[Belgium] Comparing an ETF Index portfolio with a local fiscal pension fund

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zarci
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Joined: Sat Jun 10, 2017 11:02 am

[Belgium] Comparing an ETF Index portfolio with a local fiscal pension fund

Post by zarci » Sat Jun 10, 2017 11:20 am

Hi All!


Recently i've been digging into investing, saving and personal finance. I'm a 25 y/o Belgian working my first job, so I figured it was about time to do so! I've read the Intelligent Investor by Benjamin Graham, hung around the Bogleheads wiki and caught the general vibe of long term index fund investing.

Now specifically I'm reviewing my pension fund investment. The Belgian government has legislation where if you invest into a government approved mutual pension fund, you can deduce 30% of that amount from your taxes.

I'm talking about this specific mutual fund. Keeping my valuable insights from The Intelligent Investor in mind I notice the following:
  • Average return of 5,56% over 10Y
  • TER of 1,34%
  • max amount of 940 euros / year. I can deduce 280 of that from my tax-return
That's plain bad. It's an actively managed fund, it performs under the index AND it has high costs!


So my question now is; How do I compare this to a portfolio of index-tracking ETF 's of my selection? I've tried it like this:

Imagine a portfolio like this:

iShares $ Corp Bond UCITS ETF USD (Dist)
  • 6,91% over 10Y
  • 0,20% TER
iShares MSCI World UCITS ETF USD (Dist)
  • 5,90% over 10Y
  • 0,50% TER
If i put them together in 60% equity and 40% bonds it adds up to a historical 6,3% (right?). But wait! Past performance is no indicator of future performance!

So then i subtract the TER's from the historical yield and compare with what I have now:
  • tax-deducable, acitvely managed fund 5,56% historical - 1,34% TER = 4,22% net yield
  • My proposed portfolio of index tracking ETF's: 6,91% historical - 0,38% TER = 5,92% net yield
Now, there's the tax bonus!

If I invest the maximum amount of 940 euros in a year I can deduce 280 euros from my taxes. So I've invested 940 while the outflow of my books is only 660.

So If I then run these numbers through a compound intrest calculator over 40 years I get the following results (I'm ignoring inflation) :


Tax-deducable fund that returns, suppose, 4,22% (= historical minus TER): 98K
My proposed fund that returns, suppose, 5,92% (= historical minus TER): 106K

The proposed fund performs better, now doesn't it!?

To make things worse there's a tax of ~8% on the tax-deducable fund when you cash out. I'm not sure what the situation with ETF funds would be but I do know that as a Belgian citizen it would be advantageous to invest in accumulation funds domiciled in Ireland. Dividends are taxed by 27% here.

Now; Is there a major flaw in my reasoning? Other than my using the historical yields to predict future yields. According to my calculations the tax-deducable fund is bullocks for long-term Boglehead investing. amirite? Not only to mention that the limit for the deducable amount is 30% of 940. I can save more than 940 per annum on my current income.


Thank you so much!

MarnixV
Posts: 1
Joined: Mon Jun 19, 2017 11:40 am

Re: [Belgium] Comparing an ETF Index portfolio with a local fiscal pension fund

Post by MarnixV » Mon Jun 19, 2017 11:59 am

Hi,

Interesting calculation! I'm also from Belgium, and starting out with index investing. In fact I have been contributing my 940€ to the same Argenta pension saving fund as you every year. Personally I haven't been giving much thought to the performance of this fund! I consider my index investments as my FI/pension savings, and the 940€ simply as a way to get a tax benefit, I don't really look at it except around Christmas when I need to rush to the bank to get my contribution in before new year :s.

I think your long term computation is a bit of a simplification, but the real question here is: can we find a better performing (I.e. Low cost) alternative pension fund that is also eligible for the tax refund? That would be the best of both worlds. I don't have the answer but I might start searching around for this...

P.S.: in your example you mention iShares MSCI world. But how about iShares Core MSCI World (IWDA)? This is an accumulating ETF (no dividends with 30% tax :)) with a TER of 0.20%. Sounds like a better alternative for Belgian investors ;).

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BeBH65
Posts: 840
Joined: Sat Jul 04, 2015 7:28 am

Re: [Belgium] Comparing an ETF Index portfolio with a local fiscal pension fund

Post by BeBH65 » Tue Jun 20, 2017 1:07 pm

Hello Zarci,

The decision to invest in a tax-advantaged account in Belgium requires indeed a thorough investigation. Also other forums debate this. Until now, there is no clear winner. The previous post makes some good remarks.

