Politicians are fine-tuning an instrument that is supposed to induce the Czech Republic to invest in the long-term and thus improve the miserable provision for retirement. A long-term investment product wants to attract the possibility of writing off almost 50 thousand from taxes.
Czechs save for pensions for many years, but only insufficient amounts, which are also of little value to them – the third pension pillar does not work. According to Anna Píchová, chief analyst at Cyrrus, the new long-term investment product will not save it.
“For me, a long-term investment product is not a solution to the failing third pillar. Especially for middle to low income citizens who need to be motivated to save and save, it is less motivating than I would imagine. It will interest those who are already involved in investing and have put it aside, rather than those who are completely unaware of it.”
According to Anna Píchová, the best way for the state to encourage people to invest would be to deduct money directly from their salary and transfer it to a selected fund.
“The best motivation to improve the situation of people in old age would be to establish a pension fund like they have in the West. Some percentage of the salary, which is now paid for pension insurance, would be directly and automatically invested in a compulsory fund. According to personal preferences. That would be a great pension reform.”
Her proposals are strikingly reminiscent of the “second pillar”, which was introduced by the Nečas government with effect from the New Year 2013 and which was later canceled by the Sobotka government in the New Year 2016. With the difference that at that time, unlike in other states, entry into the system was voluntary.
The so-called DIP is now heading for its third reading. How is it supposed to work? The investor sets up a special investment account with one of the institutions to which he regularly sends money. Either into specific shares, mutual funds or funds traded on the stock exchange, so-called ETFs or even into government bonds.
You can deduct up to 48,000 crowns from your taxes each year. He can thus save around seven thousand a year on taxes. The final amount can be withdrawn no earlier than after ten years and at the age of 60.
Pay as an annuity
According to Anna Píchová, the state missed the chance to motivate people to withdraw the accumulated money gradually as an improvement to their pension and not all at once. After all, this is also a disadvantage of the existing supplementary pension insurance. Despite the support of the state, people end up using it for a completely different purpose.
“It is striking that a new alternative is being created and the criticism that is there against the current supplementary pension insurance is not taken into account. At the same time, the amendment considers that one-off withdrawals will be limited for the current supplementary pension insurance. While a long-term investment product does not. It’s not quite well balanced for me,” complains Píchová.
While DIP could make the younger generation start saving regularly for old age, it probably won’t pull savings from old pension funds into investments, thinks Anna Píchová.
“It does not attract newcomers to invest and save. But maybe it will motivate the younger generation to set up some such product and send money there regularly. But that a large part of the population would suddenly wake up after the approval of the law and say to themselves, we’re finally going to start putting it aside, I really don’t expect such interest. Some people stay in transformed funds for a long time despite zero returns. Even though there were better alternatives and they could have left.’
At the end of the third quarter of 2023, a total of 4,271,938 participants saved for their pension in pension funds. Of this, roughly 2.5 million remains in the old (so-called transformed) funds.
Anna Píchová
- He heads the analytical department of Cyrrus.
- He specializes in developing global markets with a focus on US and European equity markets. He mainly follows events in the technology sector.
- In the past, she was a macroeconomic analyst at OGResearch.
- In his free time, he practices yoga and running, loves the mountains.
What will it be possible to invest in?
The DIP Act envisages that it will be possible to invest in specific shares from all regulated markets, in mutual or ETF funds and in government bonds. Corporate bonds are not included in the current version of the law. Savings account deposits have also fallen out of support.
“There is still a question mark about the savings accounts, in the very original proposal there were also savings accounts and term deposits, however, in subsequent readings, as it passed through the House of Representatives, the savings accounts were dropped,” Píchová recapitulates.
Gold is also missing from the list. “Most Czechs really buy physical gold. What can be put on the DIP, for example, is an ETF linked to gold. Futures contracts or other derivatives are not there, the motivation should not be to speculate,” says Píchová.
Entities that will offer a long-term investment product must be regulated financial institutions, i.e. banks, stockbrokers, investment companies. And that includes foreign providers, if they have a branch in the Czech Republic.
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