In volatile times for economies and with pension systems under pressure, many people are thinking of supplementary pension plans. What plans are available in Italy, how do you go about starting one and, more importantly, does it make financial sense?
First, some background.
The Italian pension system is based on what can be described as a pact between generations. This means that pensions are paid to retirees thanks to the contributions being paid in by the active workforce, who in turn will receive a pension thanks to the contributions of a new workforce.
This becomes a problem when, as is currently happening in Italy, the population is ageing and for various reasons it has not been possible to maintain a balance in the proportion of people entering and those leaving the workforce. In other words, the system has to pay out ever more retirement pensions with increasingly fewer active workers.
A supplementary pension plan could be the answer for those Italians who fear that their state pensions will not be sufficient for their needs.
While the state pension is paid out every month thanks to the contributions paid by the current workforce, pension funds work differently. Each worker joining a fund will decide how the amount he or she pays in is invested - this could be bonds, shares, or a mix of both. When retirement age is reached, the capital accumulated will comprise the amount paid in plus any yield on the investment. Members can choose to take this amount in the form of an income or as capital.
A supplementary pension could be advantageous for those Italians whose state pension will not be sufficient for their needs
In Italy, pensions funds are categorized according to the entity that provides the fund and the type of arrangement for becoming a member.
The first kind is the co-called ‘open fund’ which anyone can join on an individual or collective basis. Such plans can be established by banks, insurance companies, asset management companies or building societies. Success depends on how the market performs and, as pension funds in Italy are not obliged to have guaranteed capital, if the fund goes under, so does the investment.
The second kind of fund is called a ‘PIP’ which stands for ‘piani individuali pensionistici’ (individual pensions plans). These are also ‘open’ but, as the name suggests, only to individuals. They are managed by insurance companies. The sum paid in is invested in a fund that is usually managed by the insurance company itself. Each pension plan will incur management costs, entry and exit costs, separation costs and so on. If the plan is low margin (so with reduced risks) then it is important to remember that a part of the earnings will be eaten up by costs.
Finally, there are ‘closed’ or ‘negotiated’ funds where membership is limited to specific categories of worker and the terms are defined based on agreements between Italy’s various trade union and employer organisations. Workers are free to join a closed fund as well as an additional supplementary pension scheme.
There are various kinds of pension funds – open, negotiated or individual managed by insurance companies
With a range of options available, workers can decide how much and how often to pay into their plans - a percentage of their monthly salary, a lump sum at the end of the year, or they can choose to vary it based on income and expenditure (this could be an option for the self-employed). Italian workers also have the option to invest their severance pay in such funds, though there is no tax benefit. Any other amount paid in is tax deductible up to a maximum of 5,164 euro per year.
In Italy, supplementary pension plans can be accessed on reaching the official retirement age and provided that payments have been made for at least five years. The pension can be taken in the form of a monthly payment or 50% in a lump sum and 50% in monthly payments.
Before deciding to invest in any supplementary pension plan, it is worth weighing up the risks and advantages as well as calculating how much you can afford to invest, what that will cost, how much you are prepared to risk, how far off retirement you are and what you will need to live on in the future. It is also worth considering that a supplementary pension is not a guarantee against inflation or diminished purchasing power.