Saving for retirement as an entrepreneur? These are your options
Do you want a little extra for later? There are tax-efficient ways to build up a pension pot.
That your statutory pension will not suffice to live as comfortably later as you do today: you probably already knew that. A retired self-employed person has an average net monthly pension of €904 after contributing throughout his or her career to a single scheme or at least to schemes under a single regime. So it is in your best interests to work on supplementing your pension yourself. However you set about it, the golden rule is: the earlier you start, the better. There are two reasons for this:
- With some formulas for building up a pension, you get a tax advantage. The earlier you start, the higher the total of tax benefits you accrue.
- The money you put aside for later also earns a return. Each year, your pension pot produces a (potential) return, and that return produces a return the following year and so on. This is how you create a snowball effect.
Saving for your retirement as an entrepreneur can be done in three ways. To begin with, by building up a supplementary pension. In addition, through pension savings and/or long-term savings. And finally, by saving, investing and/or investing in real estate yourself. We will discuss the different options below:
1. A supplementary pension as entrepreneur
Most workers in Belgium have a supplementary pension, also called group insurance. Self-employed people can also build up a supplementary pension. On a monthly or yearly basis, you put an amount into a financial product. While that yields returns, you also get tax advantages. There are different ways to build up a supplementary pension:
- A Free Supplementary Pension for the Self-Employed (FSPSE) is for entrepreneurs with a company as well as for entrepreneurs without a company. In a FSPSE, you can annually deposit up to 8.17% of your net taxable income (with a ceiling of €3,447.62 in 2022). That money goes into a Branch 21 product. Branch 21 products offer a guaranteed interest rate, possibly supplemented by a profit share. The amounts paid are tax-deductible as professional expenses. As a result, you pay less in taxes and social contributions.
- A Social Free Supplementary Pension for the Self-Employed is based on the same principles as a FSPSE, but there are some differences. The amount you can deposit annually is higher: 9.4% of your net taxable income (ceiling of €3,966.67 in 2022). 10 percent of the amount you deposit goes towards covering social risks. Exactly what is covered depends on the provider. As standard, you (and your family) enjoy extra income protection in the event of, among other things, incapacity for work, maternity and death. A social FSPSE and an ordinary FSPSE cannot be combined; you therefore choose one or the other (you can take out two separate contracts, but the sum of the premiums must remain under the ceiling).
- Are you an entrepreneur without a company or do you have a liberal profession? If so, in addition to an ordinary or social FSPSE, you can also take out a Pension agreement for the self-employed (PASE). A PASE can be combined with an ordinary or social FSPSE. The money from a PASE goes into a product of branch 21 (guaranteed interest) or branch 23 (return depends on the performance of the underlying fund, and is therefore not guaranteed; the capital is not guaranteed either). For a PASE too, there is a maximum amount you can deposit. For this ceiling, the so-called 80% rule applies: the sum of your statutory pension, the capital accrued via the different formulas of your FSPSE and via your PASE, may not exceed 80% of your average income of the past three years. The deposits provide a 30% tax reduction.
- Are you an entrepreneur and do you own a company? If so, in addition to an ordinary or social FSPSE, you can also take out an Individual Pension Commitment (IPC). In this formula, your company pays the premiums. The money goes into a product of branch 21 (guaranteed interest) or branch 23 (return depends on the performance of the underlying fund, and is therefore not guaranteed; the capital is not guaranteed either). The premiums are fully deductible for corporation tax purposes, but the 80% rule also applies here.
Self-employed persons in a secondary occupation can also take out an ordinary or social FSPSE, although there are some conditions. There is an income threshold and you must have been self-employed for at least three years as a secondary occupation. Healthcare providers in the state health insurance scheme (doctors, pharmacists, physiotherapists, dentists, independent nurses) can use their National Institute for Health and Disability Insurance (NIHDI) allowance to build up a complementary pension in a special NIHDI FSPSE.
For entrepreneurs, there are therefore several possibilities. It is a good idea to first consult an advisor before making a choice. He or she is an expert in the matter and can help you find the solution that best suits your situation and interests.
2. Pension savings and/or long-term savings for entrepreneurs
Would you like to increase your complementary pension? You can! You can combine it with pension savings and/or long-term savings. That too is possible with a tax advantage.
- With pension savings, you build up an extra capital for your retirement. There are limits to how much you can deposit. In 2022, you can deposit €990 and get a tax reduction worth 30% of that amount. Or you can deposit up to €1,270 and get a tax reduction of 25% of that amount. Here, too, various formulas are possible. With a pension savings fund, your return depends on the performance of the underlying fund and your capital is not guaranteed. With pension savings insurance, there is a fixed interest rate for each deposit.
- With long-term savings, you build up additional pension capital through life insurance. You get a 30% tax reduction on the amounts deposited. The maximum annual deposit depends on your occupational income (with a maximum of €2,350 in 2022). There is no upper age limit and different formulas are possible here as well.
Pension savings and long-term savings are two separate tax categories, so you can combine both. If you also include a mortgage loan in your tax declarations, you may not be able to combine them. It is therefore best to get in touch with an expert who can help you make the right choice.
3. Individual savings as entrepreneur
Building up a supplementary pension (FSPSE, PASE or IPC), pension savings and long-term savings are formulas that offer a tax advantage. Therefore, it is wise to fill all those pots first. First an ordinary or social FSPSE, whether or not supplemented with a PASE and IPC, and then pension savings and/or long-term savings. This will give you a good head start.
However, it may be useful to have an additional pot. This will not result in tax advantages, but in the long run it will ensure that you can fully enjoy your retirement. Saving money, investing in stocks and investing in real estate are three ways of doing this.
Investing offers the prospect of greater potential returns. On the other hand, investing also comes with risks. This can be smoothed out by long-term and diversified investment.