How does PGBL and VGBL taxation work?

You can’t just rely on government resources to have a comfortable retirement.” If you identify with this idea, chances are you’ve already thought about investing in private pensions . But, after all, what are the biggest differences between PGBL and VGBL?

See more: Did you know that you can also invest in private pension with Magnetis? Build your plan for free!

We know that it is not an easy task to choose among the various pension products that exist on the market. There are many details to consider when deciding which is the best investment for retirement. Planning for the future is important, but it requires a lot of attention and study to make the best choice.

The most common doubts about private pension are about the Income Tax (IR) charged on these investments and the tax benefits. We are talking about the 12% deduction in the PGBL and the Progressive and Regressive tables of the IR. 

If in theory it is already confusing, imagine in practice! That’s why we’re here: to resolve this issue. In addition, we also did a study to show what the difference is between PGBL and VGBL. With this information, it will be easier to choose the private pension plan according to your financial goals.

First, let’s recap some concepts before we get started and understand why it’s important to have a private pension. Read on and ask your questions!

Contents [ hide ]

• 1Why is it important to have a private pension?
• 2What is PGBL?
• 3What is VGBL?
• 4What are the main differences between PGBL and VGBL?
• 5How does PGBL and VGBL taxation work?
  • 1Compensable progressive table
    • 1.1 Taxbase and tax rate (valid for 2020)
  • 2Definitive Regression Table
• 6Private pension: how much does the money invested in PGBL or VGBL yield?
• 7What other investments are suitable for retirement?
  • 1Progressive IR
  • 2IR Regressive
• 8Is it possible to change pension from VGBL to PGBL?
• 9What is the impact of income tax on private pension plans?
• 10What to consider when designing your retirement plan?
• 11Conclusions

Why is it important to have a private pension?

Private pension is an interesting alternative to the INSS, because it works as a long-term investment . It helps to increase income and ensure a more comfortable future . 

After the Social Security Reform changes , investing in private social security became a more advantageous option for Brazilians. In addition to being another possibility to diversify the investment portfolio, the hiring procedure is very simple.

In addition, private pension funds offer high rates of return in the market. You can contribute any amount and decide how the withdrawal will be in the future, without any hindrance.

First, the ideal is to find out what your profile is: aggressive, moderate or conservative? Then, just set aside an adequate amount of money to get started. Private pension can be useful for different purposes, whether it is to take a trip, guarantee retirement, purchase a property, among other options.

In fact, it doesn’t have to be exclusively focused on retirement, that is, you can even use it as an emergency reserve.

The main difference between the private pension and the INSS , for example, is that in the first option you can withdraw the money whenever you want. This may include losses, but whatever you deposit will be yours – plus interest.

However, in social security there are several rules and percentages predefined by the government, so you can only get benefits after several years of contribution. Social retirement is offered, in the first place, to those who work under the CLT regime. Therefore, those who exercise their profession as a Legal Entity, for example, must seek individual contribution through other means.

As a result, private pension can be a more profitable way to plan for retirement . In the future, worries about finances will be less, as you can receive a more rewarding value.

Another advantage of private pension is that there is no minimum age to start investing. There is also no need to prove income, meaning anyone can join a PGBL or VGBL plan.

In this type of investment, the sooner you start depositing, the greater the profitability in the future. Redemption of the amount will be available at any time, should you need to withdraw the money for any specific purpose. So, even if the long-term advantages are greater, the fund offers reasonable liquidity.

However, you need to choose a plan to invest: PGBL or VGBL . Below, see the main features of each one and which model is best for you.

What is PGBL?

PGBL stands for Free Benefit Generator Plan. It is a pension plan whose main benefit is the possibility of deducting income tax . Thus, whoever invests in PGBL and makes a complete income tax return can deduct up to 12% of the taxable income with this investment.

Another important feature of the PGBL is the way in which the tax is levied on the investment: the IR is applied on the total value of the investment (capital + income). This tax is withheld at source at the time of withdrawal.

