Explainer: Everything you need to know about a pension plan in Spain

AS stated in the General State Budgets for 2022,  the Spanish government wants to introduce changes to tax relief on contributions to individual and occupational tax-qualified pension plans.

They have proposed plans to reduce the maximum limit on contributions to a supplementary pension from €2,000 to €1,500. 

If these plans go ahead, it will be the second time in two years that these contributions have suffered a cut, since the 2021 Budget already lowered the maximum contribution to an individual pension from €8,000 to €2,000. 

According to data collected by the Inverco Observatory, in 2020 just 40% of Spanish families had a pension plan. In addition, savings grew that same year by almost 3%. 

However, only 10% of workers had a business plan, compared to 20% that have an individual pension. 

You’ve probably heard the phrase individual pensions a lot over the years but seldom been given an explanation of what it means to people living in Spain, or why it’s become an issue.

So we’ve decided to explain those issues in a nutshell:

What is the maximum contribution?

Spain has a minimum and maximum amount on its state pension.

The annual maximum contribution for qualified pension plans is currently €2,000 per year — down from €8,000. This limit applies to individual or company plans, such as ”planes de pensiones,” “mutualidades de previsión social,” ”planes de previsión social empresarial” and “planes de previsión asegurados.”

Employers can contribute an additional €8,000. Similarly, the permitted personal income tax deduction for plan contributions is capped at €2,000 per year — down from €8,000 — and employers can contribute an additional €8,000.

The total amount of contributions must not exceed 30% of the total net income derived from employment and any other economic activity during the year.

How much can I deduct?

Any contribution made to the individual pension plan can be deducted from the income tax base up to a maximum of €2000 per year or 30% of the net income from work.

What does an individual pension plan cover?

In addition to retirement, a pension plan covers other cases such as incapacity for work such as the death of the worker or beneficiary, dependency and serious illness accredited by Social Security as well as long-term unemployment (greater than 12 months and without receiving a contributory pension).

Depending on the type of plan, the money can come from contributions and benefits or from investment. The latter includes the following: 

Fixed income: Invests in fixed income financial assets, whether public or private, and the average duration of the short-term portfolio cannot be greater than two years .

Mixed fixed income: Includes both investment in fixed and variable income, the latter assuming a maximum of 30% of the plan.

Equities: They offer a higher return than fixed income and also carry a greater risk.

Mixed variable income: They are a combination of variable income, which constitutes between 30% and 75%, and fixed income.

Guaranteed: At the time of maturity, the holder may recover the entire initial capital invested ‘as long as he keeps his money until maturity’

Can you get the money back before retirement?

Saving for retirement is great, but can you use your savings sooner? According to law 26/2014, these contributions may be recovered as long as they are 10 years old and the plan started after 2015.

What is the difference between an Employment Pension Plan and an Individual Pension Plan?

Although the Individual Pension Plan is the best known and, therefore, the most widespread in Spain, there are other alternatives if you are saving for retirement, such as the Employment Pension Plan .

It is a form of savings promoted within companies and public bodies to complement the public pension. A Employment Pension Plan comes with certain advantages since they have lower commissions than individual ones and, therefore, higher profitability.

These contributions are made by both the company itself and the employee. Likewise, they allow a reduction in the income tax base of up to €8,000 per year. However, according to the Inverco Observatory, less than 10% of Spanish workers have it .

What do these proposed changes to the Maximum Contribution mean? 

With these plans, Spain’s government is making yet another move to encourage employer-sponsored retirement savings while also trying to motivate higher-paid individuals to seek alternative options and diversify their investments for retirement savings above the lower €1,5000 limit for personal pension contributions.

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