Financial P Pensions in Italy, as with many things, are dominated by the state. The state is the primary provider for people in their retirement and the pension system (known as The First Pillar) is funded by social security contributions made by workers and employers. When coming from a country where the emphasis is on private pensions such as the UK, the level of social security contributions can come as a shock, especially for the self-employed.
To make matters worse, it is far from certain what people making contributions into the system now will get back in the future with some estimates showing the system will collapse long before many of us reach pension age, which is also increasing at a steady rate. The article claims that INPS will implode in 2030 due to Italy’s ageing population and Tito Boeri (president of INPS until February 2019) states that the obvious answer is to encourage immigration which, with a properly implemented policy, would not only solve a looming pension crisis but make Italy an economic powerhouse once again. Immigration is a controversial subject in Italy at present and is unlikely to be encouraged over the coming years.
The result is that for younger workers (or anyone under the age of 56 if we believe the above) who may not be able to rely on the state to return the money they have invested into their INPS pension, private pensions take on a greater importance than they have in the past in Italy.
This brings us to what is known as ‘The Second Pillar’, which are supplementary pensions or ‘prevedenza complementare’. Unlike the UK system where employers are now obliged to setup a pension scheme for employees and make contributions, this is not the case in Italy so as an employee you may or may not be offered access to a private pension and as a self-employed person it is, naturally, entirely up to you to organise a Piano Individuale Pensionistico (PIP) or Fondi Pensione Aperto (FPA), which are similar although FPAs are preferable as they are generally lower cost and there is more flexibility around contributions.
If you work for a company which provides a good benefits package it is likely that there will be an occupational scheme. Legislation came into force in 2007 which obliges companies to redirect what they would have otherwise paid into a TFR (obligatory severance pay scheme) for an employer, into a private pension instead only if the employee opts to make contributions into the pension. The take-up of these pensions has been low, particularly among younger workers, as they have lower salaries so less disposable income to save, have less job security so prefer a TFR payment when leaving a job rather than tying money up into a pension. Once again, ironic in that younger workers are those most at risk of not receiving the full value of the INPS pension they are paying for.
In addition to this, there are limited tax benefits offered for supplementary pensions in Italy, currently income tax relief is given on only €5,164.57 per annum of pension contributions. The income received from this type of pension is taxed at a favourable rate (starting at 15%) if you are above the state retirement age and there are some circumstances where you can access the funds prior to state retirement age, such as being unemployed for an extended period, but you are then taxed at a higher rate on the income.
Generally pensions work on the basis that you receive tax relief on contributions and pay tax on income. This encourages contributions into a structure where your money is essentially locked away and inaccessible for what could be decades. If you are not receiving tax benefits, or they are negligible for doing this then saving into a pension becomes unattractive.
For the self-employed, of which there are many in Italy, the situation is made worse by the products available. PIPs are almost entirely offered by Insurance companies while FPAs are also offered by some banks and investment management firms. An unfortunate aspect of my job is that annually I have to trawl through the product information of many of these to see if we could actually recommend any of them as being a good solution. The cost, limited investment options with poor returns and lack of flexibility do not make them appealing. Some are better than others but it feels like picking the best of a bad bunch.
Occupational schemes sometimes offer a more attractive option than FPAs and PIPs, as large organisations will negotiate preferential terms with a provider for their employees. However, it is important to assess the pros and cons of the scheme before committing.
We believe that there are far better ways to save money than these products and while legislation remains the same there is a negligible tax advantage in saving into an FPA, PIP or an occupational scheme unless your employer is making considerable contributions, at least above TFR levels.
In conclusion, considering the problems INPS face in the future the private pension system is in dire need of reform. However, the bottom line is that Italian residents need to save for retirement and cannot rely on the state to support pensioners to a reasonable level as they do now.
While private pension options and the level of tax relief currently available are underwhelming there are alternatives which can provide a cost effective platform to save and grow money and when they are of reasonable value there are Italian compliant tax efficient structures which can be used which would likely allow a more efficient retirement plan than using a traditional pension in Italy.
If you would like more information about this then please get in touch, we are happy to speak to people and offer an initial retirement planning consultation free of charge and without obligation.lanning Webinar for US Connected Persons in Italy.