Why is it important to save for retirement?
It’s important to start saving for retirement for basically two reasons. The first one has to do with the aging of the Spanish population; those over 65 are 20% of Spaniards today, while this figure was 10% 50 years ago. Additionally, the economic context is becoming more complicated. In the 2021 Orange Report on Saving Habits and Pensions that we do at ING every year we see that the main concern of Spaniards at the time of retirement is financial concern, in fact, only 14% of Spaniards You believe that you will have a retirement that will be sufficient for the moment that retirement arrives. however, only a third have begun to prepare, that is, it is an issue that concerns us but does not concern us at the moment. And obviously it is important to work on raising awareness and providing Spaniards with the necessary tools to be able to sufficiently prepare for that moment of retirement.
Is the current public pension system sustainable?
Obviously the aging of the population is a relevant factor when thinking about the sustainability of the pension system. Today it is expected that in 2035 there will be 13 million pensioners and that number will increase to 16 million in 2050, that is, the problem is serious and will get worse. Obviously, Spain is also one of the countries with one of the highest replacement rates in Europe, specifically, it is 72% compared to a replacement rate of 40% in OECD countries and in our surroundings such as the Netherlands or Sweden. Obviously that makes our pension system more difficult to sustain than others. Therefore, it is also important to give priority and focus to private savings in order to complement that retirement, that public pension that we have. Therefore, working on that awareness and that people take care of that private savings in the face of retirement is an important issue as is encouraging it in a way that is interesting to do so.
What is the optimal age to start saving?
The optimal age is probably the sooner. Age is the determining factor when saving for retirement. Perhaps it is also important because doing it early allows us to save in a timely manner by making periodic contributions that allow us to somehow soften the impact of making a larger contribution at once, so that we remove pressure on that need to save in the long term. An example: if someone starts saving an amount of 100 euros per month for 30 years and that pension plan where they are investing has a profitability of 4%, which is the average that the Dynamic Orange Plans have, that amount of 100 euros, it can become 70,000 euros after 30 years preparing for retirement and completing that public pension that we hope will be less in the future. Obviously, commissions also play a relevant role here, since they are an element that reduces the profitability of pension plans; Dynamic Orange Plans charge 26% less than the maximum allowed by the market, and it is a factor to take into account when deciding to invest in one plan or another.
With the reform carried out by the Government, what incentive do savers have to invest in pension plans?
Pension plans are still a good product to invest in for the long term and to complement our public retirement. Basically, they are products that allow you to invest in a wide variety of assets, and they are products that continue to have a tax benefit that materializes the year after the contribution has been made and that additionally adjust to a great extent to the needs of customers. That maximum of 2,000 euros that has an impact on the declaration of the following year is very clear in an example: if a participant makes a contribution of 2,000 euros this year and has an income of 37,000 euros, in order to make the declaration of the year That is coming will see its tax base reduced by 2000 euros, that is, it will be taxed for 35,000. As personal income tax is a progressive tax, it means that the tax bill that you will have to pay next year will be less. Therefore, it appears that the pension plan continues to have tax advantages. Additionally, as we saw in the 2021 Orange Report on Pensions, 40% of the participants consider the pension plan as a good product to invest in the long term. If we put these two things together: the need to invest and supplement our public retirement with a good product in terms of tax advantages and profitability, we have a product that is still in good health for the future.
Do you think that other products, such as investment funds, are called to be natural substitutes for channeling long-term savings? What is the best vehicle to save for retirement?
I think there are many elements to consider. The main one has to do with the client’s profile and do everything with the investment horizon that we are talking about. When the investment horizon is longer, that is, more years are left for retirement, we will be talking about investing more in equities, dedicating a greater proportion of the money to investing in equities. In the same way, as we get closer to retirement, we will dynamically adjust the weight of equities, taking it more towards fixed income to try to preserve as much as possible that created heritage. Mutual funds can be a good vehicle to channel that long-term savings, but I believe that they are complementary to pension plans to the extent that they respond to different time horizons and especially because some have tax advantages and others no. Additionally, in investment funds it is important to consider the commissions and that these are adjusted to the product, and to look at the profitability and diversification of assets; In this sense, we have a range that are the Orange Portfolio Funds that complete the offer we have in pension plans seeking that diversification, long-term savings and those low commissions that in the term have a great impact on profitability and the amount of money that we will enjoy for our retirement.