Why Belgian pension saving ("pensioensparen" or "épargne-pension") is an important tool for a better pension.
What to pay attention to when choosing to start contributing.
How you can go further than pension saving to earn an even better pension.
Earn a better pension with pension saving
Pension saving ("épargne-pension" in French or "pensioensparen" in Dutch), is a pension saving scheme offered by the Belgian government. It’s a way to put aside funds for your pension, on top of the state pension, and it's in the so-called 3rd pillar of the pension scheme. It’s sold as an attractive option to save for retirement because it comes with a considerable tax break.
This guide is here to explain how it all works. We help you decide on the optimal pension saving plan so you can start saving.
What is the Belgian pension saving plan?
As we said in the introduction, pension saving is a way to put aside extra money for your pension, on top of the state pension that every Belgian worker starts receiving when reaching retirement age. It is voluntary, meaning that you’re free to choose whether you want to contribute to a pension saving account. Furthermore, you do it on an individual basis and not through your employer.
Every year, the Belgian state defines a maximum amount that you can contribute towards your pension saving account for that year. The government set this amount to 1,270€ for 2020 and it grows every year with inflation. 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.
Why would I want to do it?
The best thing about Belgian pension saving is that it comes with a tax break of 25% or 30%, depending on the contributed amount.
For example, if you contributed the maximum amount of 1,270€ this year, you will earn 322.50€ back through your tax returns. Essentially, this means that you contributed only 967.50€ out of your pocket and the state subsidises the remaining amount. Free money, we like that!
The other great benefit of pension saving is that you'll be able to develop some good saving habits. You'll have to create your own savings plan and you can choose to budget monthly payments to reach the 1,270€ limit or put it in one lump sum. This will help you plan for your future and develop a worthwhile habit.
How much should I contribute?
You can save any amount between €0 and €1,270 in a year. The more you save, the higher your pension will be. A higher contribution will also result in a higher tax break.
How much is the tax break?
The tax break equals to:
30% of the contribution if your contribution is less or equal to €990.
25% of the contribution if your contribution is between €991 and €1,270.
You can use the chart below to see how much your tax break will be for any given yearly contribution. Just hover with your mouse!
What is the red zone?
Imagine that you have opted for the higher tax ceiling and that you are depositing €1,000. Then you will receive a tax deduction of €250 instead of the €297 reduction for the lower ceiling of €990. Because as soon as you deposit 1 euro more than 990 euro, the tax reduction falls from 30% to 25% for the entire amount saved. In other words, a loss of €47. From the amount of €1,188 onwards, that loss will be eliminated. It is therefore not recommended to contribute between €991 and €1,188, which is indicated by the red zone in the chart. It is up to you to decide whether the higher capital accrual takes precedence over the lower tax benefit.
How are my savings invested?
A Belgian pension saving account will be either:
an insurance. You earn a fixed interest rate every year. The return will be low but mostly predictable. This is commonly called "branch 21" ("tak 21" in Dutch or "branch 21" in French, don't ask us how they came up with those names).
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 carry more risk because of the unpredictability of the markets. In the pension saving parlance, they call this "branch 23" ("tak 23" in Dutch or "branche 23" in French).
Traditionally, branch 21 investments are relatively safe. Thanks to its guaranteed minimum return and its low risk, your savings grow over time, slowly but surely.
Branch 23 is a riskier option. Because your savings are invested in the financial markets, there is a risk that the value of your investments falls below what you put in (also called the principal). Fees are also more expensive as your money is actively managed by a fund manager. However, the additional risk you take on pays off. When saving over many years, a branch 23 fund is expected to result in a much higher return than a branch 21 insurance.
The impact of low interest rates on branch 21
Unfortunately even branch 21 investments do not necessarily protect the principal. There was a warning issued in July 2020 by the Belgian financial authorities that your capital may drop in value, even for branch 21 funds. This is because the interest rates have fallen to almost 0%. If you add on the fees, the total return drops to below 0%.
Another consequence of low interest rates is that your savings in a branch 21 insurance are losing value every year. This is because of inflation, the mechanism that causes everything to get a little bit more expensive every year. Even though your savings grow a little bit, inflation reduces their value quicker than it can grow.
What are the downsides?
There are a few downsides to the Belgian pension saving scheme that reduce its attractiveness:
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. Therefore, this option is not recommended. Furthermore, most fund providers charge exit fees when you withdraw parts of your savings.
Pension saving insurances and funds have an entry fee. Most branch 21 and branch 23 providers charge a fee for every contribution that you make. For instance, if a fund has an entry fee of 3% and you contribute €990, the fund provider will pocket €29.70 and only €960.30 will end up contributing to your savings.
Pension saving funds are expensive. Pension saving funds are actively managed, which results in high ongoing fees that you have to pay every year.
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 other means.
How much do Belgian pension saving funds cost?
Each pension saving fund has three types of fees:
Entry fee. The price you pay for every contribution to your pension saving plan. You pay this once per contribution, generally as a percentage of the contributed amount. For instance, if you contribute €1,000 to a fund with an entry fee of 2%, you will contribute only €980 to your pension saving and pay €20 to the fund provider.
