Pension plans are more topical than ever. We hear this term constantly in the news and in proposals from insurers and banks. But what does it really mean, what does it mean to have a pension plan and how does it work?
Definition: What is it?
A pension plan is a long-term savings product in which a person makes periodic or extraordinary contributions in order to receive income or capital at the time of retirement.
The objective is to achieve a higher return, which will depend in part on the risk taken. In any case, depending on the results of the investments, the money will be recovered at the time of retirement with a profit or loss.
Pension plans are an option designed to prepare for retirement and increase tomorrow’s purchasing power.
As a great advantage, it is the only savings product whose contribution is tax deductible in the Personal Income Tax Base, with a limit of 8,000 euros per year.
REVISION January 2022: the maximum annual contribution has been limited to 1,500 euros in Individual Pension Plans
Although we are talking about a long term to recover the money, this benefit can be advanced in exceptional cases:
- Death of the person who had contracted this plan
- Serious illness
- Long-term unemployed status
When recovering this pension plan before retirement, we speak of a surrender, a situation that we will also discuss in more detail in this article.
But, first of all, let’s see how this type of pension fund works , which is controlled by the General Directorate of Insurance and Pension Funds of the Ministry of Economy, which regulates them.
How does a pension plan work?
The operation of a pension plan is based on contributions, which can be one-time or periodic.
- Periodic contributions: monthly, quarterly, half-yearly or annual contributions that can be increased, reduced or even stopped, depending on the client’s situation. It should be noted that contributions cannot exceed €8,000 per year (since 2022, it has been limited to €1,500).
- Extraordinary contributions: it is possible to make extraordinary contributions to nourish the pension plan at a given time when more capital is available.
As part of the operation, a very common doubt is where a pension plan invests. To which plans does the money we entrust the entities or banking companies with which we contract it go. Depending on the risk profile and age, several groups are determined:
- Fixed income plans: there are public and corporate fixed income plans.
- Variable income plans
- Mixed: combining fixed income and equities
- Guaranteed plans (called PPAs): these allow 100% of the money invested to be recovered at the time of redemption, although this is subject to certain conditions.
The law regulating pension plans already makes it clear that they are set up voluntarily, so that their benefits will not, under any circumstances, be a substitute for a public pension.
Pension plans are private and are in addition to the retirement pension guaranteed by the State.
When making the decision to take out a pension plan, it is very important to establish the conditions and know the type of plan. For this reason, we advise you to study the management companies and the plans they offer. At PIB Group Iberia we take care of this advice for something as important as the future of your savings. We look for the best pension plan option for you among our network of insurance companies, and always according to your risk profile.
Stopping a pension plan: the surrender of a pension plan
The redemption of a pension plan generally occurs at the time of retirement from Social Security. In addition, there are exceptions that make it possible to stop a pension plan and redeem it:
- Death: it is received by the designated beneficiary or, if there is none, by the heirs.
- Long-term unemployed.
- Illnesses: in cases such as permanent incapacity for work, dependency, serious illnesses…
The contracting party can recover the contributions made and the possible profitability generated. In cash it can be obtained on a monthly basis(surrender in the form of income) or at one time(surrender in the form of capital).
We hope that the basic concepts of this widespread savings product have become much clearer to you. If you want to go even deeper, we invite you to consult our post on the technical concepts. And, of course, if you are considering taking it out, do not hesitate to contact us so that we can inform you about the best options for your savings profile.
