Do you want to get 3 years’ worth of stock returns paid to you for doing nothing, risk free?

This sounds like a scam a “Nigerian prince” would send you, but you can actually do this in Malta on up to 3k worth of your investments per year, through a government tax benefit in a retirement plan. The catch is that, since this is part of a retirement plan, the investments should be withdrawn when you retire. Nonetheless, the incentive is high and should be the first opportunity to be exploited by all Malta based investors.

How do these Pension Plans Work?

It works very similarly to a mutual fund. A mutual fund is when a professional investment company gathers money from a lot of people who want to invest, and use that pot of money to go out and make good investments. Then, the investors share the pool of profits whenever they want to withdraw money.

A pension plan differs in that, once you deposit money, that money can be invested in a lot of different mutual funds that are within the pension plan, and your money is normally withdrawn at retirement.

The restriction that you need to withdraw only at retirement is a negative point, but it is outweighed by the fact that the government gives you a tax rebate on 25% of the money you invest, up to 3k per year. This means that, effectively, if you invest €3,000 this year, you’re starting with €3,750, as every year, you can claim this tax rebate of up to €750.

Since the typical rate of return in the stock market is about 8% on average, you’re getting 3 years worth of returns for free, with no risk. Over and above this, a certain portion of your pension is tax-free when you withdraw it.

Why is the government doing this?

At the moment, public pensions work by putting a social security tax on working-age people and that money collected is directly used to pay the public pensions of the retired people. No money is invested.

This system is fine for now, but what happens if there are many more retired people compared to working-age people in the future?

This is what’s going to happen, and the taxes collected from working-age people may no longer be enough to cover pensions. For this reason, the government is encouraging people to invest in private pension plans to supplement their public pension, and therefore not rely on the government as much in the future. The incentive they’re giving is the 25% tax rebate on pension plan investments.

What if I don’t know what to invest in?

This is not a problem. To take advantage of this, all you need to do is have money to invest and be willing to invest it. If you go to any professional Maltese company that offers pension plans, such as BOV, MeDirect, Mapfre and so on, they will do the rest. They can recommend the portfolio of investments suited to you.

To our knowledge, for most pension plan providers, if you want to pick your investments but still benefit from the 25% tax rebate for pension plans, you can tell them what exact investments you’d like to put in your pension plan

Should I do a Pension Plan?

Having your money invested from now until you retire seems daunting and is the primary reason why people don’t invest in pension plans. However, every additional year you remain invested makes a huge difference. The difference between 30 years and 35 years invested is huge.

The best thing to do is have some money in your pension plan, that money you know you will not need until retirement. Then have a separate account with your normal investments.

Learn more about these great Pension Plans in Malta by listening in to our podcast below:

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Disclaimer:
Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.

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