Why an IPT is (increasingly often) more advantageous than a VAPZ

There is the emergence of a new generation of retirees. There is a growing group of people who remain active after retirement age. More and more retirees enjoy professional income alongside their pension, or, through building up real estate holdings, rental income. Let's also not forget in this context the effect of unlimited additional earnings after retirement. The heart of the matter is that the payout of a VAPZ is taxed via a so called notional annuity. In plain language, this means that someone who receives a VAPZ payout at, for example, 67 years old is taxed annually until 77 years old on a notional income. Often that tax is zero. But when the statutory pension together with other income rises above approximately 16.500 euro, that notional income is suddenly taxed very substantially.

Secondly, an IPT offers the opportunity to invest in a wide range of interesting Branch 23 funds. These funds offer a view towards a potentially higher return in the long term. And as you may know, the VAPZ can only be underwritten in Branch 21. In Branch 21, the insurer guarantees you an interest rate, increased with a profit share. And although Branch 21 is absolutely safe, and gave attractive returns in the past, we have to assume that the yield of a Branch 21 policy will be low to very low in the future.

Due to the combination of these two factors, for an ever growing group of clients an IPT will become more advantageous than a VAPZ, not only fiscally but also financially.

What is the best choice for you?

Breaking down the simple logic.

Some advisors openly champion the VAPZ. Their arguments are simple. "You pay 100 euro premium, and thanks to the enormous fiscal advantage on this premium, the actual cost is about 40 euro." And they add: "Moreover, at retirement age you are taxed on virtually none of the saved amount. In short: something costs you 40 euro, and you get back almost certainly 95 euro. Why would you refuse something like that?"

We explain below that this is often a flawed line of reasoning.

But the IPT is also filleted with the same simple logic. "You shouldn't take an IPT. To begin with, you pay a tax of 4,4% on the premium. Your company enjoys a fiscal advantage of 20% on the IPT premium, and in the end you as a person get another 20% deducted. That's a zero sum operation. Why would you underwrite something like that?".

Here too, we show with hard figures that this reasoning is wrong.

Until now it was "best practice" to first underwrite a VAPZ, and then supplement it with an IPT"). The reality is that, from our duty of care as an insurance intermediary (where we put the client's interests first), we increasingly advise to underwrite only an IPT, and not start a VAPZ, or even simply stop an ongoing VAPZ. And this is because in more and more cases an IPT will be better for the end client, both fiscally and financially. How does this come about?

We look at the situation of a 40 year old person, a director in a company with 42.000 euro remuneration. For that person, during 27 years (until the statutory retirement age of 67 years), a premium of 3.000 euro is also paid annually to an insurer. We do this via VAPZ, and compare this with the situation where we take out an IPT. The person remains active until retirement age, and then receives the payout of the policies. It is important that we keep an equal cost for the company. That means:

Either the company pays, on top of a remuneration of 42.000, a VAPZ premium of 3.000 euro. This premium is then attributed to the company director as a benefit in kind. In this case the taxable salary of the director after correction for the VAPZ is [ 42.000 gross remuneration + 3.000 benefit in kind from the VAPZ premium - 3.000 fiscal advantage of the VAPZ] = 42.000. The net cost to the company in this case is [ 42.000 gross remuneration + 3.000 euro VAPZ premium] = 45.000 minus corporation tax (say 20,5%), or 35.775 euro.

Either the company pays, on top of the gross remuneration of 42.000, an IPT premium, taxes included, of 3.000 euro. In this case the taxable salary of the director is evidently also 42.000. The net cost to the company here too is again [42.000 gross remuneration + 3.000 IPT premium =] 45.000 minus corporation tax, so again 35.775 euro. We work with equal measures and equal weights.

The attentive reader will notice that, given an equal total cost for the company, it makes no difference whether a VAPZ is paid by the private individual or by the company. This is material for a future news article.

Crunch the numbers. What is the best strategy: a VAPZ or an IPT? Or both?

We have fully calculated this for you in 5 scenarios and based on all possible parameters. We look at the results for a VAPZ in 3 scenarios (A, B and C) depending on the expected marginal tax rate in personal income tax as a retiree. And we look at the results for an IPT depending on whether that policy was invested in Branch 21 (D), or Branch 23 (E). It is important that we made our comparison between Branch 21 and Branch 23 very neutral. We let the Branch 21 policies accrue at a 1,5% return (being an interest rate of 0,25% plus a profit share of 1,25%), which most insurers will consider very generous. We assigned the Branch 23 policies a simulated return of 3%, which is rather modest for the long term. Finally, one more remark: we only look at the normal VAPZ and not the Social VAPZ. You can read our opinion on the social VAPZ here").

The results for the VAPZ:

The results for the IPT:

Note: the returns mentioned in this table are purely indicative, and serve to illustrate and compare between scenarios. They do not constitute a guarantee or an offer from Life Experts or any insurance company. You can find the full table with detailed calculations here.

