IKZE – one of the ways to retire with dignity

In one of the previous articles, we mentioned about IKE, or Individual Retirement Accounts. This is not the only way to build pension savings using the third pillar. Another idea is to use Individual Retirement Accounts. IKZE is an interesting way to take advantage of tax reliefs that help build capital for retirement.

Why should you save yourself for retirement?

There's no need to cheat. Most Polish citizens do not have enough net wealth to ensure a stress-free life in retirement. The capital collected in the first and second pillars of the Polish pension system will not be able to ensure the replacement of remuneration received before retirement. Moreover, most households do not have other significant liquid assets that could be used to sustain a standard of living in retirement.

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A modest pension will not provide sufficient funds to maintain the standard of living at an unchanged level. That is why it is worth building your property a safety cushion, instead of counting on the future action of the authorities. Movement is gaining popularity in many countries FIRE (Financial Independence Retire Early), which suggests increasing your savings rate to become financially independent.

Financial independence makes a person less stressed about economic matters. It is also less susceptible to attempts to "bribe voters" through money transfers. In order to save, it is necessary to increase income so that capital can be built up faster. In addition to this, you should also limit your standard of living below your earning potential.

To build wealth and become financially independent, you must:

• Creating a fund to protect against unexpected expenses;
• Pay off all consumer debts because you save on interest;
• Creation of a fund, the size of which is equal to half-yearly expenses;
• Saving for retirement (III pillar and other ways);
• Overpay your mortgage;
• Further multiplication of wealth.

The "protective" fund is a basic element of building financial independence. The amount of the fund does not have to be large. As a rule, a few thousand zlotys are enough. The funds from this fund are invested in short-term deposits or savings accounts. The money accumulated in this fund is to cover unexpected expenses, such as car repair or repair of household appliances. Upon breach, the person should immediately "rebuild the fund".

Paying off consumer debt is also one way to build wealth. What's more, reducing debt "guarantees" a profit in the form of no need to pay interest. The higher the interest rate on your debts, the greater the benefit from paying off the debt. Very often the interest rate is higher than the average profit from investing funds on the capital market (except in the case of a sudden crash, which makes share prices very attractive).

A fund equal to 6 months of expenses is an insurance policy that provides a "safety cushion" in the event of job loss. Knowing that you have time to find a job, you can easily negotiate your salary. Unfortunately, many even well-earning people have problems with building such a fund. A lavish life means that many high earners do not even have a fund equal to the monthly household expenses.

Saving for retirement is the next step that a person who cares about financial independence must take. After providing funds for unexpected expenses and a 6-month safety cushion, you should build capital for the future. You can put money in investment funds, Insurance Capital Funds, in real estate or by buying securities yourself. You can also use legal ways to optimize tax costs. Such solutions are IKE, IKZE, PPE or PPK. It is a long road that lasts until you build a fortune that ensures financial independence.

Overpaying your mortgage is a step that can be taken along with saving for retirement. Overpaying the loan reduces interest costs and increases net worth as mortgage debt falls. Of course, you should consider whether it is better to allocate funds to an investment that provides a higher rate of return.

Further multiplication of funds is to ensure an increase in the standard of living without necessity "eating wealth". It is necessary to diversify and watch the achieved rate of return at an acceptable level of risk. At a later stage, the multiplication of wealth will be done "semi-automatically" (e.g. by having ETFsstocks or real estate). Thanks to this "semi-automatism" a person will be able to enjoy a high standard of living and a lot of free time that can be spent on his hobbies.

How to minimize the tax impact

Taxes are one of the reasons that make it difficult to build a net worth. There are several ways to reduce taxes. The most popular legal means is postponing the moment of cashing in the investment. This allows you to defer the payment of capital gains tax. However, it is worth noting that in this way it is not possible to defer the payment of tax on dividends or bond coupons received. For most people, setting up their closed-end investment fund is too expensive. The same applies to the change of tax residence. However, there are ways to defer tax also for "ordinary Smiths". Such solutions are IKE and IKZE.

What is IKZE?

The Individual Retirement Security Account was launched on January 1, 2012. Pursuant to the Act, IKZE allows you to collect funds for an additional pension. The available funds are not large. During the year, you can pay them 1,2 times the average monthly salary in Poland. From 2021, micro-entrepreneurs can pay 1,8 times the average monthly salary in the economy.

The Individual Retirement Security Account is largely based on the Individual Retirement Accounts (IKE) functioning since 2004. It is worth noting, however, that IKZE offers its participants a tax preference (tax deduction). Therefore, it allows to reduce the tax burden on natural persons (the so-called PIT).

Every person over 16 years of age has the right to deposit funds into IKZE. However, for those under the age of 18, they can only deposit money if they have been paid on the basis of an employment contract. The Individual Retirement Security Account may also be held by persons who already have an IKE account, an Employee Pension Program or an Employee Capital Plan.

The funds accumulated in IKZE may be advantageously withdrawn only at the saver's request after he or she reaches the age of 65. The capital paid out from IKZE is taxed with a flat-rate income tax of 10%. You can also withdraw funds earlier, but then it is necessary to pay tax on the collected funds in the following year in the amount of 12% or 32%.

