18 Jan Greater tax relief will make second pensions more attractive
According to the CEO of PAC DallBogg: Life and Health, it is a time of crisis now, but in the long term the money in pension funds is protected
One of the worrying mantras that has been circulating recently is that, as a result of the serious crises Bulgaria is facing, pension money from the funded pillars of the pension system is melting away, that citizens are losing their stake.
– Is this true, Mr Terziev?
– Investments in voluntary pension funds are long-term savings. That is why returns must be viewed in the long term. We are currently in a period of several simultaneous crises. It is also logical that there should be a reduction in the amounts in the funds. But usually the rate of increase after a crisis is significantly faster than the rate of decline during the crisis. One of the assets in which funds invest the money they accumulate is government securities. We are currently observing a decline in the value of government securities in numerous countries – in some places by more than 50%. And this is considered one of the safest investments.
Probably due to the collapse in the prices of this type of securities, the third quarter of 2022 demonstrates a change in the investments of universal pension funds. The share of debt securities of sovereigns and international financial organisations remains the largest, but as of the end of September it has decreased to 53.17% compared to 55% in 2021. The share of investment in equities rose to 35.32% from 33.18% a year earlier, while corporate bonds fell to 8.79% from 9.51%.
The war in Ukraine is further worsening the situation – the European economy is slowing, inflation is rising. We have record inflation for the last 2 decades.
However, it must be borne in mind that this is a momentary situation. If you analyse the last 10 years since pension funds exist, their returns have been positive. The funds have the capacity to come out positive.
– What is being done to minimise the damage from the crisis?
– At a time like this, ports of stability are being sought. The stock market reacts to different news and as a result there are price spikes, which funds try to capture to protect people’s money.
The legislator has provided full protection for the funds and gross contributions that insured persons put into the second pillar. That is to say, companies and pension funds will never pay out less than each insured person’s investment. Everything else will be additional income.
And this again makes the funds a safer haven for people’s investments than bank deposits, as only amounts up to BGN 196 000 are protected there.
– What is the solution?
– Equity schemes are one of the best investment alternatives at the moment. If people save for a third pension from the start of their working lives, they are likely to have peace of mind when the time comes to retire. But even by then, the money saved could prove to be a valuable resource in the event of an emergency or simply as a means of preserving earned money from inflation. Currently, an investment in an equity retirement plan may be considered a more efficient investment than one in real estate or a bank deposit. If a person needs funds, he cannot sell a room of his investment home urgently, but he can withdraw some of the funds in his personal retirement fund account. Moreover, without losing, as would happen if he withdrew money from a bank deposit before maturity. Accounts in supplementary pension funds are personal and can be inherited.
– Are the advantages of supplementary pensions clear enough for people?
– The superannuation sector has seen remarkable developments in the last three years. The investment portfolios of pension funds are well structured and highly diversified, with adequate reserves to guarantee the payment of lifetime pensions.
Pension fund assets are subject to daily monitoring by the FSC. And the supplementary pension business is one of the most tightly regulated.
– How can this type of saving be made more attractive?
– Legal changes are needed to make this type of saving more attractive. Under current legislation, monthly taxable income is reduced by personal contributions made during the month on behalf of individuals to voluntary pension insurance if they amount to 10 per cent of that income. In this way, the income tax payable by individuals is reduced and almost one third of the contribution is on account of the tax saved.
For sole traders, the taxable income formed under the TCGA is reduced by the personal contributions made for voluntary pension insurance up to 10 per cent of that income. The relief is available when filing the annual tax return.
For persons exercising liberal professions (architects, lawyers, general practitioners, etc.), the taxable income reduced by the statutory expenses is reduced by the personal contributions made for voluntary pension insurance up to 10% of this income. The relief can be claimed both in advance and annually when filing the tax return.
The same applies to persons employed under management and control contracts as well as under civil contracts – the taxable income reduced by the legally recognised expenses is reduced by the personal contributions made and the relief may be claimed both in advance and annually when filing the tax return.
This norm has not been changed for more than 10 years. Increasing the tax relief percentage would motivate more Bulgarians to invest in equity schemes – and this would make them independent after retirement. Moreover, these people would not rely on the pension system, and when they need more money, they would turn to the funds accumulated in their own pension account. This money, in turn, would return to the economy in the form of investments.
It is a curious fact that even the rulers in China have seen through the benefits of funded schemes. Recently, the population there has been allowed in certain areas to invest in pension funds. Because this is an investment in the future.