All articles · 2024-10-30 · Pension
What are the disadvantages of an IPT insurance?
An IPT insurance offers many advantages for self-employed individuals and company directors, but also has some disadvantages, such as limited flexibility and tax…
By Jan Hermans, CEO & founder of Lyff.
An Individual Pension Commitment (Individuele Pensioentoezegging or IPT insurance) is a widely used way for company directors to build up an supplementary pension through their company (vennootschap). Although this option is often praised for its tax advantages, there are also some disadvantages and points of attention that you should take into account. Below, we discuss the most important ones.
1. Strict conditions and the 80% criterion
The tax advantages of an IPT are only valid if you meet the 80% criterion. This means that the sum of your statutory and supplementary pension may not exceed 80% of your last gross annual salary. For company directors with a low salary, this can be restrictive, as they may not be able to fully utilize the premium.
2. Tax advantage is tied to the company
An IPT insurance can only be taken out through a company. This means that self-employed individuals without a company cannot use this pension solution. Furthermore, the pension must always remain at the expense of the company, which offers less flexibility if you want to shape your career differently.
3. Complexity and the need for advice
An IPT insurance requires a certain level of tax and legal knowledge to utilize its benefits. Without professional advice, you risk unexpected costs or incorrect calculations. This can entail additional expenses, as you may need a tax advisor or pension planner to optimally manage the IPT.
4. Taxes upon pension payout
Although the premiums are tax-deductible, the payout is taxable upon retirement. Depending on the timing and form of the payout, these taxes can be substantial, reducing the net result. The effective return may therefore turn out lower than expected.
5. Limited liquidity of the accumulated capital
An IPT insurance is intended as a pension instrument, which means that the accumulated capital has limited availability before the retirement age. Although an advance is possible for real estate, the capital cannot otherwise be used for other purposes. This makes it less flexible than, for example, other investment options.
6. Low guaranteed interest rates
The interest rates associated with an IPT insurance are generally low. This can limit the return, especially if you start building up a pension early. In periods of high inflation, it is possible that the value of your capital stagnates or even decreases in real terms.
7. Rising inflation and loss of purchasing power
Because the returns from an IPT insurance often do not keep pace with inflation, your purchasing power can significantly decrease over the years. This applies particularly to defensive financial products, such as some IPT insurances, which focus on capital preservation and less on growth.
8. High costs and commissions
Depending on the provider, the costs for an IPT insurance can be considerable. This can range from administration fees, entry and exit fees to management fees, which can negatively impact the return in the long term.
9. Regular adjustment required to maintain tax benefits
Since the 80% criterion is based on your last salary, you must regularly adjust your salary to your pension accrual to stay within the tax limits. This requires constant monitoring of both your salary and your pension plan, which takes time and energy.
10. Risk of death cover is limited
An IPT insurance usually offers a basic death cover, but this cover may be insufficient to financially protect your family in the event of premature death. In many cases, additional death insurance is necessary to be fully insured, which entails extra costs.
11. Administrative burden and obligations
An IPT insurance entails obligations, such as periodically recalculating the pension amount. This requires administrative follow-up and can be complex for company directors who prefer to focus on their business.
12. IPT insurances are subject to regulation
Regulations surrounding IPT insurances can change, causing tax benefits to shift. Company directors must stay informed of new laws and rules to avoid unexpected changes.
13. No immediate return
Unlike other investments that can yield immediate or short-term returns, IPT insurances are long-term solutions. Those who want their capital to grow quickly will find that the return in an IPT insurance builds up slowly.
14. Capital-bound and less flexible than other investments
An IPT insurance is capital-bound, which means it offers little flexibility to quickly respond to market fluctuations. Other investment options, such as stocks, bonds, or real estate, can offer more flexibility for those who want to actively manage their investments.
15. Limited adaptability to changing personal situations
In the event of a change in your personal situation, such as a change in your company structure (vennootschapsstructuur), the IPT insurance can be complex to adjust. This limits the option to quickly respond to a new financial situation.
16. Costs for surrender or modification of the policy
Those who wish to terminate their IPT insurance prematurely or transfer it to another insurance policy will often incur costs and penalties. This makes it expensive to change the IPT insurance in the interim.
17. Risks upon liquidation of the company
If the company from which the IPT insurance is financed runs into financial difficulties, this can have consequences for pension accrual. In some cases, this may mean that pension rights are less secure than expected.
18. Dependence on the insurer's return
The return of your IPT insurance is highly dependent on the insurer's performance. In a low-interest environment or disappointing results from the insurer, your return may turn out significantly lower than you initially hoped.
19. Little transparency in investment options
Many IPT insurances offer limited investment options, and the transparency regarding the costs and returns of these options is often insufficient. Company directors therefore sometimes lack insight into the risks and returns of their pension accrual.
Conclusion: Consider alternatives
While an IPT insurance offers advantages, there are also significant disadvantages and limitations. For company directors who value flexibility, growth opportunities, and lower costs, it may be interesting to also consider alternative pension and investment options. Let a pension advisor assist you in optimally aligning the pension plan with your situation and goals.