Retirement plan comparison

Discover the pros and cons of these plans compared to other savings and investment products.
Nowadays, more and more workers are deciding to take out savings and investment products with a view to their retirement. Retirement plans are a product created specifically for this purpose, but they are not the only option for savers. This article provides a comparison between a retirement plan and other long-term savings products so you can evaluate which best meets your needs.
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Comparison between a retirement plan and a pension plan

Although both terms are often used interchangeably, the truth is that retirement plans and pension plans are not exactly the same. The objective of both products is to save for retirement, but there are significant differences between them.

Retirement plans are based on life-savings insurance, with guaranteed minimum returns. In these plans, contributions by the contracting party are made in the form of a premium.

On the contrary, pension plans are an investment vehicle used in pension funds; their returns are not set, but depend on the evolution of the assets in which they invest. Therefore, the first thing to take into account when comparing them is the level of risk you want to assume and the returns you are looking for: retirement plans offer reduced, but guaranteed, returns; pension plans; higher potential returns, although without any certainties. Retirement plans are most suitable for conservative investors, while pension plans are aimed at investors who prioritize additional returns. However, it is important to take into account that there is a wide range of pension plans that cover all risk profiles.

Liquidity is another essential factor to be considered. Except in some exceptional cases (such as long-term unemployment, serious illness or disability etc.), pension plans cannot be redeemed until retirement. However, from January 1, 2025, it will be possible to redeem contributions paid at least ten years ago.

Retirement plans can be cancelled or redeemed more easily, provided the conditions of the policy are met.

Comparison between a retirement plan and an investment fund

Investment funds are another of the more common savings and investment products. In this case, the contributions made by the contracting party become shares in a fund managed by a management team, similar to pension plan funds. Funds invest in accordance with their investment policy, which determines the type of fund they are: whether it is fixed-income, equities, mixed, guaranteed etc. Except for some types of guaranteed funds, funds do not offer minimum returns, but rather, the returns depend on the evolution of the assets in which they invest. This format results in greater potential returns, but also greater risk.

Similarly, investment funds are not necessarily a vehicle designed for retirement. The contributions are not subject to tax incentives but, on the contrary, these products are very liquid: they can be redeemed quickly and easily. Although they also offer quite a lot of liquidity, retirement plans are somewhat more structured in terms of their objectives, contributions and returns.

Comparison between a retirement plan and a long-term savings plan

Long-term savings plans, also known as the Ahorro 5 Plan, are a specific type of deposit with conditions common to most of the institutions that offer them. The recommended investment period is at least 5 years, during which the contracting party can contribute up to €5,000 a year. These plans operate in two different ways: The Individual Long-Term Savings Account (CIALP) and Individual Long-Term Savings Insurance (SIALP). As with retirement plans, this second format is based on taking out an insurance policy.

The main advantage of Ahorro 5 plans is that, provided the conditions are met, they guarantee recovery of at least 85% of the investment. However, this does not imply major guarantees compared to a retirement plan in which the returns are guaranteed and form part of the contract.

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However, from a tax point of view, long-term savings plans are very advantageous, since if the aforementioned minimum of 5 years is maintained, the returns are tax exempt. On the contrary, if you decide to withdraw the money before, you will have to pay tax on the gains as investment income at rates of between 19% and 23%.

In short, there are many options available to savers. Retirement plans have the specific objective of guaranteeing income for retirement, but there are also pension plans and other long-term savings products that can be advantageous. At BBVA, we offer you a wide range of savings and investment products so you can get the highest returns possible out of your savings. Go to bbva.es or visit any BBVA branch to find out more about them and get the advice you're looking for.

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