Welfare is a way to guarantee a worker’s livelihood during his retirement.
The way welfare effectively occurs boils down to two circumstances:
1st. A Financial Reserve is put together through monthly contributions which are made over the period the worker is in full activity (Grace Period).
2nd. When it is time for the worker to retire, this Financial Reserve is turned into Income (Period of Benefit).
There are two types of welfare in Brazil:
I. SOCIAL and
II. PRIVATE
Social Welfare: the Financial Reserve is kept by monthly contributions made by active workers who contribute to it.
We call this regime “Simple Distribution” or, “Pact between Generations”.
Likewise, the future generations will keep the benefits of those who are working today and contribute to supporting today’s retirees.
Private Welfare: the Financial Reserve is made up of the participant himself and his future income depends on his monthly contributions.
We usually say that Private Welfare is a way to guarantee a Complementary Income to Social Welfare. Private Welfare has two types of plans:
PGBL – Free Generating Benefit Plan and
VGBL – Life Free Benefit Generator
The main difference between the two types is in the current Fiscal Benefit and in the Taxation which will fall upon future incomes:
PGBL – the value of monthly contributions could be deducted (up to 12%) from Income Tax Return. However, future monthly income will be taxed on its total, according to the taxation regime chosen (old or new). VGBL – the value of monthly contributions cannot be deducted from Income Tax Return.
However, in the future, only the part referring to profitability will be taxed out of the value of incomes.
There are products on the market meant for children, which make it possible for the responsible participant to guarantee a Future Income for school, when they (the children) are old enough to go to college or as initial capital to help put together their own business after graduation from college.
It is also possible to add risk coverage to the Private Welfare plan, such as: Reserve Fund (life insurance), Accident Disability Income, etc which guarantee the participant and/or his beneficiaries damage pay in case of Death and/or Disability of the participant.