A few days ago, I started to question some of my fiscal advantageous investments. What if I could do it better myself? What would you do based on the numbers?
First, some background: In Belgium, we can save up 2260€ in a fiscal the long term savings (LTS) account. This is typically done when you are not eligible for fiscal mortgage deduction. This is the case I am in. As a fiscal advantage, you get a tax return of 30 pct or 678€, so you only spend 1582€ out of pocket for an investing of 2260€. Great deal! Free lunch!
Wait, there is no such thing as a free lunch. What is the catch?
- Your money will be taxed 10pct when you reach the age of 60 (current law). That is on the total amount, after all compounded gains.
- There are hefty penalties when you acces you money before the age of 67.
- It is an insurance product that typically yields just above inflation.
- At entry, you have to pay 2 pct taxes and probably 2pct fee. So, actually, the at-the start tax advantage is only 26pct.
What is the alternative?
As alternative, I could invest myself, each year 2260€ into an investment vehicle of my choice. This means:
- The money is always available, no penalty when withdrawn befor the age of 67.
- There is no capital gain tax (not yet, no idea what the long term fiscal rules might be) and a very small trading tax (0,27%). And do not forget the trading fee.
- No 30 pct fiscal advantage.
- Potential higher yields than inflation. Long term stats are surely support this
Setting up the comparison
As humans are not good in compounding, I set up a spreadsheet to do the math for me.
Yearly investment in the LTS account: 2260, you pay 2pct tax and 2 pct fee and you reinvest the tax benefit back into the market.
This compares to investing yourself the 2260 per year in the market (after trading feed off course)
I setup a comparison between different market returns (ranging from 3 to 7pct) and different LTS insurance returns (ranging from 2 pct to 4 pct)
The result somehow surprises me. I expected the do it yourself approach to be far more ahead of the fiscal saving. This is not always the case. The reason is simple: in my model, I reinvest the tax refund in the market as well. Hence, the real difference in performance is on a smaller part (roughly 70pct) and the tax advantage is on 100 pct of the money. That makes a big difference!
As it is hard to look 20 years ahead, Ii is difficult to pick a place in the grid.
For LTS, we can assume that the average for the past 10 years was approx 3pct with a declining trend. The blue line is the market average (source: spaargids.be) The light blue area is the best in class each year. Notice the similarities with the obligation rates.
My initial idea was to do it myself. Given the that we are rather to a peak in the market than a low, It is hard to expect long term stock averages of 7pct.