Both PGBL and VGBL can be made up of fixed income or variable income investments.

The plans are customized and set up according to your profile and the best tax conditions for you. The money can be withdrawn all at once or the investment can be turned into monthly income in the future.

What is VGBL?

VGBL stands for Free Benefit Generating Life . It is currently the best selling type of plan in the pension market in Brazil.

One of the main differentials of VGBL is the way in which resources are taxed: taxes are levied only on the investment profit . Another interesting advantage is that VGBL does not enter into inventory and is not subject to inheritance tax (the so-called ITCMD ).

Thus, it works in a similar way to life insurance: the person chooses his beneficiaries when contracting the plan.

What are the main differences between PGBL and VGBL?

Now that you know what PGBL and VGBL are, it’s important to know the main differences between these modalities. The taxation model is the main point to be highlighted , since the values ​​change from one plan to another.

In PGBL, there is the possibility of income tax deduction, so it is the best alternative for people with high incomes. If you make the annual declaration using the complete model, the Free Benefit Generator Plan is the most interesting way. The biggest advantage of those who apply in this modality is to deduct up to 12% of taxable income.

On the other hand, in VGBL taxes are levied only on the profit obtained, leading the majority of Brazilians to opt for this category. Thus, it is more suitable for taxpayers who declare the income tax in the simplified model.

Basically, these are the differences between PGBL and VGBL. Even if they are minimal, they can make a big difference for those who are going to start investing.

Now, let’s know how PGBL and VGBL taxation works.

How does PGBL and VGBL taxation work?

PGBL and VGBL are the two main investments when it comes to private pension. Like investment funds , they are structured by specialized institutions.

As already mentioned, these plans can contain different types of investments (government bonds, private bonds, shares, other funds, etc.) unified in the same application.

However, there is a big difference between these plans and an investment fund. PGBL and VGBL do not suffer from come-quotas (anticipation of income tax every six months).

Thus, the resources will only be subject to the collection of IR upon redemption or when the taxpayer starts to receive a monthly income from the plan. This makes the accumulated amount larger over the years.

It is important to remember that in the case of VGBL, the IR is only levied on income. That is, about the difference between what was applied and what was redeemed. As for the PGBL, the IR is levied on the total resources invested in the plan.

In addition, there are also two taxation regimes:

Compensable progressive table

The income tax must be collected by the taxpayer at the time he receives the funds from his plan, either as a single installment or as monthly income.

In the case of withdrawal in a single installment, the rate of 15% of IR is levied on the VGBL income. For PGBL, this same rate is charged on the total resources.

If the plan provides for monthly income after retirement, the rates on this income follow the table used in the annual income tax return. Below, see the rates valid for the year 2020 .

Tax base and tax rate (valid for 2020)

• Up to R$1,903.98 : exempt;
• From R$1,903.99 to R$2,826.65 : 7.5%;
• From R$2,826.66 to R$3,751.05 : 15%;
• From BRL 3,751.06 to BRL 4,664.68 : 22.5%;
• Above R$ 4,664.68 : 27.5%;

Definitive Regression Table

Taxation takes place at source, at the time of redemption, and rates decrease over time to a minimum of 10% . So the longer your money is invested, the less tax you will pay.

There are several advantages and disadvantages to private pension plans . In this sense, the tax issue is one of the main factors to be taken into account when deciding between the PGBL and the VGBL.

In the case of PGBL, there is one more tax detail. It is possible to take advantage of a tax benefit that allows you to deduct up to 12% of the annual gross income to invest these amounts in the plan.

In this way, the taxpayer postpones the payment of the IR for when he withdraws the money or starts to receive his monthly income in the future.

However, to take advantage of this benefit, it is necessary to make a complete tax return . It is also necessary to contribute to an official pension scheme, even in the case of self-employed people.

