What is the difference between a pension fund and a private pension fund?

by Alex Musk

Typically, those looking for long-term investments focus on supplementing retirement income. Among the various options, it is important to know the difference between a pension fund and a private pension fund, as each one can better adapt to your needs.

For some time now, both alternatives have been on the radar, both for people looking for a future income and for companies that want to offer an extra benefit to their employees. Let’s know what the differences between these two products are? Check it out below!

What is the pension fund?

This modality is also a type of private pension but made in a closed group. They are common for professionals in the same category, such as public servants or who are part of the staff of companies, class entities, or associations of state and private sectors.

Pension funds are also called Closed Complimentary Pension Entities (EFPC) and are created with the purpose of “fattening” participants’ money during contribution years so that they can receive a social security benefit in addition to the income paid by the INSS.

Pension funds are usually made up of fixed income assets (LCIs, LCAs, CDBs, Treasury Direct), variable income (stocks and options), hedge funds, and Structured Operations Certificates (CEOs). It is up to the administrator to manage resources to obtain the best performance and protect themselves from economic turmoil.

What are the main features of the pension fund?

In this modality, those who participate in the fund usually contribute a certain amount monthly, while the company complements another part. The sum of the two contributions allows the final amount to be quite attractive without weighing too much on the taxpayer.

The beneficiary begins to receive the amount reached, in monthly installments, when he retires. There is also the option to receive everything at once.

If he leaves the company before retirement, he will have the right to redeem a portion of the money invested. In any case, the rules may vary from one fund to another.

What is a private pension?

Private pensions also aim to offer future income to those who hire them. In fact, it can be for the beneficiary of the plan or the successors in the event of death. Therefore, it should also be seen as a medium and long-term investment.

There are two types of private pension: the PGBL (Free Benefit Generator Plan) and the VGBL (Free Benefit Generator Life). The basic difference between them is the form of taxation. To choose the best option, take into account the type of income tax return you usually file. 

What are the main features of private pension?

Monthly contributions are made — contributions of amounts that can be pre-established — that accumulate over the years. Among the financial assets in which this amount is invested are fixed-income investment funds, multimarket funds, and variable income.

It is important to understand the asset composition of both the pension fund and the private pension fund and choose the best option for your investor profile. In some cases, it is also possible to redeem the full amount of the investment after a grace period.

What is the difference between a pension fund and a private pension fund?

Essentially, the biggest difference between a pension fund and a private pension is that the former is exclusive to a certain group of people. The second is accessible to anyone who shows interest.

While pension funds are non-profit entities with the sole purpose of managing the money received as contributions from taxpayers, pension plans are marketed by different financial institutions (banks, social security insurance companies, and brokers) as products.

What are the similarities between these two options?

Both can be considered long-term investment options as a way to complement retirement.

Another similarity is the tax regime, that is, the way income tax is collected.

Therefore, it is important to pay attention to hiring and to know if the table to be used will be regressive or progressive.

How to choose between the pension fund and private pension?

It is not the differences between the pension fund and private pension that will guide your choice, but whether you have access to the first model.

Anyone can independently plan their retirement if they opt for social security, but not everyone has access to or can participate in a pension fund.

In general, it is important to understand the proposal, fees, rules, and grace period of the contract you choose. After all, there are different plans and varying degrees of risk.

If you are sure that the amount will be invested in the long term, the profitability can be higher and suffer less from market fluctuations.

Is it safe to invest in a pension and private pension fund?

In general, they are safe options, but the best choice will always depend on the profile and objectives of the person investing. This is because both private pension plans and pension funds can invest participants’ money in different assets.

It is important to understand the capital allocation strategy — where you will allocate your money to yield — and see if the strategy fits within the limits that the National Monetary Council (CMN) determines for this type of investment.

How can these options help you have more financial stability?

Relying on the INSS stopped being, some time ago, the best alternative for a comfortable retirement, especially after the new rules established with the pension reform.

The trend is that other changes will be made in the coming years, so you can’t depend only on this feature, right?

The longer the money is invested in any of these modalities, the less it will suffer from possible instability in the economy. But, if that happens, there will be time to recover any losses that the fund has suffered.

Even though there is a difference between a pension fund and a private pension fund, both are a way to have discipline and save money for the future. Furthermore, they help to protect the capital invested because of regular contributions and in terms of the long term. The sooner you start, the smaller the installments and the greater the benefit, right?

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