Occasional contributions into a pension plan

Find out about the advantages of making occasional contributions to your pension plan.
At the end of the year, many investors review their income for the fiscal year and look for products in which they can invest the money saved during the year to reduce the amount of tax to be paid. And the answer to this is found in pension plans, long-term investment vehicles focused mainly on contingency for retirement; they allow the amount of personal income tax paid to be reduced through the contributions made to the plans. Is it advantageous to make occasional contributions to pension plans or is it better to establish a strategy of contributions on a regular basis? If you would like to find out about the advantages of making an occasional contribution to your pension plan, read on.
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Types of contributions and tax benefits

A pension plan is a long-term savings product that gives you additional financial resources after retirement. The capital contributed by savers is invested by a management agency according to the investment policy agreed with the plan holder. After retiring, they can redeem the accumulated shares revalued according to market behavior. That is, the redemption would be at the value of the shares at such date, and may be made in the form of capital in a single payment, or in the form of regular income extending over several years. In addition, if the plan's specifications provide for it, it may also be paid in the form of life annuities or withdrawals.

Contributions to pension plans can be on a regular basis or occasional. In the first case, the pension plan holder agrees with the plan's management agent on a series of regular contributions. In the second case, the contributions to the plan are left to the participant's choice without any specific frequency. This is why many pension plan holders make their occasional contributions at the end of the year, when they can more accurately calculate the total saved during the previous period, their income, and the amount that has to be taxed on their annual personal income tax return. Indeed, one of the biggest advantages of pension plans is that contributions to these products are deducted from the personal income tax base, with the consequent tax breaks. This tax break can be applied whenever the annual contributions are within the limits established by law, which are fixed in general Spanish territory at the lesser of the following amounts: 8,000 euros per year or 30% of your net income from work and/or economic activities.

Flexibility in occasional contributions:

One of the biggest advantages of occasional contributions is that they allow contributions to be adjusted to events or unexpected situations that could arise throughout the year and to make the decision to invest only at the end of the fiscal year.

Many people suffer ups and downs in their income, such as those whose salary includes a large variable component, or those whose professional activities may yield variable incomes from one year to the next. In these cases, a program for making contributions on a regular basis may be unsuitable for the pension plan holder's financial circumstances. However, since the main tax benefit of pension plans is that the contributions are deducted from the personal income tax base, savers with a pattern of irregular income can take advantage of years with higher income to make their occasional contributions higher, and thus reduce the amount to be taxed.

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Another advantage of occasional contributions is that, since it is the investor who decides when to invest, they can take more advantage of market fluctuations and contribute money to their fund when the economic situation is most favorable to them. In this regard, it is advisable to take into consideration the investment strategy of the pension plan taken out, since plans with more risky profiles with a high percentage of investment in equities are what are most affected by stock market fluctuations. However, it must be taken into account that, whatever the type, pension plans are generally long-term saving instruments and, therefore, less sensitive to unusual market movements than other investment products. It has also been demonstrated that, in the long term, regular investment strategies are the most profitable, although it is always possible to apply a strategy that combines contributions on a regular basis with occasional contributions if there are favorable conditions.

That is, an occasional investment strategy, being more flexible, is more suitable for those with extensive market knowledge who understand when it is the optimal time to make a contribution. However, even for professionals it can be difficult to always get it right when it comes to the market. This is why, particularly given the long-term nature of these plans, the safest strategy for most participants is regular investment since this dilutes the risk of entering a market spike as average prices are obtained (for example, 12 purchases, one a month, compared to a one-off purchase).

Now that you know what occasional contributions to a pension plan and the advantages of these types of investment strategies mean for you, you can decide which pension plan is the best for you. If you think that these kinds of products would be a good vehicle for investing your savings, visit one of our branches or go to bbva.es to find out about our range of pension plans, and choose the most profitable plan for you according to your personal circumstances.

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