Private pension plans: new rule provides flexibility in tax regime choice

Investors can now select their tax regime upon initial withdrawal of funds

On January 11, the Federal Government enacted Law No. 14,803/2023, amending the regulations that govern the taxation of private pension plans, which include the PGBL and the VGBL. The new legislation provides more flexibility for investors, allowing them to choose between the progressive or regressive tax regime until the first withdrawal or redemption of accrued benefits. Under the previous rules, the choice could only be made at the time of enrollment.

The change applies to accumulated entitlements in benefit plans managed by private pension funds, insurance companies or Individual Retirement Funds (Fapi).

In addition, if a participant has not selected their tax regime of choice, the rule allows their dependents, beneficiaries, or legal representatives to make the decision on the former’s behalf.

This act represents a substantial improvement in the Brazilian private pension system. Previously, the decision had to be made by the last working day of the month following the participant’s enrollment. Now, investors are able to defer this choice to a later point in time where it is more feasible to predict which scheme will be the most favorable.

See below the differences between both tax regimes and how they affect the taxation of investment income:

Regressive scheme x Progressive scheme

Upon enrolling in a private pension plan, investors are given the option to choose between two tax regimes: the regressive scheme, with rates varying based on how long their investment is held, and the progressive scheme, where the rate is determined by the amount to be redeemed.

Regressive rates

Under the regressive regime (also known as "definitive"), the Income Tax (IR) amount is not determined by the specific amounts involved but rather by the duration of the investment. In this case, the rates are exclusively paid via withholding.

In simpler terms, the longer the investor waits to redeem their funds, the lower the tax burden, and there is no adjustment to the annual Individual Income Tax brackets.

The regressive table starts with a 35% rate for withdrawals over the first two years and is reduced by 5% every two years thereafter, reaching a minimum of 10% for withdrawals made after 10 years of investment.

Regressive Income Tax Rates
Accumulation period	Rates
Up to 2 years	35%
From 2 to 4 years	30%
From 4 to 6 years	25%
From 6 to 8 years	20%
From 8 to 10 years	15%
More than 10 years	10%

Progressive rates

Under the progressive scheme (also known as "offsetable"), income tax is levied at the rates specified in the brackets disclosed by the Federal Revenue Service, which range from 0% to 27.5%. According to this framework, the rates are determined by the earnings redeemed by the investor in the corresponding year, irrespective of the duration of the investment.

It should be noted that the progressive brackets involve a 15% withholding tax rate. Upon filing your annual income tax return, this amount will be adjusted and may be offset upwards or downwards relative to the information provided in the corresponding tax return.

Progressive Income Tax brackets for the year
Annual Taxable Income	Income Tax Rates	Deductible Portion
Up to BRL 24,511.92	Exemption	-
BRL 24,511.93 to BRL 33,919.80	7.5%	BRL 1,838.39
BRL 33,919.81 to BRL 45,012.60	15%	BRL 4,382.38
BRL 45,012.61 to BRL 55,976.16	22.5%	BRL 7,758.32
More than BRL 55.976,16	27.5%	BRL 10,557.13

What to consider when choosing a tax regime

The decision between the progressive and regressive tax regimes hinges on various factors, including the investor's profile, the invested capital, and the timeframe for redemption.

The progressive regime proves more beneficial for individuals with smaller investments, which fall below the 27.5% rate in the table, or for those planning to redeem their investments in a shorter period. On the other hand, regressive taxation is recommended for individuals aiming to maintain their accumulated pension funds for extended periods, irrespective of the invested amount.

Choosing between these two schemes should be a part of an individual's tax planning, thus it is advisable to seek specialized support for making an informed decision.

Tax support for individuals

DPC has a department focused on providing guidance on tax planning for individuals interested in making investments in private pension funds, ensuring compliance with tax authorities. You can rely on our support: dpc@dpc.com.br.