In other words: whoever opts for this modality but makes a simple tax return cannot enjoy the benefit . The same goes for those who do not contribute to the INSS – or any other official social security scheme, in the case of public servants.

Private pension: how much does the money invested in PGBL or VGBL yield?

Not knowing exactly how a financial product works can make you invest your money in something that doesn’t fit your profile. In extreme cases, you may even lose money if you redeem before the recommended deadline or if you do not take advantage of the benefits offered.

We did a study to show how the relationship between PGBL, VGBL and Income Tax works in real life .

We compare private pension with other fixed income investments. Our calculations showed that a well-planned investment can represent twice the value of another one that does not consider the profile of those who invest.

Imagine the difference between having R$250,000 and R$500,000 (!!!) in your account when you retire. Regardless of your goal, getting R$250,000 more will never be a bad option.

What are other investments suitable for retirement?

In addition to PGBL and VGBL, we also consider investments such as the Treasury Selic and a CDB that yields such as those found in large banks.

We also added the Magnetis 2 Portfolio to the simulation as it diversifies investments and increases the chances of a higher return over longer terms.

In addition, the strategy used to build this portfolio also makes it more resistant to economic turmoil.

As for the fees charged for each product, we simulated different administration fee ranges for PGBL and VGBL. Thus, it will be possible to see the impact of these tariffs in the longer term.

Remembering that for the Selic Treasury there is a custody rate of 0.25% per year on the total value of the bonds. In the case of the Magnetis 2 Portfolio, there is an advisory fee of 0.4% per year, also on the amount invested.

Given all this information, it was still necessary to consider how taxes are levied on these applications.

In the case of Tesouro Direto and CDB, the IR rates range from 22.5% (applications of up to six months) to 15% (over two years). This tax, as the name implies, is levied only on the difference between the amount invested and the amount redeemed.

As the Magnetis 2 Portfolio is assembled with corporate bonds (generally CDBs of medium-sized banks, with better profitability), we consider the same costs for these products.

There is also a 20% portion of this portfolio allocated to funds. 10% are invested in DI funds (administration fee of 0.3% per year) and 10% in multimarket funds (average administration fee of 2%).

Taxes on PGBL and VGBL can be charged differently, as we saw in the previous topic.

All these points cleared up, now let’s go to our simulation numbers .

Progressive IR

Regressive IR

One of the first things you’ll notice is the impact of the management fee on investments over time.

It is this rate that makes the VGBL have a lower yield than the Treasury Selic in all scenarios. This is because the lowest VGBL management fee (0.5% per year) is higher than the Treasury Selic custody fee (0.25%).

And even a CDB from a major bank can yield more than a VGBL, depending on the management fee of the latter.

Over shorter periods, these fees may not make such a big difference. The picture, however, is inverted the longer the application period is.

The term, by the way, is also crucial for the yield of an investment, as we have already explained in this other post on the power of compound interest . In this simulation, you can clearly see that the longer the money remains invested, the greater the multiplier effect on it.

Compared to other investments, the Magnetis 2 Portfolio has a consistent result in longer terms. Our diversification strategy mixes assets from different classes and allows you to take advantage of the best results from each investment with less risk.

You will notice that, in the case of the progressive table, it is the application with the best profitability. This is because, in this modality, the taxation of PGBL and VGBL income is higher according to the income received. And since the 15% rate applies to other investments after two years of investment, the income of the Magnetis 2 Portfolio stands out.

In the case of the regressive table, the PGBL with an administration fee below 1% ends up performing better if the tax benefit is used. The possibility of collecting income tax only at the end of the accumulation period at a rate of 10% is what makes the investment more advantageous. However, the most impressive conclusion is related to the fiscal issue .

Is it possible to change pension from VGBL to PGBL?

The pension portability only happens between planes of the same type, ie, you can not switch to VGBL PGBL . Furthermore, it is also not allowed to change the regressive to the progressive tax regime. Therefore, it is important to pay close attention to the rules of private pension before contracting the plan.

