Saving for retirement across Europe has become an increasingly troublesome issue, with roughly 20% of EU citizens at risk of poverty or social exclusion in old age. In an attempt to tackle this issue, there is plenty of ongoing innovation in the pension space, and one of the latest developments is the PEPP (Pan-European Personal Pension Product).
We’ll give you a complete explanation of how this pension product works so that you can decide if this is a suitable retirement saving option that suits your long-term goals.
What is a PEPP?
A PEPP (Pan-European Personal Pension Product) is a new type of voluntary pension savings option available to residents of the EU (European Union). It runs alongside existing pension programmes running within individual countries, examples include:
- 401k (USA)
- PPR (Portugal)
- SIPP (UK)
- RIESTER, bAV, Ruerup (Germany)
- PERCO, PER (France)
It’s a portable, transparent, and cost-effective personal pension product with the tax advantages that you’d expect from a retirement savings option. This means that you could live in Germany and invest in a PEPP offered by a Spanish investment firm. What does this mean for the industry?
On the one hand, you as an investor are no longer limited to the local pensions offered by your local providers. On the other hand, this adds competition, which often results in more transparency, a better service, and lower fees.
The PEPP does not include tax incentives, and it is up to individual member states to decide whether to offer tax incentives. The European Commission encourages member states to provide the same tax treatment for PEPP savers as for similar national personal pension products, to ensure a fair competition.
How does a PEPP work?
It’s separate from both state-based pensions and occupational pensions (your workplace pension). Essentially, it provides you with another option to save for retirement.
The PEPP is based on the European Parliament’s Regulation 2019/1238, which came into effect in March 2022 and created a single market for voluntary retirement savings for EU citizens (similar to 401(k) plans in the US).
This pension product is designed to encourage people to save and invest, which means more capital for firms, and hopefully – a larger retirement fund for you.
PEPP fees and costs
The exact fees and costs will be determined by your PEPP provider and the investment products on offer, but the total annual costs will be capped at 1%.
Who can provide a PEPP?
Pan-European Personal Pension Products (PEPPs) can be offered by:
- EU alternative investment fund managers (EU AIFM).
- Investment companies, money management companies, and investment firms that manage portfolios.
- Credit institutions.
- Insurance companies and banks.
- Institutions for occupational retirement provision (IORPs).
Currently, the only company offering a PEPP product on the EIOPA central register is Finax (if you’re interested, check our Finax Review).
Finax is a ‘wealthtech’ investment company based in Slovakia. But, its Pan-European Personal Pension product can be used throughout the EU and comes with the following features:
- Invest in your PEPP from just €10 per month.
- The fees are 0.6% (+VAT) per year (meaning a total cost of 0.72%).
- A managed investment portfolio that uses the Finax robo-advisory software, adjusting and rebalancing as you age.
- The Finax robo-advisor investing strategy uses broad market ETFs (exchange-traded funds) for stocks and bonds worldwide to give you plenty of diversification.
- You can manage everything online.
- It’s portable across different countries.
- No entry or exit fees.
- If you encourage your employer to use the Finax PEPP, you can earn €500 for each employee who opens a PEPP.
Who is the European Pension (PEPP) for?
This new type of cross-border pension product is available to a range of savers and investors between adult and retirement age:
- Individuals looking for an alternative retirement saving opportunity.
- Those who are employed full-time, part-time, or self-employed. You can also use it if you’re unemployed or in education.
- Multinational companies that want to provide all employees across various EU countries with consistent and uniform pension benefits.
- Companies that employ people across borders.
- Workers that spend time in employment in multiple European countries.
Key features and advantages of PEPPs
Here’s a summary of the main features and advantages of this personal pension product:
- Transferrable: you can switch providers every five years and the costs for doing so are capped.
- Transparent: all costs and fees will be disclosed in the Key Information Document (KID), meaning no sneaky hidden charges.
- Mobile: you can keep saving and investing with the same pension even if you move countries and change your residency within the EU.
- Affordable: basic PEPP costs are capped at 1% of the accumulated savings each year, allowing you to keep more of your returns.
- Tax efficient: the exact tax benefits may vary across countries, but the PEPP is designed to be tax advantageous.
- Safe: strict regulation of PEPPs means legislative protections are in place for your invested money.
Main disadvantages of a PEPP
This retirement savings product comes with some drawbacks to consider:
- It may only be worthwhile using once you’ve maximised your contributions to your workplace pension.
- Like most pension products, you can’t access your funds until retirement.
- The regulatory framework for PEPPs is very recent, and there may be some teething issues.
- Because it’s such a new pension product, there may only be a small choice of providers until more companies can provide more competition (possibly leading to better deals).
- The tax benefits aren’t completely clear because they may vary across different countries (and a withholding tax applies).
How the tax incentives work
This is where things get slightly murky with the PEPPs. Although this pension product is designed to be used throughout the EU, it’s unclear yet what the exact taxation rules and benefits will be.
The uncertainty is because each European country still controls how it taxes citizens. So, even though this pension product can be used in different regions, the tax rules may vary and depend on where you’re residing.
Is it safe?
Yes! Although this is a new pension product format, plenty of laws and regulations will apply. This is why there are so few providers right now – there are many hoops to jump through before an organisation can get approval to provide a PEPP.
If you need to make a complaint, you’d still have to contact your country’s financial authorities or regulators, but the EU will oversee the whole PEPP system. Along with national regulators, PEPPs also fall under the European Insurance and Occupational Pensions Authority’s (EIOPA) control.
How is the PEPP being applied in the different EU jurisdictions?
This is still a work in process. As it stands, eight countries have regulations in place:
- Czech Republic
- The Netherlands
Also, Portugal is still in the process of drafting its PEPP legislation. The exact fiscal framework for PEPPs in various EU jurisdictions is still being hashed out.
The PEPP and European Robo-Advisors
The European market, comprised of various countries with distinct languages, tax laws, and financial regulations, leads to a difficult market for Robo-advisors who want to expand internationally. To expand to different countries, they should create different investment strategies to accommodate the local policies of the country.
Because local solutions cannot take advantage of the same economies of scale as their American counterparts (like Betterment or Wealthfront), this results in higher prices or inferior products.
That’s why we find PEPPs especially interesting for the robo-advisor industry: this product could help in the growth and expansion of national robo-advisory firms to the whole European market by offering a product that works in all countries.
The PEPP may become a staple retirement fixture across the EU, but first, countries must work out exactly how they will treat this pension product. And how it will fit in with the rest of each country’s financial regulations and framework.
We’ll keep you up to date with any further developments!