Pension plans for the self-employed: more savings today, more peace of mind tomorrow

The main benefits of a pension plan for self-employed workers are:

• Returns: the contributions made to the self-employed pension plan will be managed by experts with one goal: to maximize returns.
• Flexibility: it allows self-employed individuals to choose when and how much to contribute to the pension plan, adapting to their financial situation and investor profile.
• Tax relief: annual contributions of up to €1,500 can be deducted from personal income tax (IRPF), reducing the taxable income.
• Redemption options: it allows you to withdraw the contributed amount along with any returns earned upon retirement and also in the following situations: the account holder's inability to work, serious illness, dependency, death of the account holder, long-term unemployment or after the pension plan for self-employed workers has been maintained for ten years.
  

Simplified employment pension plans for the self-employed (PPES) were created with Law 12/2022, which came into force in January 2023. They work in a similar way to the occupational pension plans that some companies have for their employees.

A pension plan for the self-employed allows you to make a maximum investment of €5,750 per year (€4,250 contribution for your self-employment and €1,500 individual contribution).

If you cease to be self-employed and you have a plan, you would become a suspended participant and you could only make contributions of €1500 a year to an individual pension plan.

If you re-register as self-employed, you may contribute again to your self-employed plan up to the limit of €5,750 per year.

Retirement is one of the situations that allow for the redemption of the pension plan.

Contrary to what happened in the years of contribution to the plan, the income that is withdrawn from the pension plan (once in retirement) will increase, and not reduce, the personal taxable income, since it will be considered as 'earned income'. It is therefore important to take into account the form in which the pension plan is redeemed in order to assess its tax impact.

To give you a clearer idea, here is an example taking into account the general tax scale. Please note that these calculations may be affected by the personal and family circumstances of each taxpayer.

If we take the previous example again: after contributing for 35 years, with a gross salary (per year) that, in the last decade, has been €22,000, an approximate pension (per year) of €19,615 remains. In accordance with the rate of personal income tax brackets, retirement income will be taxed at 19% (first 12,450 euros) and at 24% for the remainder (up to 19,615 euros).
Now, and based on the above, we proceed to redeem the pension plan, for which there are several ways to do so:

This modality will allow 100% of the capital accumulated in the pension plan to be redeemed, i.e., the contributions that have been saved over the years and the "possible" profitability derived from them are recovered.
When the pension plan is withdrawn in this way, only one tax payment is due (related to the amount saved in the pension plan). To calculate it, the annual public pension of €19,615 must be added to the amount redeemed (for example, €90,000) and the marginal rate will be raised to 45%. Everything exceeding 60,000 euros (49,615 euros in our example) is taxed at this rate of 45%.

Practically the rest of the amount coming from the plan (between 35,200 and 60,000 euros) is also taxed at a high rate: 37%.

In the following years, tax is again levied exclusively on the state pension, since no other income is received, and the marginal rate will be reduced again. However, the tax impact of the redemption of the pension plan is very high.

This type of pension plan redemption means that you receive, periodically (monthly, quarterly, half-yearly or annually), an amount of money that can be, in turn, fixed or variable (depending on the type of income you have chosen):

• If you opt for a "guaranteed income": Since the performance of a pension plan is subject to market movements, the contribution received may vary over time. This does not occur in the case of insured annuities, and the same amount is always collected when the pension plan is paid.
• If you opt for a "financial income": In this case, the amount received periodically for the redemption of the plan varies according to the plan's profitability.

Back to the example: If, as we indicated above, one enjoys a state pension of €19,615 and has 90,000 saved in the pension plan, redeeming it as insured income over a period of 20 years will yield approximately €6,569 per year. When added to the state pension, this gives a total of €26,184, which is taxed as follows:

• First 12,450 euros: 19%.
• Between 12,450 and 20,200 euros: 24%.
• The rest, up to 26,184 euros: 30%.

The redemption of the pension plan in the form of an annuity, as opposed to that taken out 'in the form of capital', usually has a more progressive tax impactsince the taxation is distributed in different tax years. It is usually the most efficient way of redeeming a pension plan, although you must plan the redemption correctly in order to determine which annual amount minimizes the tax bill and to try to avoid passing into the higher IPRF personal income tax bracket.

A third way of redeeming a pension plan is the mixed redemption, which consists of receiving a part of what has been saved in capital and, subsequently, receiving a periodic income.

Again, it is important to calculate the point up to which you would be interested in receiving a portion in capital, and therefore facing an increase – or not – in your personal income tax bracket.