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 aim of making regular contributions, in principle, every year, so that when we reach retirement, we can supplement our Social Security pension, which is expected to decrease progressively.
We should consider taking it out when our personal financial 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 personal income tax., This will reduce the tax 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, (REVIEW January 2021: contributions to Individual Pension Plans are limited to €2,000/year).
See an example so that you can see it better:
If my taxable income is 40.000 €.
In principle, you would have to pay tax of around €8,000 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 around €6,000.
That is to say, we would save almost €2,000 in taxes, which could be used for other purposes.holidays, for example.
As we can see, there is a double advantage in the pension plan:
a tax return (due to the saving in personal income tax which can reach 50% of our contribution), as well as
the financial return (in terms of 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 them to the income from work, and they will be taxed for that concept, so that a very important moment to be well advised is also in retirement. Here is a guide to how to redeem the pension plan.
How do I make contributions and where do I invest them?
This financial product makes it possible to do:
Extraordinary contributionsfor example, at the end of the year, we decide how much we want to put into the plan or how much we want to spend on the plan.
Having a regular contribution, This would allow us to protect ourselves from market fluctuations.
As for 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 should put most of your money in equities, and progressively move towards more conservative options; but that is what our advisor is there for, and he will ask us the necessary questions so that we are not confused in our choice.
Is it a liquid product?
The answer is NO. It is the least liquid form of savings that exists, as 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 which we do not want to find ourselves in at all. In the same way, the latest pension reform has improved this liquidity, but only for 10 years., Since we make each contribution, so it is still somewhat limited.
For whom is the pension plan intended?
This is why we say that this is not a product for everyone: it is understood that it is for people who are fiscally interested and can get the maximum tax deduction; Otherwise, there are also other targeted savings products that are more favourable for the taxpayer: PIAS, SIALP, retirement savings....
For all these reasons, we advise you to ask a specialist who can help you choose the alternative that, depending on your personal and professional circumstances, is best suited to your interests. Of course, what we have already said is that it makes no sense to keep money in an account without obtaining a return (with inflation, we lose purchasing power). Subscribing to savings products is the most advisable thing to do.
At PIB Group Iberia and Investment, We have been advising our clients for more than 30 years. Come and decide between the best pension plans market.
