How to apply a pension plan tax deduction

Discover the tax benefits of this savings product.
Saving for retirement is increasingly important for the vast majority of workers. Given the significant challenges faced by the pension system, the importance of thinking ahead and saving part of your income for the future cannot be overemphasized. As well as being a financial product designed for this purpose, pension plans also offer great incentives, such as reducing how much personal income tax you have to pay each year. Read on to know more about tax relief and how to benefit from it.
Upper Banner Calculate Retirement Upper Banner Calculate Retirement
Save for your retirement
Calculate how your retirement would improve with contributions to a pension plan

What is a pension plan?

A pension plan is a savings and investment product aimed at retirement. As with investment funds, there are management companies for pension plans which are responsible for the investment policies for the plans. Likewise, there are depository companies that supervise and manage the funds. Furthermore, the Directorate-General for Insurance and Pension Funds of the Ministry of Economy is responsible for monitoring all pension plans.

There is quite a lot of flexibility around making contributions to pension plans. The contributions can be made on a one-off or regular basis, or a combination of both. Although there is no set minimum contribution, the amount depends on the selected plan and the issuing institution. On the other hand, the maximum annual contribution as stipulated by law is €8,000.

The investment policy of the plan also adapts to different types of investors and risk profiles. Depending on the policy, the return potential of the plan may be higher or lower. However, under no circumstances is a specific return guaranteed as it is dependent on market conditions. It is only possible to know the specific return upon maturity in advance by choosing certain guaranteed pension plans.

As for liquidity, this is a long-term savings product designed for pension savings. Therefore, the redemption terms and conditions are limited to certain circumstances, such as retirement, long-term unemployment, and incapacity for work. However, from January 1, 2025, it will be possible to withdraw any contributions made in the previous ten years.

Tax deductions for pension plans

The main advantage of pension plans is that you can get tax relief on your contributions. The tax basis of the Personal Income Tax (IRPF) can be reduced by making contributions, depending on the tax savings of the contribution amount and the marginal rate of the taxpayer. A taxpayer with a marginal rate of 45% who contributes the legal maximum limit of €8,000 would obtain €3,600 in tax savings, which ideally should be reinvested in the same pension plan.

Also, if your spouse does not have an income or earns less than €8,000 a year, you can contribute up to €2,500 euros each year to their pension plan and then deduct this amount from your own tax return.

In addition, anyone with a level of disability equal to or over 65% can also increase their annual limit to €24,250. In this case, the person's direct relatives can contribute up to €10,000 per year on their behalf, since the combined annual limit for the taxpayer and family members is €24,250.

Keys for taking advantage of pension plans

The accumulated savings in a pension plan are not entirely exempt from tax. The savings must be included on your annual tax return as earned income once you start to withdraw the funds. Therefore, it is recommended to withdraw the money gradually as regular income, rather than collecting the full amount all at once. For example, if a pension claimant receives €1,000 each month, the increased yield at the end of the year is not that significant and does not affect the tax basis of the Personal Income Tax (IRPF) as much as if you had withdrawn all your money at once. It all depends on each taxpayer's situation and, therefore, it is essential to analyze each case individually.
Central Banner Pension Plan Central Banner Pension Plan
Pension plans adapted to your needs
See the options we offer:

Apart from tax relief, if you want to obtain a certain return with a pension plan, it is crucial to know about the associated fees and expenses. Pension plans typically include management and depository fees which vary from one company to another. Therefore, before making a decision and opening a pension plan, it is important to calculate the total percentage of the fees and compare it with the potential return offered by the plan.

At BBVA, we are aware of how important saving for the future is for our customers, especially for retirement. For this reason, we offer savings and investment products for all types of profiles, including our range of pension plans. We have pension plans for all ages and types of investors. Calculate now how much you can deduct and open the pension plan that best suits your needs.

CTA Pension Simulator CTA Pension Simulator
Pension Plans - You might also be interested in Pension Plans - You might also be interested in

You might also be interested in

  • These are the changes made in 2018 involving pensions and the maximum amount payable during retirement.
  • We are going to explain how you can calculate the pension benefits you will receive after retiring.
  • Several factors can affect the personal income tax withholding for retirement pensions. Determine your percentage.
Pension Plans - Tools Pension Plans - Tools

Pension plan tools

  • How much state pension will you receive when you retire? Find out in three simple steps.
  • Find the pension plan that best suits your savings needs and start planning your future.
  • Our comparison tool will enable you to know the characteristics of all our plans and choose the one that best suits you.
  • With our calculator, you can find out the final benefit you will receive when you retire.
  • Would you like to know how much you can save on your annual tax return if you contribute to a pension fund?