An Individual Retirement Security Account may be maintained by:

• Banks
• Dom Maklerski
• Insurance Company
• Universal Pension Society
• Investment Funds Association

IKZE as a savings account

This type of Individual Retirement Security Account can only be offered by domestic banks. Domestic banks are all banks that operate in Poland and are regulated by the Polish Financial Supervision Authority. The savings account is a very safe product. It does not provide high rates of return. The advantage of IKZE as a savings account is the avoidance of capital gains tax.

IKZE in an institution conducting brokerage activities

By selecting the offer of the Brokerage House, the investor can invest his funds in regulated securities markets. Thanks to this, the investor can buy shares, bonds, ETFs, derivatives or structured instruments. The investor can build his own investment portfolio, which will be tailored to the investment profile. Thanks to IKZE, it is possible to achieve a higher, effective rate of return on investment, because capital gains tax is deferred.

Signing an agreement with an investment fund

The investment fund offers professional asset management services. By employing professionals, investment funds try to beat market benchmarks. However, it is worth remembering that they charge management fees for their services and sometimes additional commissions (on profits, handling fees). The advantage is the wide range of products. The advantage of using IKZE is the deferral of capital gains tax at the time of redemption of participation units. Thanks to this, the investor can allocate his funds actively without the risk of payment "Beam Tax". However, IKZE does not protect against fees for redemption of participation units.

IKZE in the Life Insurance Company

This is a rare way to set up an Individual Retirement Security Account. Most often, the product is a life insurance contract combined with a unit-linked insurance fund (Ubezpieczacyjny Fundusz Kapitałowy). Pursuant to the signed agreement, the customer determines what part of the amount will be invested in insurance and what part will be entrusted for investments using unit-linked funds. Of course, before signing the contract, it is worth looking at the costs of early resignation from the unit-linked contract.

Benefits of IKZE

One of the most important benefits of IKZE is the possibility to deduct the amount paid from PIT. Depending on which tax threshold the taxpayer is subject to, the savings may amount to 2022% or even 12% in 32. In 2022, the payment limit was PLN 7. This means that in the case of a maximum payment, the tax benefit will be PLN 852 (12% threshold) or PLN 2273 (32% threshold). The solution is particularly attractive for people in the second tax bracket.

It is also worth noting that if the program participant has been paying funds for at least 5 years and is over 65, he will pay 10% tax at the time of withdrawal. It is therefore beneficial for long-term saving. Thanks to this, the investor does not have to pay capital gains tax every year.

Disadvantages of IKZE

IKZE also has its disadvantages. One of them is a small capital that can be deposited into the account. For this reason, this product is only one source of your future retirement. The capital accumulated in IKZE will not be able to ensure security in retirement.

Another disadvantage is the need to pay 10% tax on the capital accumulated under IKZE at the time of withdrawing funds from the account. This may discourage some people from saving under this project.

Similarities and differences between IKZE and IKE

IKE and IKZE are pension products related to the so-called third pillar. These retirement accounts are also similar in terms of the age for making contributions (from 16 years). Another similarity is the possibility of inheriting funds, which is possible both in IKE and IKZE.

However, there are many more differences. The table below explains in detail what are the differences between IKE and IKZE.

Can funds from IKZE be nationalized?

This is a question that many give as an argument against not using the mentioned solution. The reason for such disbelief is the behavior of Polish politicians in connection with the "reforms of the pension system", which resulted in a significant reduction in the scale of operation of Open Pension Funds. The "reform" of the second pillar has led to a decline in confidence as to whether the solutions from the "third pillar" will last in an unchanged form until the retirement age is reached.

It is worth mentioning, however, that the reforms of the pension system concerned funds financed from pension contributions. On the other hand, solutions such as IKE or IKZE are financed from private funds. The chance of nationalizing such funds is the same as real estate bought with savings or cash accumulated in a bank account or brokerage account. They are therefore private assets of individuals that cannot be nationalized without amending the Basic Law (i.e. the Constitution).

The probability of the scenario of nationalization of funds from IKE or IKZE is close to zero for the time being. Of course, you should check the election polls and check the economic views of the major political parties. Due to the low risk of nationalization of funds, it is worth considering whether to take advantage of the reliefs available to persons using Individual Retirement Security Accounts.

Who should use IKZE

The Individual Retirement Security Account (IKZE) may be an interesting idea for many people. Can be replaced:

• Already saving for retirement;
• Located in the second tax bracket;
• The person irregularly paid money to IKZE and is approaching the age of 65.

If someone is already accumulating funds for retirement, he or she should transfer some of the funds to IKE and IKZE accounts. Thanks to this, he will be able to make tax optimization, which will increase the rate of return on investment.

People in the second tax bracket should use IKZE to be able to deduct 32% of the amount paid into the pension account. Given that at the time of withdrawal of funds (after reaching 65 years of age), the tax will be 10%. Micro-entrepreneurs who pay 19% tax (7 percentage points more than most full-time employees) also have a lot to gain. What's more, micro entrepreneurs can pay a much higher amount to IKZE. In 2022, instead of PLN 7106, PLN 10.

If a person is approaching 65 years of age and has not systematically saved in IKZE, he may not benefit from the flat-rate tax of 10%. To take advantage of the preferential taxation, you must be over 65 and pay into IKZE for 5 years.