- 19/5/2022

Pension savings and long-term savings

5 min

What is the distinction between pension savings and long-term savings? Why is it advantageous to start saving early?
And what options are available to individuals?

Please note that this article is based on the tax regulations applicable to private investors in Belgium, as they stood at the time of writing. It is essential to be aware that tax laws are subject to change, and your personal tax benefits will depend on your individual circumstances.

What are the different tax-efficient savings options?

Pension savings

To benefit from a tax advantage, you need to have taxable income. Between your 18th birthday and 31 December of the year you turn 64, you can supplement your state pension by regularly contributing to a pension savings fund or a pension savings insurance plan. It is generally recommended to use these savings options for a period of at least 10 years. 

If you choose a pension savings fund, you will be investing in a fund that puts your money into shares and bonds. This investment carries market risk, and your capital is not protected. You can decide on your level of risk tolerance by selecting a formula that suits you best. The higher the risk, the higher your potential return is likely to be. 

 On the other hand, if you prefer to take less risk, a pension savings insurance plan may be a better option. With this plan, you will receive a guaranteed interest rate on each payment you make until the end of your contract. Additionally, the insurer may pay out an annual profit share, although this is at their discretion. While your potential return may be lower, you will benefit from capital protection. However, in a worst-case scenario where interest rates are very low or zero, and there is no profit sharing, the capital paid out to you after taxes and costs may be less than your initial investment. Nevertheless, the tax advantage on your premiums can help offset this risk. 

 Both pension savings funds and pension savings insurance plans are tax-efficient savings options. You can claim tax relief on the payments you make into either of these plans.

Long-term savings

When it comes to long-term savings, you have two primary options:

• Soit You can choose a life insurance policy (branch 21) with capital protection, which allows you to supplement your retirement savings if you already have a pension savings plan in place.
• Alternatively, you can opt for an individual life insurance plan to save for the outstanding balance on your future home.

You must take out a pension savings plan before your 65th birthday. This type of plan is not only a tax-efficient way to save; it also offers a tax advantage on the premiums you pay, depending on your individual circumstances and taxable income.

As the name suggests, long-term savings plans have a longer term, typically lasting at least 10 years.

Why is it better to start early? The younger you start, the more you earn

Tax advantage

The government promotes pension saving and long-term saving by offering tax incentives. In principle, you can benefit from a tax reduction on the amount you save each year under these plans. If your taxable income is sufficient, you will typically receive a tax reduction on your personal income tax return the following year. You can also combine the tax benefits of long-term savings and pension savings. 

When contributing to your pension savings, you can choose between two tax-exempt ceilings:

• The basic ceiling is 990 euros, which entitles you to a 30% tax reduction, up to a maximum of 297 euros.
• The higher ceiling is 1,270 euros, which offers a 25% tax reduction, up to a maximum of 317.50 euros. Please note that if you deposit more than 990 euros but less than 1,188 euros, your maximum tax reduction will be lower than if you deposit the maximum amount for the basic ceiling (990 euros). You cannot deposit more than the maximum amount of the chosen ceiling each year.

Your pension savings (capital and return) are subject to an 8% one-off final tax, which is levied on your 60th birthday or in the 10th year of your contract if you started saving for retirement after your 55th birthday. You do not pay tax on profit sharing. 

Please be aware that if you withdraw the money invested in a pension savings plan before the age of 60, you will be charged a penalty by the State and will also have to pay municipal taxes, resulting in a total tax of 33%. 

In the case of long-term savings, you can benefit from a 30% tax reduction on the premiums paid. The maximum tax-deductible amount is 2,350 euros, and your net taxable earned income must be at least 36,226.67 euros to be eligible for this tax reduction. Please note that the amount of this ceiling may vary depending on your personal situation, such as if you already benefit from tax advantages related to a property loan. It is recommended that you consult with your adviser to evaluate the various options. 

*The amounts mentioned are valid for income earned in 2022.

Starting earlier allows for exponential savings

A tax reduction of 25% or 30% on the amount you save each year is equivalent to a nice return. Not to mention the snowball effect: every year that you set money aside, you acquire a potential return or interest that accumulates over time. So, the earlier you start (there is no minimum age for long-term savings, but the minimum age for pension savings is 18), the more you can contribute to the fund or insurance, and the more you will have saved. Please note that in order to benefit from a tax reduction, you must have a taxable income. In addition, you can start saving from as little as 30 euros a month with pension savings or long-term savings.