December is here, and with it, the flood of contributions to pension plans, most of which receive contributions only at the end of the year. Today we will see why this practice can lead to a loss of more than 2% a year, as opposed to making regular contributions throughout the year.
More than half of the contributions are left until the end of the year.
As this is so, and the entities already know it, the greatest efforts to attract contributions are made at this time of the year. In fact, we have been hearing all November about gifts for transfers, for contributions… Which, by the way, increasingly require more and more permanence; in some cases up to 8 years.
However, what is worrying is the lack of knowledge that this practice causes a real high loss compared to the yield that our pension plan could achieve if we were contributing throughout the year.
Why is it better to contribute to the pension plan periodically?
There are 2 main reasons why it is really beneficial to contribute throughout the year and not to accumulate it in a specific period
Savings do not occur in December, but accumulate throughout the year.
Something that seems as simple as that, what it comes to say is that the savings that we achieve month after month remains wasted in our bank account the potential yield that we could cause in that time until we make the contribution at the end of the year.
Example: if at the end of the year we contribute 2,400 euros to the pension plan, it means that I have saved approximately 200 euros per month. If at the end of January, February, March… I put that money in as I accumulate it, I will generate a yield during: 11 months, 10 months, 9 months… so on and so forth. Instead of waiting until December to put it in all at once.
The risk of buying too expensive
If we only invest a large amount of money at a single point in time, instead of spreading it out over the year, we may find that we are “buying expensive”.
This is an obvious risk, and it shows that, when we invest in non-guaranteed pension plans (e.g. mixed, which are our favorites), they go up and down throughout the year…
If it turns out that it has been a very good year and the pension plan has been revalued by 7%, and then you go and contribute your 2,400 euros, you are “buying it at a premium”. If you had done so during the year, you would have been acquiring assets over time, minimizing the risk of these fluctuations working against you.
How much do I lose if I do not make regular contributions?
The experts at Abante Asesores say that, according to data from the last 20 years, we are talking about an annual average of 2.7%. This estimate is applied to pension plans with a high percentage of risk, not precisely with PPAs.
In any case, if your purpose with the pension plan is to maximize your savings and benefit from its favorable taxation during the contributions, we advise you to consider this option, without a doubt, since the long-term profitability will be very high.
If you want us to help you choose the best alternatives, we work with 20 insurance companies, among them are the leading national managers. Talk to our Savings and Investment Department and they will help you to know how to choose the right pension plan.
