Differences between a retirement plan and a pension plan

We'll tell you about what a retirement plan is

We tend to think that a retirement plan is the same as a pension plan, because they will both be a complement to our pension and help us maintain our standard of living after we retire.

But they are, if fact, two different products, with different characteristics and different ways of operating.

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- How they work: A retirement plan is really an insurance policy, and it is managed by an insurance company. A pension plan, however, is a financial savings product into which we make contributions that we will be able to withdraw upon retirement.

- How funds are withdrawn: The system of withdrawal is different: in the case of a retirement plan, funds can be withdrawn at any time, provided that you meet the previously agreed conditions. Otherwise, a penalty will be applied. However, funds can only be withdrawn from a pension plan upon retirement, except for certain exceptional cases in which earlier withdrawals are permitted.

- The return/risk ratio: As it is not a financial product, the return of a retirement plan is not as high as that of a pension plan. In this sense, a plan is more attractive, but being a financial product that depends to a great extent on the performance of the markets, it also entails greater risk, most notably in equity plans.
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- Taxation: deduction on the annual tax return. Unlike pension plans, retirement plans are not tax deductible. But, although retirement plans do not qualify for tax relief, when withdrawing money on retirement, you will only pay tax on the interest generated by the plan (which has previously been paid in the installments).

Retirement plan or pension plan? Why not ask us for advice? If you would like more information on these products, please contact us; our experts at BBVA will be happy to help.

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