PEA or ETF savings plan?

When planning for a future of financial peace of mind, we can adopt different strategies according to our savings capacity, needs and objectives.

In the current economic context, which is marked by inflation that may erode our future purchasing power (i.e. our ability to buy goods and services), the search for higher returns in the capital market may make sense.

Savings accounts are one of the preferred solutions for savers, particularly the more cautious, but they may not be enough to offset the loss of purchasing power caused by the general rise in prices. On the other hand, investing in the stock market through an equity savings plan or an ETF savings plan allows you to benefit from the growth of some of the world's best-performing companies, and the potential return can, in some cases, be higher than inflation.

Below, we provide an in-depth analysis and comparison of the PEA and ETF savings plan.

What is a PEA?

The savings plan in stocks or Plan d'Epargne en Actions (PEA) is a regulated savings product that allows its holder to acquire a portfolio of shares and potentially benefit from tax exemptions. The French authorities define 3 types of PEA: the classic bank PEA, the classic insurance PEA and the PEA-PME. The latter has a higher payment limit and can be combined with one of the other two.

The return on a PEA is not guaranteed. It allows you to buy shares in European companies, but does not offer a capital guarantee, as its return depends on the performance of the investment instruments.

How is PEA taxed?

One of the main advantages of a PEA is that these gains are exempt from income tax. However, this PEA tax system requires certain conditions to be met. In the event of a withdrawal within the first 5 years of the savings plan, not only are the gains taxed normally, but the PEA is also closed. If unlisted securities are held in the PEA, the tax exemption is limited to 10% of the acquisition value of the securities.

Regardless of when the PEA was opened or the type of securities held, all profits from the PEA are subject to social security contributions such as CSG and solidarity tax.

The myths of the PEA

For many people, subscribing to a PEA seems attractive, either out of habit or based on information such as the fact that this method of saving is tax-free, or that the capital can be deposited without risk. Both statements are false.

In reality, there are several alternatives to savings plans that may be more advantageous from a tax point of view, but they also offer other benefits, such as greater transparency (regarding what happens to contributions), profitability (how much our payment earns us), and liquidity (the money is easier to withdraw).

As for taxation, while the PEA is exempt from income tax under certain conditions, it is still subject to various social security contributions.

ETF savings plans: an alternative?

Plans to invest in ETFs (exchange traded funds that track a stock market index) can complement or replace these investments to increase wealth over the long term. They allow you to diversify your investment strategy (i.e. not put all your eggs in one basket: regions, companies, sectors, asset classes, etc.) with a regular contribution of just €1 per month.

While the PEA is reserved for European equities, the ETF savings plan is not subject to this limitation and allows you to invest in equities from all over the world, bonds, commodities and precious metals and even cryptocurrencies. The PEA has a ceiling of €150,000, unlike the CTO (compte-titres ordinaire or securities account) savings plans, which has no ceiling. However, ETF savings plans do not benefit from tax advantages.

Another interesting concept is the effect of compound interest: the added value of regular payments is reinvested in the plan, with capitalising ETFs, which can make the capital grow exponentially. Finally, ETF savings plans are more flexible than other instruments such as the PEA, which we analysed earlier, since they can be interrupted or adapted at any time.

Once you've looked at 'traditional' PEAs and CTO ETFs savings plans, it's up to you to decide which type of investment best suits your situation and needs. Or even to recognise a certain complementarity between the two, both serving the same purpose in different ways.