Pension plans are more topical than ever. We hear this term constantly in the news and in the proposals of insurers and banks, but what does it really mean? 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 carries out periodic or extraordinary contributions, to receive income or capital at the time of the retirement.
The objective is to achieve a higher return, which will depend in part on the risk taken. In any case, depending on the outcome of the investments, the money will be recovered at retirement at a profit or loss.
Pension plans are an option designed to prepare for retirement and increase the purchasing power of tomorrow.
One major advantage is that it is the only savings product whose contribution is tax deductible in the Personal Income Tax Base., 8,000 per year.
REVIEW January 2022: the maximum annual contribution has been limited to 1,500 € in Individual Pension Plans.
Although we are talking about a long period of time to recover the money, this benefit can be advanced in exceptional cases:
- Death of the person who had contracted this scheme
- Serious illness
- Long-term unemployed status
The recovery of this pension plan before retirement is a surrender, a situation which we will also discuss in more detail in this article.
But first of all, let's look at how this type of controlled pension fund by the Directorate General 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-off and regular.
- Regular contributionsMonthly, 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 may not exceed €8,000 per year (since 2022, this has been limited to €1,500).
- Extraordinary contributionsIt is possible to make extraordinary contributions to the pension plan at a certain point in time when more capital is available.
As part of how it works, a very common question is where a pension plan invests. To which plans does the money that we entrust the entities or banking companies with which we contract it go. Depending on the risk profile and age, there are several groups:
- Fixed income plansThere is public and corporate bonds.
- Equity plans
- Mixed: combine bonds and equities
- Guaranteed plans (called PPAs): 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 schemes already makes it clear that they are set up on a voluntary basis, so that their benefits are in no way a substitute for a public pension.
The pension schemes are of a private nature and are added to the old-age 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 fund managers and the plans they offer you. At PIB Group Iberia we take care of that advice for something as important as the future of your savings. We look for the best option for you pension plan among our network of insurers, and always according to your risk profile.
Stopping a pension plan: the surrender
The pension plan redemption is generally produced at the time of retirement from the social security system. In addition, there are exceptions that allow a pension plan to be stopped and withdrawn:
- Death: received by the designated beneficiary or, if there is no designated beneficiary, 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 month by month (surrender in the form of an annuity) or all at once (capital redemption).
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, please do not hesitate to contact us so that we can inform you about the best options for your savings profile.
