After their forties, Éric and Nathalie are quite satisfied with the property choices they have made so far (main residence, then rental property and a few thousand euros in savings). Now holders of substantial property assets, they want to develop their financial investments, and in particular start saving for their retirement. Financially, they have the possibility of saving around €300 every month for this project, and are hesitating between opening a life insurance contract or a Retirement Savings Plan.
Life insurance, the flexible option favored by savers
With more than 1,800 billion euros in assets, life insurance is unquestionably the preferred financial investment of the French. It must be said that with its diversified supports (funds in euros, UCITS, Pierre Papier, etc.), its flexibility of payment and withdrawal (no limit of amount or duration), and its tax and inheritance advantages, life insurance meets the objectives of any saverand not just those who want to save for their retirement.
In concrete terms, what are the advantages of life insurance:
- Many contracts without entry fees.
- Opportunity to invest in a euro funds, guaranteed by the insurer, and whose yield is quite attractive for a risk-free investment. Average return on the euro fund market in 2021: 1.3%* (source FFA).
- Possibility of investing in more dynamic media such as UCITS partially or totally invested in equity marketsor investments of Stone Paper (SCI or SCPI) to invest indirectly in real estate. Choosing a contract that offers many quality and diversified units of account is therefore particularly important.
- Possibility of making partial redemptions, or a total redemption, at any time. Indeed, contrary to popular belief, life insurance is not blocked for 8 years.
- Soft taxation, from the first year: unlike other investments or envelopes (passbook A or securities account for example), the gains made in life insurance are only taxed upon redemption (apart from social contributions taken each year from the fund in euros). Only part of the redemption is taxed. Indeed a buyback is made up of only part of the earnings, the other corresponds to a fraction of the payments made. This part is calculated in proportion to the gains over the entire contract. Eg: on a €100,000 contract on which the investor has paid €80,000 (therefore €20,000 in earnings), a redemption will only be made up of 20% in earnings.
This share of earnings is subject to a single flat-rate deduction of 30% (choice for TMI + PS possible).
- Very soft taxation after 8 years. After 8 years, the saver benefits from an allowance of €4,600 (€9,200 for a couple) on the annual gains from redemptions of life insurance contracts. In addition, in certain cases (payment before September 2017, outstanding amount of less than €150,000 for a single person and €300,000 for a couple), the IR rate can be lowered from 12.8% to 7.5%.
- Estate benefits : the insured designates the beneficiaries of his life insurance policy in the event of death. For sums paid before the age of 70, each beneficiary benefits from a reduction of €152,500 on inheritance tax. After age 70, an overall allowance of €30,500 is applied for all beneficiaries (interest and capital gains are exempt from inheritance tax).
Simulation for Eric and Nathalie:
The couple pays €300 per month into a life insurance contract with no entry fees, favoring a balanced allocation (euro funds, diversified funds**, SCPI***).
After 20 years, the capital on the contract reaches €98,066 (ie an average return of 3% per year), including €72,000 in payments and €26,065 (ie 26.6% of the contract) in interest. At that time, if the couple made monthly withdrawals of €540, they would only have to pay social security contributions on the interest included in the withdrawal (because of the €9,200 allowance on earnings). That’s around €25 per month.
The couple thus obtains a net income supplement of €515 per month which would last for 20 years. until the capital is exhausted (if the average return remains at least 3% per year).
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The PER, a tax-efficient tunnel product
Created in 2019, the new Retirement Savings Plan has several components, including an individual component: the PERin, Individual Retirement Savings Plan. This plan is intended to receive voluntary payments from savers who wish to prepare for their retirement and benefit from tax reductions. Until then, nothing new compared to existing retirement savings products (in particular the PERP, People’s Savings Plan). The plan incorporates several features of the PERP:
- Main advantage of these plans, the payments made in a PERin are deductible from taxable income within the limit of 10% of income from work capped at 8 times the PASS (Annual Social Security Ceiling), or 10% of the PASS if the income is too low. As it is a tax deduction product, the reduction depends on the marginal tax bracket. The higher it is, the greater the reduction will be: a taxpayer subject to the 45% bracket will therefore benefit from a 45% reduction in his payment (if he does not exceed the ceilings).
- It should also be noted that, as for the PERP, the PERin is copied on the life insurance envelope: the savings are placed in a guaranteed fund in euros and/or units of account (OPCVM, Pierre Papier, etc.). As with life insurance, the choice of contract is essential.
- Main disadvantage, it is a “tunnel” product: the sums are blocked until retirement. There are a few rare cases of early exit linked to life accidents (death of spouse, disability, over-indebtedness, expiry of unemployment rights, etc.).
