Knowing what type of investor you are and, most importantly, what you want to use the money you want to invest for are two essential factors when deciding on a pension plan or an investment fund, two of the star products on the market. Knowing its basic characteristics well will help you make the best decision for your personal finances. Remember: you should never invest in anything you are unaware of or that raises so many doubts that it takes away hours of sleep.
The pension plan has been, for years, the main formula for planning retirement and retirement, regardless of the payments that we will receive for the contributions. A plan is a collective investment and forecasting product that pools the money of many people to invest. In this sense it is something similar to an investment fund. "The plan invests your money in the pension fund, which is the one that allocates the capital to a well-diversified basket of assets," they explain from Fundación MAPFRE. And all this is done at an affordable cost.
There are actually several types of plans and ways to classify them. For example, if one takes into account where the plan is invested, we find variable income plans, in which 75% of the investment is allocated to that type of income; mixed variable income, which has between 30% and 75% of the investment in variable; mixed fixed income plans, whose variable investment cannot exceed 30%; others such as long and short-term fixed income plans and guaranteed plans, which are not subject to market risk. In addition to individual ones, there are also employment pension plans, which are promoted by companies for their workers.
If a pension plan is chosen, you should know that your contributions are limited by law —no more than 1,500 euros in an individual plan per year— and, if all goes well, the expert managers will make the money in the plan increase. If your personal circumstances change, you also have the possibility of transferring the money to another plan at no cost, although it must not be forgotten that, like any investment, it also includes commissions. Another of its advantages has to do with the Treasury.
The money you invest is subtracted from your tax base in the income statement, that is, you will pay less taxes for this investment. The experts at Fundación MAPFRE explain it with the following example: if you earn 35,000 euros a year and invest 1,500 euros in your pension plan, that amount will be subtracted from your salary in personal income tax and for the Treasury it will be as if you had only deposited 33,500 euros. Upon recovering the money from the plan, the capital will be taxed as savings income.
But you have to be cautious with the bailout, since taxes are a defining part of the pension plan. "You must be careful when rescuing if you do not want to pay more than what you deducted at the time," they point out from Fundación MAPFRE. Thus, the Treasury allows you to recover the benefits of the plan as income, as capital or in a mixed way. In this sense, it is advisable to plan well to rescue the plan and not do it suddenly the year you retire, in such a way that you will optimize the taxes you pay each year.
Diversification is another of the characteristics of investment funds, which pools the money of many small savers to invest it in a very varied basket of assets. As with a pension plan, with a fund you can do things that you alone with your savings could not, such as invest in the largest companies in the world. How much is needed to invest? Whatever a participation costs, something that can range from 1,000 to 50 euros or less.
With a pension plan, you can only recover the money in certain cases beyond retirement, such as disability, serious illness, long-term unemployment or death, in which case the beneficiaries or heirs can redeem it. On the other hand, with an investment fund you can recover the money you have available whenever you want, almost instantly. This makes them very liquid investments.
Investment funds, like pension plans, are managed by experts who can implement more efficient strategies that are different from those we would do on our own. As expected, it also involves certain fees to which must be added the costs of the fund to buy and sell shares or the assets in which it is invested. To do this, you have to look at the total cost, the TER or Total Expense Ratio. "The lower this percentage, the greater the benefit for the participants", they highlight from Fundación MAPFRE.
In addition to being able to conscientiously follow the performance of the chosen investment fund, investors can take advantage of tax advantages. “Transfers between funds are exempt from paying personal income tax. If you move your money from one fund to another, you will not have to pay taxes when making the income statement for accumulated earnings, ”the experts comment. What's more, this allows us to take better advantage of compound interest because taxes are only paid at the end.
Pension plans and funds are safe and regulated investments. But, like any investment, they involve more or less risks. Even in the case of funds, there are countless products and not all of them are convenient. “That is perhaps the main disadvantage of the fund market, that the offer is increasing and it is not always easy to choose”, warn Fundación MAPFRE. Therefore, first of all, you will not only have to know what you are investing for, but also have a team of experts to help you make the best decision.
