When planning for a future of financial peace of mind, we can adopt different strategies according to our savings capacity, needs and objectives.
In the current economic context, which is marked by inflation that may erode our future purchasing power (i.e. our ability to buy goods and services), the search for higher returns in the capital market may make sense.
Savings plans in their traditional form are one of the favourite options for savers, especially the more cautious ones, but they may not be enough to combat the loss of purchasing power due to the generalised rise in prices. On the other hand, investing through a savings plan provides the possibility to expose ourselves to the growth of the most competitive companies in the world, so that the potential return can to some extent beat inflation.
Below we will analyse both options in depth and compare the Individual Systematic Savings Plan - or PIAS -, and the ETF savings plan.
According to the Bank of Spain, the Individual Systematic Savings Plan or PIAS is a long-term financial savings instrument with a specific purpose, in most cases to complement the public retirement pension.
Specifically, PIAS is a life insurance policy designed to generate a life annuity in the future.
One of the appeals of pension plans, and more specifically of PIAS, is the potential tax benefits that we can enjoy. However, it should be borne in mind that this is a not flexible savings system and that the conditions subscribed to must be fulfilled at the risk of losing these privileges. In particular, if the funds are redeemed within 10 years after the first contribution, the tax benefits are waived. In addition, the annual contribution limit is €8,000.
Many people may be tempted to take out a pension plan out of habit, or be encouraged by information such as the fact that this form of savings is tax-free or that the capital deposited does not carry any risk. Both statements are false.
The reality is that other alternatives to pension plans can be more advantageous in tax terms and also provide other benefits, such as greater transparency (knowing where our contributions go), profitability (what we get in return for our contribution), and liquidity (the ease of getting our money back in cash).
In terms of taxation, it is well known that the tax authorities can reclaim up to 45% of the plan through income tax.
ETF savings plans (exchange-traded funds that track a stock index) can be a complement or alternative to increase our wealth over the long term. They allow us to implement a diversified investment strategy (i.e. to place our ‘eggs in different baskets’: regions, companies, sectors, etc.) with a regular contribution of just €1 per month and much lower costs than in the case of any fund.
An interesting concept is the effect of compound interest: price gains from regular contributions are reinvested in the plan, which could benefit its growth. Finally, ETF savings plans are more flexible than other instruments such as the PIAS we have previously analysed, meaning that they can be paused or adjusted at any time.
Having now looked at both the ‘traditional’ PIAS and ETF saving plans, as an alternative form of investing, it’s up to you to decide which type of investing suits your situation and your investment needs best.
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