In scenario A we have a traditional retiree. That means that after retirement this person does not receive any other income. The VAPZ is not additionally taxed, and is fiscally very attractive. But even here we have to conclude that the IPT from scenario D (Branch 23) yields more in absolute amounts.

In scenario B we have a retiree whose taxable income is higher. As a result, the VAPZ is taxed in the form of a notional annuity at a marginal tax rate of 25% for 10 years. I refer to the table below with current marginal rates in personal income tax. We should not apply this table blindly to retirees because a retiree benefits from all kinds of tax reductions. But we may assume that as soon as the statutory pension together with other income rises above approximately 16.500 euro, the notional income of the VAPZ is indeed taxed.

Figures valid as of 1/09/2021

What stands out in scenario B is that, with an equal Branch 21 investment strategy, an IPT and a VAPZ are almost equally fiscally efficient (14.28% versus 13,84%). The VAPZ (scenario B) does generate more capital at retirement age (82.349,04 euro versus 78.473,11 euro), but scenario B also has a dark side. The retiree who chooses scenario B does receive a capital payout at 67 years old, of which he/she gives back a part, little by little, to the tax authorities over 10 years. And most retirees don't find that so pleasant after all.

In scenario C we raise the retiree's marginal tax rate to 40%. This is the least attractive scenario for the insured. Based on the table with marginal personal income tax rates above, you can see that the tax brackets lie fairly close together. The point we are making is that a marginal rate of 40% is not unrealistic for many people.

The last two scenarios concern the IPTs. Whether or not a retiree enjoys additional income is irrelevant for the tax on the payout of an IPT. Here we do make the calculation for a Branch 21 contract (D) with a fixed interest rate, or a Branch 23 contract (E, a fund investment). It is clear that scenario E is the best scenario for our self-employed company director. In real life we will often invest an IPT in a mix between Branch 21 and Branch 23. As a result, the results of an IPT will in reality end up somewhere between scenario D and E, and will be better than those of a VAPZ.

Based on these examples, we conclude that the statement "a VAPZ is always better than an IPT" is wrong.

Simplicity has its charm. When is a VAPZ advantageous?

There are situations in which a VAPZ is a good choice. For example:

- A VAPZ is a product that is easy to understand and manage (indeed a rarity in the insurance world).

- A VAPZ is also a solution for starting self-employed individuals or self-employed individuals who do not yet have a full annual remuneration in their company. For them this is an entry level policy and an advantageous way to, for example, underwrite supplementary guaranteed income.

- Naturally the same applies to self-employed individuals without a company, sole proprietorships and liberal professions. For these people the VAPZ is the logical first choice within the toolkit of the 2nd and 3rd pillar (alongside pension savings and the POZ, the pension agreement for the self-employed without a company)

- Even self-employed individuals whose 80% rule has been exceeded can still underwrite a VAPZ. Strange but true.

- In the context of guaranteed income, through a VAPZ you can, with some insurers, insure slightly higher amounts than with an IPT. This has to do with the application of the so called 100% rule.

- If you ever want to make a withdrawal against a policy, you can withdraw a higher % of the reserve from a VAPZ (up to 90%) than from an IPT (up to 65%). A minor consideration here is that the reserve in an IPT is generally much higher, so you should not overestimate the effect of this.

Finally, something can also be said for this. The fiscal rules of the game do sometimes tend to change. We are not always happy about that. In that sense it can be worthwhile to still underwrite a VAPZ first and then fill up your 80% rule with an IPT. Spreading across fiscal regimes can be a good idea.

Main matter and side matter. When is it better to take out only an IPT?

Above we made the comparison for an equal premium of 3.000 euro in both VAPZ and IPT. In reality, the IPT usually has a much higher premium than the VAPZ. In other words, the IPT is the main matter, and the VAPZ the side matter.

For example: within the fiscal limits, the company director can pay 3000 euro into a VAPZ (8.17% of reference income), on top of which his company may then pay up to 10.000 euro per year into an IPT (in accordance with the 80% rule).

Focusing on the main matter is always a good idea, and so it is conceivable that a company director decides that an IPT is sufficient. A company director who realizes that investing monthly in Branch 23 is the best way to increase returns will also choose an IPT.

A question we often get in this context: "If I only underwrite an IPT, will I then build up less 2nd pillar capital?" No. You should realize that this question no longer falls within the scope of this article, because here the question is being asked about the maximum pension capital that can be built up, where the cost to the company is allowed to increase. Well, you may in general assume that someone who takes out only an IPT cannot build up lower maximum pension capital than someone who underwrites a combination of VAPZ followed by IPT.

The example above makes this clear. It could perfectly well be that the company director does not underwrite a VAPZ and that the company pays [ 10.000 + 3.000 = ] 13.000 euro into an IPT.

It would take us too far to fully explain this topic here, this is perhaps material for a future article.

The answer to the question of whether an IPT is better taken out separately, or combined with a VAPZ, is highly dependent on personal circumstances. We find that we increasingly have to recommend underwriting only an IPT without a VAPZ, because this is better for our client, both fiscally and financially. To find out the best advice for your specific situation, consult one of our Experts.