How to benefit from tax savings with a pension plan

A simple mechanism for you to save more now and in the future.
A pension plan is a financial product that channels savings during your working life to be used during retirement to supplement your state pension. Pension plans offer a number of tax benefits that provide tax savings on the amounts contributed, consequently, as well as guaranteeing extra money in the future, they can be used to optimize current resources. This article will explain how to benefit from tax savings with a pension plan.
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Taxation of contributions to pension plans

Pension plans, together with guaranteed benefit plans, vehicles which operate similarly but are based on life savings insurance, are the only savings instrument with contributions that reduce the tax paid, as they reduce the personal income tax base up to a maximum of 8,000 euros a year. That is, saving through pension plans generates additional tax savings, which should ideally be reinvested in the plan itself, thus generating major benefits in terms of long-term savings.

Additionally, these instruments also offer the option of making contributions in favor of the spouse of up to a maximum of 2,500 euros a year, in addition to their own contribution, provided that the spouse does not earn income of more than 8,000 euros a year.

In addition, there is a special tax system for participants with disabilities, which raises the annual limit to 24,250 euros, and allows contributions in their favor of up to 10,000 euros a year by direct or extended family members up to the third degree (inclusive). As well as the spouse and individuals under guardianship or foster care. The total limit on contributions from the taxpayer and family members is 24,250 euros a year.

Taxation when redeeming pension plans

In general, pension plans are redeemed at retirement, as this is what they are designed for. However, the law provides for certain cases in which it is possible to redeem pension plans early. serious illness, disability, death, long-term unemployment or dependency. From 2025, it will also be possible to redeem shares that are a minimum of 10 years old. In any case, the capital redeemed is taxed as earned income. On a temporary basis, it is possible to receive a tax reduction of 40% on contributions prior to 2007 that are redeemed in the form of capital.

This is why, when it comes to redeeming a pension plan, it is important to assess the conditions under which the capital will be recovered in order to not lose some of the tax benefits accrued over the years. The money in a pension plan, that is, all the contributions to it and any revaluation of the same, can be redeemed in two different ways: capital and income. In the case of redemption in the form of capital, that is, in a single payment, all the money in the fund is included in the earned income tax base for that fiscal year. The higher the capital, the higher the tax base, which will place it in a higher income bracket with the consequent increase in applicable tax rates. If, on the other hand, you decide to redeem the pension fund in the form of regular income, the capital is received through contributions on a regular basis that are only taxed in the corresponding year, with minimal impact on the tax bracket.

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In addition, mixed redemptions are also possible: that is, a combination of the capital and income redemption options. In this way, some is received in the form of capital and some is received in the form of regular income. Furthermore, if the plan's specifications provide for it, it may also be redeemed in the form of withdrawals without a defined frequency or in the form of life annuities.

In any case, when it comes to redeeming a pension plan, careful calculations need to be made to see which method is the most appropriate, depending on the investor's expectations and economic situation.

Saving with your pension plan is a quick and simple option for improving your quality of life now and assuring your future. At BBVA, we have a wide variety of options for these types of instruments, and we are here to help you. We have detailed information available on our website about the different plans we have designed. Our pension plan simulator helps you compare them according to your age and objectives so you can choose the best option for you.

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