With the recurring debate over the future sustainability of the public pension system, more and more people are wondering whether they need to supplement their future pension with private savings. Pension plans are one of the best-known vehicles for this, though not the only one, and not always the most suitable depending on the case.
What a pension plan is
A pension plan is a long-term savings product, specifically designed to supplement income at retirement (though it also covers other payout scenarios, such as disability or long-term unemployment). The money contributed is invested according to the chosen plan's policy (fixed income, equities, mixed), generating a return that's expected to be positive over the long term, though not guaranteed.
The main tax advantage
Contributions to a pension plan reduce your income tax base in the year you make them, within annual limits set by law. This isn't a tax exemption, but a tax deferral: you don't pay less tax overall, you pay less now and more when you withdraw the plan (usually at retirement), at which point it's taxed as employment income.
Why the deferral can pay off (or not)
Tax deferral pays off especially if you expect to have a lower marginal income tax rate at retirement than during your working life, which is common since retirement income tends to be lower than an active salary. If your expected tax situation at retirement were similar to or higher than it is now, the tax advantage shrinks considerably.
The main drawback: lack of liquidity
Unlike other investment products, money contributed to a pension plan stays locked up until retirement, except in exceptional payout scenarios (serious illness, long-term unemployment, or other specific cases), or unless at least 10 years have passed since the contribution was made, under current regulations. This lack of liquidity is an important factor to weigh against other, more flexible savings options.
Individual pension plans vs. employer pension plans
Besides individual plans (taken out directly by the individual), there are also employer pension plans, set up by companies for their employees, which in recent years have gained regulatory weight compared to individual plans, with different contribution limits and, in many cases, additional contributions from the company itself, making them a particularly attractive option when available.
It's not the only way to supplement your pension
Pension plans aren't the only savings route for retirement: investment funds, stock portfolios, real estate, and other investment vehicles can also serve that purpose, with different tax treatment and different liquidity. The decision of which vehicle to use depends on your current and expected tax situation, your need for liquidity, and your risk tolerance.
Simulate your supplementary savings
Regardless of which vehicle you choose, our compound interest calculator lets you project how supplementary savings for retirement would grow based on your monthly contribution and your time horizon until retirement, and our retirement pension calculator gives you a rough estimate of your future public pension.