Benjamin Franklin said that in this world, only two things are certain: death and taxes. While taxes are unavoidable, how and when you pay them need not be. And it is precisely this difference – between what is inevitable and what is poorly planned – that many taxpayers are unaware of as the year draws to a close.
We are just weeks away from closing an opportunity that has been open all year. It doesn’t appear now, but it ends with the calendar. For those who file a complete income tax declaration, receive taxed income and contribute to the INSS or to their own pension plan, this opportunity has a clear name: the annual contribution ceiling in PGBL type pension plans.
Up to 12% of gross taxable income for the year can be allocated to this type of plan and deducted from the tax calculation base. In practice, this means stopping paying income tax on income already received. Many see this mechanism as a simple tax deferral. The reading is correct, but incomplete.
Without the PGBL, these same incomes would already be taxed today, possibly at the maximum rate of 27.5%. With PGBL, payment is deferred. And, in the meantime, the money that would immediately go to the taxman remains invested and brings in income. In practice, unpaid tax begins to behave like capital and works in favor of the investor.
John Locke, in discussing the reason for the existence of the state, stated that “the great and principal end of men who unite in political societies is the preservation of their property.” Tax planning is not about bending the rules, but about organizing choices within them to protect assets over time. Deferring tax, in this case, does not eliminate the obligation, but preserves resources so that they continue to produce value.
There is also a second relevant effect. In the regressive social security system, after ten years, the income tax rate is reduced to 10%. In other words, tax that would be paid today at a high rate may be paid in the future at a lower rate. Tax is levied on the principal and income at the time of redemption. But it is precisely this principal which would already be imposed from now on. The difference is that in this interval it has increased and can be taxed more lightly.
In addition, private pensions preserve two other little-noticed but powerful advantages: the absence of quota payments and the absence of income tax payments during investment exchanges. Unlike traditional funds, there is no half-yearly income tax advance. All capital continues to earn continuously, without the silent erosion caused by recurring taxation every six months or during exchanges. In the long run, this detail makes a significant difference in the final assets.
Another point that has gained importance in the recent scenario is the creation of a minimum income tax. In this context, the PGBL plays an additional role. The contribution reduces current taxable income and the appreciation of assets over the years is not considered annual income for the purposes of tax base composition. This is a deferral which, in addition to deferring tax, makes it possible to organize the flow of declared income over time.
There is also the benefit of reducing costs and bureaucracy associated with succession of assets.
It is not common to find a financial decision that brings together all of these benefits without requiring sophisticated structures, high costs or increased risk.
This mechanism is, however, limited. It is only worth up to 12% of taxed income for the year and cannot be combined. Anything not used by December 31 is simply lost. It does not generate credit and cannot be offset later.
Therefore, the end of the year does not create a benefit, it simply ends the possibility of using it. For those who follow the rules, ignoring this advantage is neither prudence nor conservatism. It’s simply a matter of agreeing to pay more taxes today, without needing to.
Taxes may be right. Inefficiency, no. In decisions like this, what separates good outcomes from future regrets is rarely financial genius. It almost always takes discipline to act before the calendar counts down.
Michael Viriato is an investment advisor and founding partner of Investor House.
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