Exit fee. Some funds charge a fee to get your money out. This is almost always a percentage of the total amount saved up. So if you have saved up €30,000 over your career and your fund charges a 5% exit fee, you will recuperate only €28,500 and pay €1,500 to the fund provider.
Running costs. The price you pay to the fund provider on an annual basis to manage your money. It's charged as a percentage on the total amount of your savings.
All your questions answered
How do I get the tax break?
Every year, your provider will provide a statement (281.60) which will list all the contributions you've made over the year. You have to keep this statement at disposal in case the tax authorities demand it.
You will declare this in your yearly tax return to receive the credits on your taxes for the year. Even if you forget to declare it one year (or more!), you can tally them up and provide it to the authorities with the full statement of contributions from your bank or insurance provider to negotiate the tax break. We recommend speaking with the tax authorities directly in that situation.
How do I subscribe to a Belgian pension saving plan?
It's easy. All taxpayers resident in Belgium, or coming from another state of the European Economic Area, and aged between 18 and 65 years old, are eligible for the Belgian pension saving scheme.
To get started, you need to get in touch with one of the many providers that offer branch 21 or branch 23 funds. An overview of these is coming soon in this guide!
Do I have to pay anything when I want to get the money out?
Yes, you'll have to pay tax on your pension savings when you take the money out. The tax is collected automatically by the tax authorities from your bank when you turn 60. This tax is important to calculate your final return when you retire!
The tax is calculated differently for branch 21 and branch 23.
For branch 21, the tax is calculated on the capital you would have perceived if it had grown at the guaranteed rate of the fund and equals 8% of that amount. Because the return on a branch 21 fund consists of the guaranteed rate and a profit-sharing, this calculation is in your favour.
For branch 23 funds, the tax is also 8%. But it's calculated on the capital that you saved if your fund had a fictional yearly return of 4.75%. In the current economic climate, such a return is pretty high and a lot of funds are not able to obtain it. So the way the tax is calculated for branch 23 funds is likely not in your favour.
Remember that if you get the money out before you're 60, you will have to pay a large exit tax of 33%. This tax may be higher than the amount of the tax reductions you received when you put the money into a pension saving plan. Also, your fund provider may charge you a fee if you leave the pension savings insurance before the maturity date. All the more reason to avoid leaving early...
Must I get the money out as one lump sum or can I get paid monthly?
That's entirely up to you. If you choose to save through a branch 21 fund, on your 65th birthday (or when your contract ends), you can choose to get all the money out in one go or choose the option to be paid out your money every month.
If you opted for a branch 23 fund instead, you can choose to sell your funds partially or in one go. That's up to you to decide.
Can I continue investing even when I'm over 60?
You will be able to continue your pension savings after your 60th birthday and until your 65th birthday. You will still benefit from a tax reduction when you make your payments, but you will no longer have to pay any final tax. On your 60th birthday, the amounts withdrawn will be deducted from the final tax of 8%. This means that you will be able to enjoy a nice tax break in the final years.
What happens if I pass away before I'm 65?
Morbid question but these are things to consider when you're selecting a plan that fits you. If you opted for a branch 21 fund and you die before it expires (usually before your 65th birthday), your heirs will receive the amounts paid out, the guaranteed interest and any profit-sharing.
If you opted for a branch 23 fund, your heirs will be entitled to the value of the fund at the time of your passing away. If you pass away before your 60th birthday, the advance tax will first be deducted before the money is released.
Your heirs will have to pay inheritance tax on the amount they inherit. If you die before your 60th birthday, the withholding tax will first be deducted, and they will then have to pay inheritance tax on what remains.
Can I change my plan even though I'm already subscribed to one?
Yes, you can. For instance, you may not be pleased with the return or the costs of a fund.
One way to change plans is by stopping your contributions to your old fund and start contributing to one that fits your profile better.
Another strategy is to request a withdrawal of your old contributions but that will likely incur the 33% tax penalty and exit fees. We recommend you consider that before choosing another investment strategy altogether.
I still have questions about Belgian pension saving. What do I do?
Growing your pension beyond the Belgian pension saving scheme
In Belgium, your pension comes from contributions from four so-called pillars:
State pension (pillar 1). The government entitles every Belgian worker, whether employee, freelancer or public servant, to a state pension. The amount is dependent on the number of years that you’ve worked throughout your career as well as the salaries that you’ve earned. The higher your salary during your working life, the higher the state pension will be. You can use our calculator to estimate what your state pension will be!
Occupational pension (pillar 2). This is called “aanvullend pensioen” (Dutch) or “pension complémentaire” (French). The contributions are paid through your employer and carry a tax break. Usually, both your employer as well as yourself contribute to the occupational pension.
Pension saving (pillar 3). What this guide is about!
Voluntary personal savings without a tax break (pillar 4). Any further saving that you do on your own, for instance by contributing to a savings account or by investing your savings, fall into this category. This type of saving is not part of a state-subsidized scheme so you cannot take advantage of any tax breaks.
It’s possible to save through all four pillars. Your final pension will be the accumulation of the contributions of each. We recommend you focus your attention on the two other ways apart from pension saving through which you can save for a higher pension:
Save through the occupational pension ("aanvullend pensioen" or "pension complémentaire") through your employer.
Save additional funds on your own through investment products such as Curvo.