Most clients who contract a pension plan do so with the intention of saving and being able to access that money when they retire. As you may already know, this product involves making periodic contributions to obtain a certain return on the money invested, as well as tax advantages.
As savings and investment advisors, we believe that this is a good long-term savings mechanism, although there is a lot of ignorance about how to redeem a pension plan and when it is possible to do so.
What is the redemption of a pension plan?
In case you were not very clear, when we talk about redeeming a pension plan we are referring to recovering the money you have been saving over the years.
This amount can be recovered in different ways, depending on the personal and tax circumstances of each individual. But, if you want to minimize the tax impact and maximize the return on your savings, it is important that you are aware of all the options available.
When can a pension plan be withdrawn?
So, how can you redeem a pension plan? The most common way is to do it at the time of your retirement.
However, there are also other exceptional circumstances in which you may have access to these savings.
In what cases can a pension plan be redeemed?
In addition to after retirement, you can redeem your pension plan in any of these cases:
- Long-term unemployment
- Permanent incapacity for work
- Severe or high dependence
- Death
If you are in any of these situations, you will need to properly plan your rescue to avoid unpleasant surprises.
In addition, since 2018, a new liquidity assumption was created, and it is that from January 2025 the part of the pension plan from whose contribution more than 10 years have passed can be recovered.
Is it mandatory to redeem a pension plan when you retire?
In any case, even if it is possible, you should know that it is not mandatory to redeem a pension plan at the time of retirement.
In fact, in many cases, it may be more beneficial for you to postpone that surrender to reduce the tax impact. There are people who, for example, decide to bequeath that pension plan to their heirs in the event of their death.
How much do I have to pay to the tax authorities when I redeem a pension plan?
The amount you will have to pay to the Treasury to redeem your pension plan depends on several factors, such as:
- The form in which you decide to redeem it: capital, income or mixed.
- Your taxable income in the year of redemption.
As we said, the best thing you can do before redeeming it is a careful planning, preferably with an advisor such as PIB Group Iberia. By studying your needs and your financial situation, we can prevent you from having to pay more taxes than necessary.
As it increases your income from work, it is important to know when that redemption should be made. Below we give you a series of tips.
Mistakes when redeeming our pension plan
In Spain there is a huge lack of knowledge about how to redeem a pension plan, but what exactly is the reason for this? Well, among other reasons, to the low financial culture in our country and the constant search for short-term profit, as well as the lack of advice from banks.
When the time comes to retire and we decide to redeem our pension plan, we all want to pay as little as possible to the tax authorities. Most clients know that the contribution is tax deductible, but do not know how to recover the investment.
On the other hand, there is a generalized idea that these plans are a “scam” that leads to losing money because, when you go to recover it, it has been reduced by half. Nothing could be further from the truth: if this has happened to you, it is because you have not been helped to do things right.
In fact, it is the best product for people with high incomes to obtain tax benefits. For example, if your annual income is around 70,000 euros and you contribute 5,000 euros to your pension plan, you could avoid having to pay up to 2,250 euros to the Treasury on your next year’s tax return – that’s a lot of money!
So, what is the biggest mistake we can make when it comes to redeeming a pension plan? It is clear: what we should not do under any circumstances is to withdraw all the money at once, that is to say, all at once, when we reach retirement.
The reason? If we recover a large amount from that plan, that amount will be added to our income for that year, so we will have to pay a lot more tax – maybe even become part of the last bracket in the IRPF!
Advice on the best way to recover your pension plan
So, how to redeem a pension plan in order to pay less to the tax authorities? Is it possible?
Of course you can! We’re going to give you a few tips on how to pay less tax when redeeming your pension plan:
- To begin with, it is usually a good idea not to redeem the pension plan the same year you retire. The last paycheck tends to be higher than the amount of the pension. Therefore, in order to start from a lower taxable base, it is advisable to plan the redemption one year after retirement.
- On the other hand, it is advisable to take advantage of the 40% exemption for contributions prior to 2007. If you made contributions before December 31, 2006, you have a great tax advantage: a 40% reduction of your contributions. However, the time is limited to 2 years. The ideal is to redeem before the subsidized part with this exemption to take advantage of this benefit, but making sure that we are not moving to a tranche that is too burdensome.
- The best thing to do is to go for what is known as a “mixed rescue”. This means recovering part in the form of capital in order to take advantage of the 40% reduction and the rest in the form of income, i.e., little by little.
If, on the other hand, you were to make a total surrender, you would automatically move to the highest IRPF bracket, as we have already mentioned. You would be paying more than 40% in taxes on a large part of your pension plan.
Conclusions on the redemption of a pension plan
Since we created our Savings and Investment Department, more and more people trust PIB Group Iberia for the recovery of their pension plan. There are many clients who, even if they have between 300,000 and 500,000 euros, do not feel that their bank is concerned about advising them on what is best for them.
Our philosophy is to give you a differential treatment, so that you can really understand the reason for what we advise you. After all, it is your money, and you must understand every step you are going to take to recover it. Would you like to contact us?
