Pension plans

Yes, Law 26/2014 allows contributions to pension plans that were made at least 10 years earlier (from 2015) to be redeemed. This means that, if you opened a plan in 2015, starting in 2025 you would be able to redeem what you contributed in 2015, in 2026 what you contributed in 2016, and so on.

There are other specific circumstances in which you can also redeem the investment before retirement: in cases of unemployment, disability, dependency or severe illness, among others. Ask us about the best way of doing it.

The tax relief or deduction on contributions to a pension plan are what we commonly know as the reductions in the taxable income base for Personal Income Tax purposes, which results in savings that will depend on the marginal rate of each customer. 

Starting in 2022, contributions made to pension plans can be deducted from the taxable base for personal income tax (IRPF) for an amount up to 1,500 euros, limited to 30% of the net income derived from work and other economic activities. The percentage that the retirement plan deducts depends on your marginal rate of Personal Income Tax.

There are two types of contributions to a pension plan:

• One-off: those that are made occasionally.
• Periodical: those that are made regularly (normally every month or quarter).

The maximum deduction of a pension plan corresponds to the lesser of the following amounts:

1.500 € anuales.

30% of the net yield from work and financial activities individually received during the year.

Retirement is one of the contingencies that allow for the redemption of the pension plan. 

Contrary to what happened in the years of making contributions to the plan, the income that is withdrawn from the pension plan (once 'retired') will increase, and not reduce, personal taxable income, since it will be considered as 'earned income'. It is therefore important to optimize the form of pension plan redemption (to minimize its tax impact).

If we take the previous example again: after contributing for 35 years, with a gross salary (per year) that, in the last decade, has been €22,000, an approximate pension (per year) of €19,615 remains. In accordance with the rate of personal income tax brackets, retirement income will be taxed at 19% (first 12,450 euros) and at 24% for the remainder (up to 19,615 euros).

Now, and based on the above, we proceed to redeem the pension plan, for which there are several ways to do so:

This modality will allow 100% of the capital accumulated in the pension plan to be redeemed, i.e., the contributions that have been saved over the years and the "possible" profitability derived from them are recovered.

When the pension plan is withdrawn in this way, only one tax payment is due (related to the amount saved in the pension plan). To calculate it, the annual public pension of €19,615 must be added to the amount redeemed (for example, €90,000) and the marginal rate will be raised to 45%. Everything exceeding 60,000 euros (49,615 euros in our example) is taxed at this rate of 45%. Practically the rest of the amount coming from the plan (between 35,200 and 60,000 euros) is also taxed at a high rate: 37%.

In the following years, tax is again levied exclusively on the state pension, since no other income is received, and the marginal rate will be reduced again. However, the tax impact of the redemption of the pension plan is very high.

This type of pension plan redemption means that you receive, periodically (monthly, quarterly, half-yearly or annually), an amount of money that can be, in turn, fixed or variable (depending on the type of income you have chosen):

• If you opt for a "guaranteed income": Since the performance of a pension plan is subject to market movements, the contribution received may vary over time. This does not occur in the case of insured annuities, and the same amount is always collected when the pension plan is paid.
• If you opt for a "financial income": In this case, the amount received periodically for the redemption of the plan varies according to the plan's profitability.

Back to the example: If, as we indicated above, one enjoys a state pension of €19,615 and has 90,000 saved in the pension plan, redeeming it as insured income over a period of 20 years will yield approximately €6,569 per year. When added to the state pension, this gives a total of €26,184, which is taxed as follows:

• First 12,450 euros: 19%.
• Between 12,450 and 20,200 euros: 24%.
• The rest, up to 26,184 euros: 30%.

The redemption of the pension plan in the form of an annuity, as opposed to that taken out 'in the form of capital', usually has a more progressive tax impactsince the taxation is distributed in different tax years. It is usually the most efficient way of redeeming a pension plan, although you must plan the redemption correctly in order to determine which annual amount minimizes the tax bill and to try to avoid passing into the higher IPRF personal income tax bracket.

A third way of redeeming a pension plan is the mixed redemption, which consists of receiving a part of what has been saved in capital and, subsequently, receiving a periodic income.

Again, it is important to calculate the point up to which you would be interested in receiving a portion in capital, and therefore facing an increase – or not – in your personal income tax bracket.