The first thing to know about a pension plan is that it is not for everyone. It has special characteristics that make it special, such as: its lack of liquidity, its special taxation, the variety of possibilities where to invest it, etc.
For these reasons, we are going to offer some guidelines to follow before contracting it:
Why and when to take out a pension plan?
The pension plan is a LONG-TERM savings plan, with the purpose of making periodic contributions, in principle, every year, in order to supplement the Social Security pension, which is expected to decrease progressively, when we reach retirement.
We should consider contracting it when our personal economic situation, thanks to our level of income, allows us to have a margin to save, and we know that it is money that we will not need in the short term.
How does the pension plan affect our personal income tax return?
The contributions we make to the pension plan are deductible in our IRPF, so it will reduce the taxable base, lowering our tax bill.
We should know that in 2015 there was a tax reform, which introduced some limitations. Each person has a maximum of 8.000 € per year(REVISION January 2021: the contribution to Individual Pension Plans has been limited to 2,000 €/year).
Let’s see an example so that you can see it better:
If my taxable income is 40,000 €.
In principle, you should pay taxes of about 8,000 euros, at an average personal income tax rate of 20%.
But, if I contribute to the pension plan, for example €5,000, my tax bill is reduced to about €6,000 to be paid.
In other words, we would save almost €2,000 in taxes, which we could use for other purposes: vacations, for example.
As we can see, there is a double advantage to the pension plan:
a tax return (due to savings in personal income tax that can reach 50% of our contribution), as well as
the financial return (the interest it may generate over the years).
But, at the same time, we have to consider that, as they are deductible, when we redeem the plan, we will also take it to the work income, and will be taxed for that concept, so a very important moment to be well advised, is in retirement. Here you have a guide on how to redeem the pension plan.
How do I make the contributions and where do I invest them?
This financial product allows you to make:
Extraordinary contributions: for example, at the end of the year, we decide how much we want to put into the plan or how much we want to pay into the plan.
To have a periodic contribution, which would allow us to protect ourselves from the ups and downs of the market.
Regarding whether to look for a guaranteed, fixed income, mixed or variable income product, it depends on our risk profile, as well as our age. Normally it is said that when you are young you are in time to put most of your money in variable income, and progressively you should move to more conservative options; but for that there is our advisor, who will ask us the necessary questions, so as not to confuse us in our choice.
Is it a liquid product?
The answer is NO. It is the least liquid form of savings that exists, since the availability of the money we decide to save in this way will be very limited.
There are a number of situations (rather contingencies) that would allow us to redeem this money, but in which we do not want to find ourselves in any way. Also, the latest pension reform has improved this liquidity, but only for 10 years from the time we make each contribution, so it is still somewhat limited.
To whom is the pension plan intended for?
For this reason we say that it is not a product for everyone: it is understood that it is for people who can be fiscally interested and tax deductible to the maximum; otherwise, there are also other savings products, more favorable for the taxpayer: PIAS, SIALP, savings-retirement…
For all these reasons, we advise you to ask a specialist who can help you to choose the alternative that, depending on your personal and professional circumstances, is more advisable to your interests. Of course, what we have already said is that it does not make sense to keep money in an account without obtaining a return (with inflation, we lose purchasing power). Subscribing to a savings product is the most advisable.
At PIB Group Iberia e Inversión, we have been advising our clients for more than 30 years. Come and decide among the best pension plans in the market.