I opened a thread not so long ago on this forum. Will need to get back to that in the next days to perform and publish my calculations.



Let me comment on your post.
zarci wrote:Hi All!


Recently i've been digging into investing, saving and personal finance. I'm a 25 y/o Belgian working my first job, so I figured it was about time to do so! I've read the Intelligent Investor by Benjamin Graham, hung around the Bogleheads wiki and caught the general vibe of long term index fund investing.

Now specifically I'm reviewing my pension fund investment. The Belgian government has legislation where if you invest into a government approved mutual pension fund, you can deduce 30% of that amount from your taxes.

I'm talking about this specific mutual fund. Argenta Pensioenspaarfonds - today 66% stocks (mainly europe), and 31% bonds (mainly EURO) - all this in accordance with the limitations on pensioenfunds in Belgium.
Keeping my valuable insights from The Intelligent Investor in mind I notice the following:
  • Average return of 5,56% over 10Y
  • TER of 1,34%
  • max amount of 940 euros / year. I can deduce 280 of that from my tax-return
That's plain bad. (why?) It's an actively managed fund, correct it performs under the index Looking at the graphs you linked, it indeed performed worse then its index (mixfunds flexible EURO) the last 10 years, if you select any other standard period it performs equal or better then its index. In Sept and Oct 2008 the fund seems to have taken the wrong gambles AND it has high costs! correct if you compare to index ETF, compared to other mutual funds in Belgium the ER is in the same ballpark.


So my question now is; How do I compare this to a portfolio of index-tracking ETF 's of my selection? I've tried it like this:

Imagine a portfolio like this: This is a portfolio of USD bonds and world equity, not the same as the above fund.

iShares $ Corp Bond UCITS ETF USD (Dist)

This forum does not often advise USD corporate bonds for European investors
  • 6,91% over 10Y
  • 0,20% TER
iShares MSCI World UCITS ETF USD (Dist)
As mentioned in the other reply, there is an accumulating clone of this; 0,20TER, and no 30% taxation on the dividends. this latter is often advised on this forum for European investors with similar taxation as in Belgium.
  • 5,90% over 10Y
  • 0,50% TER
If i put them together in 60% equity and 40% bonds it adds up to a historical 6,3% (right?). But wait! Past performance is no indicator of future performance!

So then i subtract the TER's from the historical yield Why? the TER is already included in the yield. A fraction is already substracted day by day.
and compare with what I have now:
  • tax-deducable, acitvely managed fund 5,56% historical - 1,34% TER = 4,22% net yield as mentioned above, no need to subtract the TER
  • My proposed portfolio of index tracking ETF's: 6,91% historical - 0,38% TER = 5,92% net yield
no need to subtract the TER; however, how did you take into account the taxation of your dividends?

Now, there's the tax bonus!

If I invest the maximum amount of 940 euros in a year I can deduce 280 euros from my taxes. So I've invested 940 while the outflow of my books is only 660.

So If I then run these numbers through a compound intrest calculator over 40 years I get the following results (I'm ignoring inflation) :
could not follow you here, how did you account for the difference between the amount that "flows out of your books - 660euro and 940Euro respectively" and the amount that compounds (940 euro for both?)
Tax-deducable fund that returns, suppose, 4,22% (= historical minus TER): 98K
My proposed fund that returns, suppose, 5,92% (= historical minus TER): 106K

The proposed fund performs better, now doesn't it!?

To make things worse there's a tax of ~8% on the tax-deducable fund when you cash outExcept for the investments between age 60 and 65, there the 30% ax deduction is net. . I'm not sure what the situation with ETF funds would be but I do know that as a Belgian citizen it would be advantageous to invest in accumulation funds domiciled in Ireland. Dividends are taxed by 27% here. 30% according to my info

Now; Is there a major flaw in my reasoning? Other than my using the historical yields to predict future yields.
According to my calculations the tax-deducable fund is bullocks for long-term Boglehead investing. amirite?

Not only to mention that the limit for the deducable amount is 30% of 940. I can save more than 940 per annum on my current income. Please indeed save more then the 940Euro. 940Euro per year will not be worth a lot when you are 67 years old. There is no regulation to limit yourself to either the pensionfund or the ETF portfolio.



Thank you so much!
We have an Investing_from_Belgium wiki page. It does not yet discuss this comparison.

(disclaimer: I have an AA roughly 60/40. My Stocks are world stocks with a small tilt to Europe. My bonds are Euro bonds. Part of my tilt to Europe comes from my pensionfund - although I am not sure it actually improves my portfolio or not)
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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