Despite the tax advantage, savers did not really favor the PERP, because of the capital blocked until retirement and the lack of flexibility on exit. It is on this last point that the government has considered with the Pacte law. With a real improvement compared to the PERP: now, on retirement, the sums may be recovered in the form of capital (in one or more instalments), or a life annuity, or a combination of the two.
The output is therefore much more flexible. However, it is taxed. The paid-up capital, which allowed a tax deduction on entry, is subject to income tax on exit, the TMI (no social security contributions). This capital has generated gains (interest and capital gain). These gains are subject to the single flat-rate deduction (PFU) of 30% (possible choice for TMI + social deductions of 17.2%). A point on which the saver must be very vigilant. Because if he withdraws a lot of capital, he could switch to a higher bracket and therefore be heavily taxed (hence the interest of withdrawing in several instalments).
In the end, provided you benefit from the attractive tax advantage of the PER on entry, block the sums until retirement and remain vigilant when withdrawing at the tax level, the PER can prove to be very judicious for prepare for retirement and benefit from a tax reduction.
Simulation for Eric and Nathalie:
The couple, subject to the 30% bracket, pays €425 per month into a PER. It saves €127.5 in tax per month (30% x 425). That is a real savings effort of €297.5. Here again, he favors a balanced allocation (euro funds, diversified funds**, SCPI***). After 20 years, the capital on the plan reaches €138,925 (i.e. an average return of 3% per year). At this time, the couple makes monthly withdrawals of €615. On this withdrawal, €450 (corresponding to the part of the payment) is added to the taxable income (part of this income will be taxed at 11%, and the other at 30% because the capital withdrawn puts the couple in the bracket high). The rest is subject to the PFU of 30%. The couple thus obtains a net income supplement of €515 per month which would last for 25 years. until the capital is exhausted (if the average return remains at least 3% per year).
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If we compare the two practical cases, thanks to the tax advantage on entry, the savings made in a PERin allows you to obtain a larger capital than life insuranceeven after tax, if we base ourselves on an identical rate of return on capital between the two envelopes.
In the case of life insurance, the couple saves €300 per month and benefits after 20 years from a capital of €98,000 (ie an average return of 3% per year). Thanks to the soft taxation of the contract, they can make withdrawals of €540 per month and pay only €25 in tax, i.e. a net income of €515 for 20 years until the capital is exhausted.
But in the case of the PER, the couple can save more. Indeed, rather than paying €300 in life insurance, he can pay €425 in a PER and as he will receive €127.5 in tax reduction, his savings effort is identical.
By placing €425 per month in the PER, its capital after 20 years reaches €138,925 (still an average return of 3% per year). €40,920 more than for life insurance! Certainly, the taxation on withdrawals will be higher. The couple will have to withdraw €655 each month to benefit from a net return of €515 per month. But in this case, the capital will be exhausted after 25 years. 5 years after life insurance!
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However, it seems necessary to recall that the sums placed in a PER are blocked until retirement (except in exceptional cases) whereas for life insurance, they are available at any time. Thus, a couple who wishes to invest exclusively for retirement must favor the PER. But when the objectives are not perfectly defined, when we want invest for retirement, but keeping the possibility of being able to use this capital for other projects, then it is preferable to opt for the flexibility of life insurance.
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Non-contractual communication for advertising purposes
* rate net of management fees, excluding social security contributions and income tax. Past performance is no guarantee of future performance
**Investments in units of account present a risk of capital loss, must be considered from a long-term perspective and relate to a small part of an overall heritage. Unlike funds in euros, the value of these units of account, which reflects the value of the underlying assets, is not guaranteed but is subject to upward or downward fluctuations depending in particular on the evolution financial markets. Past performance is not indicative of future performance and is not constant over time.
*** SCPI units are long-term investment vehicles (minimum 10 years) and must be acquired with a view to diversifying your assets. Past performance is not indicative of future performance and is not constant over time. Like any investment, real estate presents risks:
– The fall in the value of the investment. The capital invested in an SCPI is not guaranteed. The share value of an SCPI evolves over time, in close relation to the state of the business real estate situation. This situation follows successive cycles, with upward and downward phases.
– The decrease in rental income. In a less favorable economic context, the fall in rental income paid to partners is due to the fall in the financial occupancy rate and/or the fall in the overall amount of rent paid by tenants. However, this decline may be mitigated by the effect of risk pooling thanks to the real estate and rental diversification of the SCPI’s portfolio.
– Liquidity. Since the SCPI is not a listed product, it has less liquidity compared to financial assets. The terms of sale (deadlines, price) may thus vary depending on the development of the business real estate market and the market for SCPI shares.