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e usually live more focused on the present than on any other time, which sometimes conditions our ability to anticipate and prepare for future situations that may be unexpected. However, and taking into account the current rise in inflation and the possible reduction in pension amounts, guaranteeing a nest egg to face unpredictable situations can be the guarantee for a more comfortable life in the future.
“It's imperative”, considers Rita Pimentel, an expert at Montepio. “People are aware of the enormous crisis we are going through and the difficulties that await us”, she explains. These uncertainties are, in turn, reflected in younger generations' concern with early retirement planning. According to Rita, the main advantage of planning a supplementary pension is the possibility of taking into account the various less favourable scenarios that, in terms of income, can happen at a more vulnerable stage of life. “By acting to prevent the future, we will be more able to deal with the possible drop in income that may happen when we retire”, she believes.
From term deposits to savings and retirement plans, there's a number of investment options and financial products that you can consider. This week we introduce you to some of them so that you can start thinking about saving. And, no, it's not too early to think about that.
1. Term deposits
Did you just get your holiday allowance or the refund from the IRS and you want to put that money in the bank - and, if possible, get some income from it? One of the options that banks offer is to apply this amount in a term deposit. What distinguishes the term deposit from the current account you use every day is the fact that this type of deposit can't normally be used, at least during a certain period of time.
It is, therefore, a good solution for that money that you want to put aside but that you know you will not need to use for a while. The advantage of term deposits is that if you manage to keep that money in the bank for the agreed period, you will earn interest on those deposits. In other words, the amount you have invested is not only guaranteed – contrary to what happens with other financial products – but it can also increase. And, of course, the greater the amount applied, the more money you will get.
2. Retirement certificates
Retirement certificates, nicknamed by some as “State's savings and retirement plans”, are a form of voluntary and individual savings made through a monthly contribution, during your working life, to an investment fund that is managed by the State. These contributions will allow you to obtain a supplement to your pension later on.
In this case, Social Security will deduct the contribution that has been defined from your salary every month (2%, 4% or 6%). Monthly contributions are converted into participation units in an investment fund (Retirement Certificate Fund) managed by the Social Security Capitalisation Fund Management Institute (IGFCSS).
This public capitalisation scheme was created by the Portuguese government more than ten years ago to encourage people to save for retirement. Retirement certificates are subscribed by Social Security membership (in person or online) by completing the form for that purpose (Model RPC01-DGGS). Membership is renewed annually, in February, automatically and for a period of 12 months.
3. Savings and retirement plans
Savings and retirement plans are products precisely designed to promote savings in the long term. They combine the flexibility of financial products with strict movement rules, but also with very interesting tax benefits. The goal? Ensuring that, when retirement comes, you have a nest egg to ensure a more comfortable life.
Although this is a savings account for the future, created to be used only in case of retirement, experts advise thinking about it between the ages of 30 and 40, or, at least, when the person has their professional life and personal finances stabilised. This is because the sooner you start saving, the more you will be able to save.
But one step at a time. Firstly, it is necessary to understand not only its characteristics but also the forms in which this way of saving can be presented: in the form of and insurance (the preferred one by the Portuguese people) or an investment fund.
a) Insurance vs Funds
Insurance in the context of a savings and retirement plan is capitalisation insurance in which the saver delivers an amount to the insurer and the insurer invests it in an autonomous fund that normally offers a minimum income and has guaranteed capital. These plans are managed by insurers.
Funds in the context of a savings and retirement plan, on the other hand, are similar to securities investment funds, based on participation units that have a certain value that varies according to the market, or the instruments in which they are invested. These kinds of fund may invest in US equities, European bonds or other types of assets. They can assume different levels of risk (depending on where your portfolio is invested) and, therefore, allow gains above insurance. These have no guaranteed capital and are managed by investment fund management companies.
b) Tax advantages
One of the great advantages of savings and retirement plans is related to an attractive tax: the deduction from the collection (tax) of IRS of 20% of the amounts applied per year, with the following limits by age of the taxable person:
● Up to 35 years old: you can deduct up to 400 euros, as long as you invest 2,000 euros annually in the savings and retirement plan;
● From 35 to 50 years old: you can deduct a maximum of 350 euros, as long as you invest 1,750 euros;
● From 50 years old (and up to the date you retire): you can deduct a maximum of 300 euros, as long as you invest 1,500 euros.
The potential problem of this tax benefit at entry would be the existing penalty, if any income from the savings and retirement plan is received ahead of time, considering as such the cases of reimbursement/income received that do not fit the following:
● Five years after the respective delivery and, simultaneously, within the scope of any of the situations defined by law;
● By death.
In cases where there is a penalty, it consists of returning the amount deducted, plus 10% for each year that has elapsed. Therefore, and because there are different types of savings and retirement plans, before subscribing to any of them, we suggest that you carefully read the standardised information sheets (FIN) that summarise all the characteristics of the products.
4. Capitalisation Insurance
Another of the options you should consider are capitalisation insurances, which are intended for those who want to start or reinforce savings without running the risk of losing the amount invested. Therefore, they work as a medium or long-term piggy bank, which makes it possible to build up or monetise existing capital. In addition to the capital guaranteed at all times of the investment, capitalisation insurance also guarantees, in the event of the death of the insured person, the payment of the capital invested to the beneficiaries.
Depending on the profile and objective of the person who subscribes to this product, it is possible to outline three main objectives: to establish or reinforce savings, plan retirement or invest existing capital. Although they do not have as attractive tax benefits as, for example, savings and retirement plans, capitalisation insurances have attractive interest rates, which grow over the years of the investment period.
