Investment funds or pension plan, pros and cons

Find out what type of investment is best suited to your goals.
As a result of the growing concern about the future of pensions, more and more people are deciding to plan for their own retirement for their future peace of mind. However, most individuals don't have the knowledge or the means needed to invest directly in assets, so they resort to collective investment instruments, such as investment funds or pension plans, two of the most popular savings vehicles in Spain. Although the two instruments may seem similar, each of them features specific aspects that may be more or less beneficial, depending on the characteristics and objectives of the individual investor. In this article, we explain in detail what the differences between the two are so that you can make the best decision when choosing between investment funds or pension plans.
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What is an investment fund?

Investment funds are Collective Investment Institutions, the purpose of which is to combine the savings from multiple investors and invest them as a whole, in keeping with a specific investment strategy and in a way that maximizes the returns while adhering to certain risk parameters. Collective investments offer significant advantages to investors over direct investments. These include economies of scale, professional management, security and favorable taxation that, among other things, allows the investment to be transferred between funds with no tax implications. In addition, investment funds are highly liquid products that don't require large individual investments.

What is a pension plan?

A pension plan is a financial product for long-term savings that is especially designed to channel retirement savings. Through pension plans, individual savers make a series of regular or one-time contributions that are then invested by the plan managers in accordance with a preset investment policy that seeks to maximize returns. Given their purpose as a long-term product for pension savings, the withdrawal conditions for these products are limited to specific circumstances, such as retirement, long-term unemployment, and disability. However, starting on January 1, 2025, it will also be possible to redeem those shares that are at least 10 years old.

Pension plan or investment fund?

The main difference between investment funds and pension plans is the liquidity offered by each, that is, the ability of individuals to cash in their investment. In this regard, investment funds offer much greater liquidity than pension plans, since investors can withdraw their capital and the corresponding returns at any time. In the case of pension plans, savers must be retired (at the usual, early or deferred age) before they can redeem their investment; however, there are some cases, such as the death of the account holder, long-term unemployment or permanent disability, in which the capital can be withdrawn early. Although the lack of liquidity is often considered a disadvantage, investments in pension plans are intended solely to provide for the individual's retirement, so not having access to the capital can be very beneficial in the long term. Liquidity seeks to preserve the purpose of pension plans: this money must in fact be intended to provide retirement income. In any case, the liquidity of pension plans will increase starting in 2025.

In terms of the assets they invest in, the philosophy is very similar. Pension plans are attached to pension funds, which would be equivalent to investment funds. There are different types of investment plans and funds, ranging from highly conservative to very aggressive, depending on their investment policy. In either case, these portfolios are diversified into multiple assets in order to minimize the risk.

Tax-wise, both investment funds and pension plans offer an essential advantage: in both cases, it is possible for individuals to make transfers between plans or funds without any tax implications. It is also possible to make transfers from pension plans to comparable products, such as insured pension plans. Moreover, in the case of pension plans, any contributions made by the participant can be deducted, up to a certain amount, from their annual taxes, reducing the base amount subject to taxation, which can yield significant tax savings, depending on the participant's tax bracket. Finally, when redeeming the investment, the profits obtained through pension plans are taxed as earned income, while investment funds will be taxed as a capital gain or loss in the savings base.

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Lastly, we should mention that contributions to pension plans are limited to 8,000 euros a year, which can be a disadvantage for individuals with a high net worth. In contrast, with investment funds, you can invest as much capital as you want. In this regard, funds are a good complement to plans to channel the excess savings that can't be allocated to pension plans.

Still not sure of the best way to make money from your savings? At BBVA, we can help you. Our website contains detailed information on each of the savings and investment instruments that are available to our customers. You can also use our pension plan simulation tool or the investment fund search engine to compare the products that interest you and choose the one that best suits your profile and your goals.

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