10 November 2020
How to build up a supplementary pension as a self-employed person
When it comes to statutory pensions, the self-employed are at the back of the queue with average pensions of just 751 EUR, gross... The good news is that you can do something about it. And like employees and civil servants, you can get tax benefits.
Being your own boss gives you the scope to do your own thing. The only hands on the steering wheel are yours. You choose the route and how much throttle you give it. Of course, with freedom comes responsibility. More so than is the case for civil servants and employees, you are responsible for thinking about your future. By which we mean your pension, of course.
The statutory pension does not amount to much these days. The average pension for a self-employed person currently amounts to just 751 euros gross. For an employee it is 1,281 euros gross and for a civil servant, it is 2,511 euros gross (for those with an uninterrupted labour status)*. When you factor in tax and other deductions, the net amount is far from enough to live comfortably.
What are the alternatives?
You can aim for your business to become or remain successful for your entire working life. That is one strategy for building up a good amount of capital to enjoy life fully later on. However, no one can predict the future. That’s why most self-employed people are advised to build up a reserve in another way as well. Such as by saving for retirement.
Just like civil servants and employees, self-employed people can pay into the pension savings system every year. This can result in a tax benefit of 25 or 30% of your paid-in capital, depending on the amount you set aside (note: there are annual limits). However, there are also options that are, from a tax point of view, even more attractive for self-employed people.
In a nutshell
- Do you not have a company? (For example, are you a one-man business or liberal professional?) Then you can opt for a Free Supplementary Pension for the Self-Employed (FSPSE) in combination with a Pension Agreement for the Self-Employed (PASE).
- Do you have a company? Then you can take out a Individual Pension Commitment (IPC) on top of a FSPSE.
For all self-employed persons
1. For all self-employed persons
You can opt for a Free Supplementary Pension for the Self-Employed (FSPSE).
A FSPSE is a Branch 21 product. This provides the opportunity of a guaranteed interest rate (on 1/8/2020 it was 1%), and the additional possibility of profit sharing. Subscribing to this option is open to self-employed people with and without a company.
In contrast to ordinary pension savings plans, the ceiling for a FSPSE is higher. You can therefore deposit more than 1,270 euros (note: this is the 2020 maximum for ordinary pension savings). The payments are tax deductible, although there is a maximum of 8.17% of net taxable income (the 2020 maximum is 3,291.30 euros).
With a FSPSE you also pay less in social security contributions. The income on which these contributions is calculated decreases because the premium for the FSPSE is deducted from it.
2. Do you not have a company?
Combine your FSPSE with a Pension Agreement for the Self-Employed (PASE).
Depending on your preference, the premiums you deposit in a PASE will go into a Branch 21 or Branch 23 product, or a combination of both. A Branch 21 product offers the prospect of a guaranteed interest rate (at 1/11/2020 it was 1%), and the additional possibility of profit sharing. A Branch 23 product is an investment which does not guarantee either your return or your capital. However, with higher risk comes higher potential returns.
From 2018, self-employed persons without a company have been able to opt for this formula, in addition to having a FSPSE. This solution is therefore for those who have one-person businesses, independent professionals as well as their assisting spouses.
The deposits you make into a PASE can result in a tax reduction of up to 30%. If you deposit 1,000 euros, you can enjoy a tax benefit of 300 euros. In theory you can deposit as much as you like, although you do have to take the so-called ‘80% rule’ into consideration. This means that the sum of your statutory pension, the capital in your FSPSE and PASE may not exceed 80% of your average income over the past 3 years.
3. Do you have a company?
Then you can take out a Individual Pension Commitment (IPC) on top of a FSPSE.
Depending on your preference, the premiums you pay for an IPC go into a Branch 21 or Branch 23 product, or a combination of both. A Branch 21 product offers the prospect of a guaranteed interest rate (at 1/11/2020 it was 1%), and the additional possibility of profit sharing. A Branch 23 product is an investment which does not guarantee either your return or your capital. However, with higher risk comes higher potential returns.
You can opt for this formula if you have a company (public limited company, private limited company, cooperative company with limited liability, etc.). In this scenario, your company is the policyholder, while you yourself are the insured (and therefore the beneficiary).
The premiums are paid by your company. These payments may be fully deductible as a business cost. This reduces the company's profit, which in turn becomes a tax benefit. Again, you must take an 80% rule into account: the total of your statutory pension, and all the capital in your FSPSE and IPC may not exceed 80% of your gross income from the previous year.
If certain conditions are met, an IPC can also have several other benefits. For example, the premiums paid by the company cannot be taxed as in-kind benefits on your private income. You can also request an advance for private use from your reserve to buy, build or renovate a house.
Start preparing for your retirement now
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