When preparing for retirement, many savers hesitate between using a pension plan or an index fund to grow their savings. And although these are two different options, they are not necessarily antagonistic. In fact, they complement each other very well, since they provide a series of characteristics that you should know before making a decision. That’s why today we’ll make a comparison to help you make the best decision.
Remember that beyond choosing one or the other, financial preparation for retirement goes far beyond choosing a financial product that fits our needs. It is also vital that you plan the process, that you are aware that saving is the basis and that you should not set your goals too high.
What are these financial products?
Before analyzing whether we should choose between a pension plan or an indexed fund, we must be clear about what they consist of:
What is a pension plan?
A pension plan is a financial savings product specially designed to prepare for retirement by channeling savings into investment products, more or less conservative, which are subsequently received once one retires. Thus, pension plans work through periodic or one-off contributions made by individual savers, which will be invested in accordance with the previously established investment policy and in search of maximum profitability.
Bear in mind that, being a long-term provisional savings instrument, the liquidity of these products is restricted to a series of contingencies and assumptions, such as retirement, disability or long-term unemployment.
What is an index fund?
Index funds, also known as index funds, are passively managed collective investment schemes, i.e., without the intervention of a human manager.
This type of fund is created to replicate a specific index, which may be known, such as the IBEX 35, S&P 500 or the Eurostoxx 50, or one created for this purpose on any theme. The particularity of this type of product is that, instead of trying to beat the market, as active management investment funds do, what they do is follow the performance of the index. This and their automation allow them to have very low costs.
Comparison: pension plan or indexed fund
Once you know what each product is, so that you can have a better perception in order to choose one or both of them to prepare your retirement, we explain below what the main characteristics of each one are and how they differ. Remember that there is no one that is better than the other, but that each one offers you a series of advantages that you should evaluate if they fit your needs. Let’s see if a pension plan or an indexed fund is better for you.
Investor profile and flexibility
The first point is how they fit an investor’s risk profile. In both cases, the two products are a perfect fit for investors who are looking for a vehicle in which to invest their savings for long-term, risk-free growth. However, keep in mind one consideration: the pension plan is more difficult to redeem (conditions must be met), which means that, if you think you may need the money at some point, an index fund offers you more guarantees to get it back.
The flexibility they offer
Another point of view to take into account is the flexibility offered by one or the other. As you have already seen, when it comes to recovering your money, index funds are a more liquid product, since you can always get your money back. However, pension plans are much more flexible once you have retired, because they allow you to choose the option that best suits your preferences to receive the money you have been saving. Now it is up to you to decide which of the two options best suits your profile.
Which product has higher costs: the pension plan or the index fund?
La comparativa de los costes que se asumen con dos productos de inversión diferentes resulta vital siempre, ya que a menor coste la rentabilidad total puede ser mayor. En este caso, los fondos indexados parten con una ventaja, puesto que se trata de vehículo de inversión especialmente competitivo en este apartado. Por su parte, los planes de pensiones también han mejorado mucho en este aspecto. De hecho, esa leyenda de que son muy costosos proviene de los planes que ofrecen muchas entidades bancarias. Sin embargo, en la actualidad hay plataformas y roboadvisors que ofrecen un servicio de planes de pensiones con unos costes muy reducidos, que pueden competir con los fondos indexados.
Taxation
The taxation of pension plans and indexed funds is perhaps the most differentiating point between the two. This is due to the fact that the former have a tax advantage: they allow deducting part of the investment in the income tax, which makes them more advantageous at first. However, bear in mind a series of particularities:
- The total amount to be deducted has been reduced over time.
- This is a delayed taxation, i.e., you will pay the taxes when you receive the money.
- Index funds also have some advantages, especially when it comes to transferring funds from one to another, since they have no tax cost. This feature also applies to pension plans.
Which has more profitability and risk?
En cuanto a la rentabilidad, realmente ningún producto es mejor que el otro per se, sino que depende del plan de pensiones y del fondo elegido. De hecho, hay productos en ambos casos que han obtenido una rentabilidad sólida a lo largo del tiempo y otros que están generando pérdidas de capital. Ante este punto es casi mejor centrarse en la propuesta de inversión que nos ofrecen, si el plan de pensiones se gestiona de forma activa o pasiva, y los activos que lo componen. Finalmente, ten en cuenta lo comentado anteriormente, que tener menores costes repercute en una rentabilidad total mayor.
En el caso del riesgo, por último, la diferencia tampoco es real, sino que depende del caso, ya que un fondo indexado puede estar igual o mejor diversificado que un plan de pensiones. No obstante, es una realidad que es mucho más fácil limitar el riesgo cuando tienes una cartera de inversiones, sea para un plan de pensiones o de fondos indexados, amplia y con diferentes activos, que si solo inviertes en uno. Quizás esa es la parte más interesante a tener en cuenta.
inbestMe, the option with which you always win, whether you choose an indexed fund or a pension plan
As you have seen, both index funds and pension plans are worthwhile. Whichever option you choose, even if you bet on combining the two, the choice you must make is inbestMe. The platform offers a wide variety of pension plans adjusted to each risk profile. It also offers an even wider range of index funds to complement the investment portfolio and provide greater diversification, at very competitive costs.
On the other hand, inbestMe stands out for offering expert advice and intuitive tools, facilitating the management of your pension plan and ensuring a clearer path to retirement for its users.
