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Is a pension plan good, is a pension plan advisable, and is it advisable? Like almost everything in life, the answer is both complex and easy: it depends. Given the loss of purchasing power of pensions and the unknowns facing the new generation of contributors, in this article we analyze the advantages and disadvantages of a pension plan.
Before contracting a pension plan it is necessary to know the pros and cons of this savings product. Financial planning is crucial, so at PIB Group Iberia we always advocate financial advice when choosing the best plan for each profile and, above all, the right way and the right time for its redemption.
Having all the information will help you make a smart investment in your pension plan.
Advantages and disadvantages of a pension plan
Below, we take a closer look at the features you should know about this retirement-oriented savings product.
Advantages of the pension plan
Tax benefit in the pension plan
The pension plan is the only savings product whose contribution is tax deductible in the Personal Income Tax Base. That is to say, the annual contributions to this plan reduce the taxable base of the income tax return, so that the taxpayer pays less tax.
It should be noted that the annual contribution limit (from January 1 to December 31, 2021) is 2,000 euros. That is, each year you can only contribute that amount to your pension plan. For 2022, a reduction to €1,500 has been approved.
Let’s imagine that a person who earns 28,000 euros per year decides to make the maximum contribution of 2,000 euros per year to his pension plan. For the tax authorities, he will be taxed on the 26,000 euros. That is why, for many savers, one of the main advantages of the pension plan is its interesting taxation at the time of making the contributions.
Products for different investment profiles
One of the main mistakes is to choose the first pension plan you are offered. The reason is that there are a multitude of options and everything will depend on your situation and your investment profile: whether you are more conservative or less conservative.
For this reason, there are different types of pension plans, such as the Insured Pension Plan (PPA) in which investments are guaranteed under certain conditions. If the profile of the saver is more risk-oriented, there are some savings plans that provide a fantastic return, but, on the other hand, they are not guaranteed. For this reason, we always insist that it is necessary to inform very well about the risk to be assumed.
Possibility of transfer
The pension plan is transferable between entities, that is to say, we can change the company without the need to redeem the product if we are not convinced by what we are offered. You can transfer it as many times as you want and you cannot be charged taxes or commissions.
Supervised by the Directorate General of Insurance and Pension Plans (DGSFP).
The Directorate General of Insurance and Pension Plans (DGSFP), under the Ministry of Economic Affairs and Digital Transformation, is responsible for the supervision of pension plans. This entity is dedicated to controlling the proper functioning of the sector and ensuring adequate protection of savers through pension plans.
Disadvantages of a pension plan
Recovery on retirement and other assumptions
If you are looking for a savings product with which you can easily dispose of your money, forget the pension plan. As its name suggests, this product is aimed at guaranteeing purchasing power after retirement, so it cannot be withdrawn at any time. These are the assumptions that are included in the legislation:
- Retirement
- Serious illness
- Death of the participant
- Unemployment
- ERE
In 2015, a regulation was passed to also contemplate the elapsed time, so that you can start recovering your money 10 years after the first contribution.
Investment limited to 2,000 euros in 2021 and 1,500 euros from 2022 onwards.
Previously, an annual contribution of up to 8,000 euros was allowed, but now a pension plan is limited to 2,000 euros per year in 2021 and, from 2022, it drops to 1,500 euros.
Plan the timing of the rescue well
At the time of redemption, the amount will be taxed as earned income in the income tax return. That is to say, although you have benefited from the tax savings at the time of the contributions, in the end you will have to pay taxes. For this reason, we continue to insist on the need for good advice to avoid the redemption of our pension plan becoming a “tax axe” from the Treasury.
Except for the PPA, it is not a guaranteed product.
Pension plans are not generally guaranteed savings products, i.e., there is a possibility of losing money if you do not choose where to invest. Only the aforementioned Insured Pension Plan (PPA) can guarantee it in the event of any of the aforementioned scenarios and, therefore, it is the one we always recommend to more conservative profiles.
Pension Plan: Yes or No?
According to the Inverco Observatory, 20% of Spaniards already have a pension plan. An interesting option that has grown along with the drama of Social Security and our future pensions. Many times, behind a dissatisfied saver with his pension plan is a bad initial advice or, simply, the lack of information.
PIB Group Iberia always insists that this product is not for everyone, but that it is necessary to study the situation of each person when choosing the best savings product.
In many cases the Pension Plan becomes the perfect solution, but certainly not the first one offered to us. In our insurance brokerage we have a Savings Department specialized in advising on pension plans and savings products. In this way, you can compare with us the plans offered by a multitude of entities without going from office to office and receive the financial advice you need to make this decision about your money.
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