.1% return since 1979.

ETFs are cheap

Fund managers charge a fee for managing their funds. The total cost of a fund is indicated by the total expense ratio (TER). ETFs are typically much cheaper than the active funds that are sold by the traditional banks. So, the popular IWDA ETF has a TER of 0.20%. In contrast, this actively managed “climate” fund from Belfius costs 1.92%, on top of which you pay an entry fee of 2.5% on every investment you make. Fees is an important reason why index investing is favoured over “traditional” active investment funds.

Index investing through the Curvo app

With Curvo, we built the easiest way for Belgian freelancers to close the retirement gap through passive investing. The investment portfolios are managed by NNEK, a Dutch investment firm licensed by the Dutch regulator (AFM).

Curvo offers the following benefits:

• Rooted in index investing. We don't believe in chasing the market. Instead, we understand passive investing is the time-tested way to grow your savings through a diversified portfolio of low-cost index funds.
• Peace of mind. All the complexities of investing are taken care of, so you don't have to worry.
• Automated monthly contributions. Put your contributions on autopilot so you can save for retirement while spending your time on the things you enjoy.
• Start investing from €50. And there are no limits to how much you can contribute!
• No entry or exit fees. You pay an annual fee to use the service.
• Fractional shares. This means that all your money is invested. There’s no cash sitting on an account that isn't working for you.
• Safety. NNEK manages your investments. Through them, your investments are secure and regulated by the Dutch financial authorities. You are also protected by the European investor protection scheme.

Closing Ben's retirement gap with Curvo

Let's take the argument back to Ben. We calculated he needed €381,000 to close his retirement gap. The chart below shows that he can achieve this by contributing €267 every month to a Curvo Growth portfolio, which is expected to return an average 5.7% net return per year.

Calculate your own retirement gap

Although Ben's situation is pretty average, we know everyone's lives are totally unique. The calculations underlying the graph above are freely available in a spreadsheet, so you can make a copy and tailor it to your own circumstances. You may also find that some of our assumptions do not fit your situation. In that case you'll have to make more consequential adaptations.

Conclusion

We explained the different ways you can save for your pension as a Belgian freelancer. It's especially difficult for the self-employed because the state pension is low compared to that of employees and civil servants. Fortunately, the Belgian government has several mechanisms at disposal beyond the state pension through which you can save in a tax-advantageous way.

We've presented how you can benefit from the different pension products offered by the Belgian government, using Ben as a use-case. Unfortunately, it's unlikely that he will get the post-retirement life that he envisages, due to a combination of contribution limits, high taxes imposed upon retirement, and high fees charged by banks and other providers. Ben faces a retirement gap that he needs to fill, and he isn't alone.

At Curvo, we strongly believe that passive investing is the best way for freelancers to close this gap. It makes your money work for you, and has none of the disadvantages associated with other options like a savings account or real estate investment.

Don't wait until it's too late to plan your pension.