VGBL X PGBL (US IRAs)
1. What is it?
Both PGBL and VGBL are the equivalent to US IRAs (Individual Retirament Accounts) in the Brazilian market. Both are retirement plans that allows a person to accumulate funds for a certain period (several years, in most cases). For such period, contributions are invested and held by the chosen financial institution or insurance company.
These investments have two different stages. In the first stage, the investor makes contributions monthly for a long period of time, increasing the total amount in a VGBL/PGBL account at the insurance company. When the investor retires, a second stage starts, and the insurance or financial company pays the benefit back, usually in a monthly basis, but sometimes at once, and the investor can start to benefit from his contributions for a lifetime or long time the first.
You can choose the way to benefit from the investments: you can cash it back and hire a kind of ‘service’ (that pay the benefit as though it was a salary), that provide monthly payments. Or you can also withdraw part of the account balance before the retirement or end date, as long as the grace period is carried out.
There are five ways to redeem the benefits by the end of the contract:
Lifelong monthly payments: the investor receives, from the retirement date on, a monthly income, for the remainder of his natural life.
Momentary monthly payments: the investor receives, from the retirement date on, a monthly income, for a stipulated period of time or the end of his natural life, whichever comes first.
Lifelong monthly payments for guaranteed period of time: from the retirement date, the investor receives monthly payments for the remainder of his natural life. After that, if the guaranteed period is still in course, the payments should be maintained to a beneficiary described in contract.
Lifelong monthly payments conversible to a previously nominated third party: when the gainer retires, he keeps receiving monthly payments for the remainder of his natural life. Thereafter, a nominated third party (i.e. spouse) keeps receiving part of the benefits also for the remainder of the natural life.
Full redemption: as of his retirement, the investor is allowed to redeem the full pension account balance.
Monthly payments of the benefit after retirement will depend on the contributed value, type of PGBL or VGBL, interest rates and more.
There is no guarantee of a minimal profitability. That will depend on the chosen plan, the manager’s ability to invest the capital in more profitable assets, the economic scenario and also on taxes and carry on fees. On the other hand, all profits made in the investing period are credited to the investor.
Usually, all money monthly paid is then invested in options and bonds. When hiring a plan, one can be choosing where the capital is to be invested. There are three usual plan to be choosing:
Sovereign plan: invest the capital in public and national bonds only;
Fixed-income plan: invest the capital in public bonds and other fixed-income notes;
Composite plan: invest 51% in fixed-income and 49% in variable-income (stocks).
Also, you can share your capital in more than one type of plan, diversifying even more your retirement account.
When acquiring a PGBL/VGBL, you are incurring in two basic risks:
1. Premature decease
Anyone hiring a retirement plan wants to be using the benefits of having those savings for retiring. However, there is a risk of deceasing before getting the savings back.
2. Insurance company going bankrupt
When acquiring a plan, one must be assessing the reliability and trustiness of the insurance company, just like it happens with a bank. AS it is a long term investment, if the insurance company experiences anu problem, clients might be financially harmed, or in the best situation, wait for a long time for legal decisions that retrieve their capital.
If you change your mind after acquiring a plan from certain company, it is possible to move your savings to a another insurance company, as long as the type of plan is maintained. For instance, a sovereign VGBL plan can only be moved to another insurance company if this profile is kept.
It is crucial to analyze all fees and costs that plans charge from associates. Those are the so-called “carry on costs” and “administration fees”.
Carry on charges are incident over the monthly contribution, and according to Anapp data (Brazil’s retirement plans association) is equivalent to 3% of monthly contributions, in average, but it can reach as much as 5%. For instance, that means with 3% of carry on charges, for each BRL100.00 of contribution, only BRL97.00 will be available to withdraw later.
Administration fees, for their turn, are annually charged over the total contribution value, and usually reach 1.5% to 2% of this total amount. By the end of the year, if you have a total amount of BRL10,000.00 accumulated, fees will reach BRL200.00, considering the charge is 2% of the total amount.
If comparing PGBL/VGBL to common investment funds, maybe they sound as a more expensive option. However, we must remember that these retirement plans are basically insurance plans, hence their administration by insurance companies. By acquiring a plan like these, you are choosing a practical solution. Retirement plans are a good opportunity for people who have no time or interest in managing themselves their savings and capital.
VGBL/PGBL show an interest benefit. As the investments are actually made by the institution, the customer for those plans does not pay income taxes on profits himself.
However, the client is free of taxes only during the period of investments. When he finally retires, to any withdraw made, income taxes are due to pay. Unfortunately, he will pay income taxes over the total withdrawn amount, not only the profits.
For this reason, although it is sometimes believed that PGBL/VGBL are exempt of taxes, the payment is solely postponed.
5. How it works
To invest in VGBL/PGBL, the sole you need to do is to register and open an account in a financial institution licensed to operate with retirement plans. Then, it is just choosing the right plan for you. In other words, choose how you contributions will be managed and invested, what kind of benefit the plan will be offering, etc.
Also, you must know what will be the deadlines, timetable and amount of contributions – if deposits will happen monthly, each six months, every year, and how much is to be invested. Remember you can invest any further not only by stipulated dates, but anytime you want.
6. Differences between PGBL x VGBL
VGBL is the midterm between an retirement plan and an insurance. For people who make the simplified version of the tax return or freelancers , VGBL is the best option. It is also indicated for those who want to diversify, or those who want to invest more than 12% of their total income. That because in VGBL, taxes are due only over the profits.
Let’s show an example. When you have a salary, income taxes are automatically deducted from your wages. If you are investing in a VGBL, though, you can see a reimbursement of part of these taxes. However, once you start withdrawing the capital, you’ll need to pay income taxes again, but only over the profits made. If you save BRL200,000.00 after 20 years of contribution, of which BRL20,000.00 are profits, once you cash this capital back, income taxes will need to be paid over the amount of BRL20,000.00.
In PGBL, contributions can be deduced from due taxes in your tax return, to the limit of 12% of your total annual income. Let’s say someone gets an annual income of BRL100,000.00. With a PGBL, he can just declare BRL88,000.00 as being his income, and the other BRL12,000.00 will be just considered when he withdraws the value from the retirement plan. However, for those who pay income taxes automatically in the payroll, it is not worth to invest.
However, income taxes are due over the total PGBL accumulated amount, contrary to what happens with the VGBL.
A PGBL, in case of death of the beneficiary, cannot be claimed by heirs just like other investments. A nominated person in PGBL contract can withdraw the money in a matter of days, without any legal charge.
- One of the most well-known and used retirement plans;
- A good retirement option together with an insurace policy;
- Possibility of withdrawing the money quickly with no need of legal order.
- The false assumption of income tax exemption, once it is just postponed;
- Administration fees;
- Carried on taxes that reduce the accumulated amount.