The conversation about retirement usually starts late and in vague terms. It becomes much clearer when two figures are put on the table: what is earned today and what is expected to be earned then. The gap between the two is what needs to be financed.
The two necessary figures
The first, the estimated pension: the Social Security offers simulators and the employment history report provides the actual contribution base for each year. The second, the expenditure one wishes to maintain, which is not the gross salary but the net living standard. With both, one obtains the personal replacement rate, and from there the annual gap to cover multiplied by the years of life expectancy after retirement.
Why the individual limit ceased to be the main route
The contribution limit to the individual pension plan has been substantially reduced in recent years, while that of employment plans has remained much higher. The practical consequence is that efficient planning is no longer an exclusively personal matter: it involves the company, and those without an available employment plan must compensate with other vehicles.
The employment plan and the simplified plan for the self-employed
The employment pension plan allows contributions far superior to the individual, the company's contribution reduces its taxable base and for the worker it is deferred remuneration with favourable treatment. For the self-employed, there is the simplified plan, which opens its own limit far above the individual. In professional offices and small companies, it is the most underutilised tool we see.
Vehicles without contribution limits
When the fiscal margin is exhausted, products without a cap come into play: unit linked, which allows managing the investment with advantages in transmission; PIAS, which is taxed favourably when redeemed as a life annuity after the minimum term; and guaranteed savings insurance for the portion of capital that should not take on risk. Their advantage is not the deduction on contribution, but the taxation on redemption.
The decision that moves the most money is how it is redeemed
In the pension plan, redemption in the form of capital is fully taxed as earned income and can spike the marginal rate in a single year; doing it as an annuity spreads it out. There is also a reduction for contributions prior to 2007 subject to strict deadlines. Planning the redemption two or three years in advance changes the net result more than any difference in product profitability.