If you no longer want PGBL, for example, the best option would be to redeem it and reinvest the money in VGBL. However, you will need to pay Income Tax and pay off the investment term. It is not an advantageous option and can bring more losses than profits.

However, there are no impediments to changing financial institutions or looking for a more profitable alternative. If you choose private pension portability, you can make the change at no cost.

There are two possibilities for those who want to migrate: internal and external portability . In internal portability, you change plans within the same financial institution; on the external side, migration takes place between different institutions. The process is simple and does not involve payment of fines or taxes.

Portability can be advantageous, as there is no need to redeem resources and it is also not mandatory to hire a new plan. In this way, you can adapt your investment strategies to obtain the best profit, with the lowest possible expenses.

What is the impact of income tax on private pension plans?

The main conclusion that we draw from this study is the importance of investing according to your profile, including tax .

Choosing a PGBL or VGBL plan in a progressive tax regime can be advantageous for those whose income falls within the first two income brackets. That is, for those who do not need to declare income tax or are taxed at up to 7.5%.

From the next age on, the regressive regime makes more sense for those with higher income.

In addition, there is a big difference between applying in PGBL with or without tax benefit . This benefit is the possibility of deferring the payment of income tax on this investment, allocating up to 12% of the annual income for investment.

Let’s consider an investment in this type of product with the same conditions (minimum application, additional contributions and administration fee). The difference between enjoying this benefit or not can mean around R$ 100,000 for those who invest, at the end of three and a half decades.

Look at the year 35 column in the simulation and note the income from PGBL investments in both tax regimes, with and without tax benefit.

The difference in the regressive regime is at least R$79,600 for an administration fee of 2% per year. For a rate of 0.5% per year, it reaches R$ 112,800.

In the case of the progressive regime, the minimum difference is R$ 64.1 thousand for the administration fee of 2%. The impact reaches R$90,100 for the 0.5% rate.

The IR is only levied on the redemption or receipt of income obtained with this PGBL. In this way, the multiplier effect of compound interest shows its power over the years. Instead of paying IR annually for 35 years, the money remains applied and tax is paid only when the accrual period ends.

It became clear that the same investment can either have the best performance in your portfolio or be your worst nightmare . It all depends on knowing how to take advantage of the benefits it offers and matching it with your financial profile.

What to consider when putting together your retirement plan?

Not only PGBL and VGBL is a private pension plan. Treasury Direct, fixed income, real estate and even variable income can be part of an investment portfolio for retirement.

It is necessary to have clear objectives when investing. Knowing how much you need to save to have a certain standard of living in the future will help a lot in defining the best applications for your financial goals.

It’s also critical to know what level of risk you’re willing to take to earn a certain yield. However, keep in mind that the main purpose of investing for retirement is to preserve purchasing power. So, it doesn’t make sense to put this reserve in a riskier application, seeking the maximum return. The risk of loss is usually great.

Those who do not take these points into account may be putting money into a product that is inappropriate for their profile. And, as we’ve seen in the simulation above, it’s possible to lose a lot of money over time by making the wrong investment.

The ideal strategy is to build a diversified portfolio, balancing investments that offer a little more risk with others that preserve equity .

Conclusions

Having several financial investments in your portfolio is important to have more security in your investments . This is because, if there is any turbulence that harms the yield of part of the assets in this portfolio, the others will have the strength to offset the negative effect.

Investing in fixed and variable income is the best way to ensure profitable options and broaden your horizons. When it comes to long-term investments, the PGBL and VGBL plans are attractive possibilities , especially for those who want to ensure a comfortable retirement.

Currently, relying solely on the INSS is not the most viable or safe option. Of course, you can continue to contribute to social security, but it never hurts to consider new ways to invest your money.

Finally, the PGBL and VGBL plans offer numerous benefits , especially in terms of income tax taxation. Now that you’ve answered questions about the topic, how about relying on Magnetis to diversify your investments? Discover our Private Pension!