A few weeks ago, we tackled one of several “elephants in the room” that haunt Portugal and our Algarve – the Portuguese pension system.
This problem, due to its long-term nature, does not entail a sense of urgency, something that could not be less true.
I believe that this problem of inadequate livelihoods in old age and in retirement will be more accentuated in older areas of the country, such as the Algarve. This should have an impact not only economic, but also social, relevant to the region.
As a summary, in the previous article, we talked about a study published by the Francisco Manuel dos Santos Foundation and entitled “Sustainability of the Portuguese pension system”, which presented very worrying numbers (from 2027 onwards, the current pension system will no longer be economically sustainable), possible equally worrying solutions (raising the retirement age to 69 years or more) and it was suggested to implement an alternative model, similar to the Swedish model (which would considerably improve the financial sustainability of the pension system but it would be at the expense of a great social impact and a drop in income).
Today we are going to present another alternative, which I think is more favorable and less painful – the UK model.
First, the UK system is based on a sharing of risk between the state, individual and company, to finance workers' retirement. Unlike ours, in which the overwhelming majority “trusts” only the State and the old-age pension as a means of subsistence in retirement, thus neglecting any form of reasonable financial planning and constitution of savings for retirement.
How does the British model work anyway?
– Since 2016, the retirement pension (state pension) no longer includes the amount of monthly salary in its calculation, now taking into account only the years of contribution to social security and the respective contributions.
This makes sense for several reasons, including:
1) Establish a minimum retirement income;
2) It makes individuals with higher salaries assume the responsibility of financing their retirement, not penalizing the State for their high salaries;
3) It makes the model clearly more sustainable because it “guarantees” that monthly contributions exceed monthly pension expenses.
– Companies are obliged to offer pensions to their employees when they exceed a certain number of employees and size. More than being mandatory, the system guarantees very significant tax benefits for companies to do so.
The end result is a great “win-win”, for both the company and the worker. For example, a minimum of 4% of the base salary contributed to the pension fund which is totally exempt from IRC, IRS, social security and capital gains within the fund.
- "self-enrollment”, most individuals, especially those with lower financial literacy, when faced with the decision to receive €100 tax-free in a pension fund or receive €80 (before tax!) in their salary, prefer the second option.
To combat this, unless workers expressly say that they prefer not to join the pension fund, they are automatically considered as members.
Result: higher savings rate for the general population, in a simple, tax-free way and consequently less burden on the State in the future.
– Existence of large tax benefits for the constitution of a supplementary private pension (optional). These benefits have nothing to do with the negligible benefits offered by the current PPRs in Portugal, where there is a maximum benefit of €350 for a minimum annual contribution of €1.750, for an individual between 35 and 50 years old VS total exemption from IRS and Social Security for annual contributions of up to £40.000 for individuals with annual incomes of less than £150.000, together with exemption from UK pension fund capital gains tax.
– Regulation of maximum amounts that banks and insurance companies can charge for this type of product and also list of permitted investments.
Those of us who have already had the opportunity to analyze the quality and cost of the current solutions provided by the main banks and insurance companies in Portugal were, like me, certainly disappointed with the high costs, existing conflicts of interest and the lack of quality in the supply of investment options. An obstacle and a disincentive to saving that must be corrected in favor of the general interest.
– Minimum age for accessing old-age pension at 67 years old, but minimum age for accessing private pension funds at 55 years old. This creates a clear incentive for those who intend to retire at a younger age, to save more and early, taking advantage of broad tax incentives and not depending on the state to finance their retirement lifestyle.
It remains to be said that this system is not perfect and that it has its disadvantages compared to the current Portuguese system. In particular, this model is based on greater financial literacy of the population and also on greater quality, competitiveness and transparency in the offer of this type of pension and investment products by banks and insurance companies.
I must also stress that it represents an obvious transmission of the risk of financing and providing a livelihood in reform, from the public sector to the private sector (companies and individuals). Having said that, wouldn't it be necessary to consider the possibility of its use in Portugal? The question remains.
Author
João Martins has a degree in Business Management and a postgraduate degree in Corporate Finance from the Faculty of Economics of the University of Algarve.
He is a trainee member of the Ordem dos Economistas and is passionate and enthusiastic about financial markets.
He is currently a financial consultant at Blacktower Financial Management, a company based in Quinta do Lago.
Algarvian for several generations, he considers himself lucky to have lived, studied and worked in the Algarve.
He emphasizes the fact that having a twin brother is one of his greatest wealth and privileges.
Note: article published under the protocol between the Sul Informação and the Algarve Delegation of the Order of Economists
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