How inheritance works with a pension plan

We tell you who can inherit a pension plan and how it is taxed

A pension plan is a savings mechanism intended to complement the Social Security retirement pension. It is a private, voluntary plan that in no case is a substitute for public pension payments. Although, in principle and as a general rule, you cannot access the funds until retirement, one exception is the death of the plan holder. Therefore, it is necessary to explain who will inherit the pension plan and how this is taxed.

To understand how the inheritance of a pension plan works, it is essential to differentiate between the three people involved:

  • The promoter of the pension plan : any company, society, body, etc. that promotes the setting up of the plan or participates in its development.
  • Participants: the individuals in whose benefit and interest the plan is set up. In other words, the person whose retirement, disability, dependency and/or death is covered by the pension plan.
  • Payees: the people with a right to receive the benefits of the plan. In the contingencies of retirement, disability or dependency the payee is the same as the participant. However, in the event of death, the beneficiary will be the person or people designated by the participant.

This is in the last appointed contingency, concerning to the death of the pension holder, in which the question of the inheritance of a pension plan appears.

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Who can inherit a pension plan?

If the holder of the pension plan dies, the consolidated rights of the plan will pass to the person who has previously been appointed in the notice of express appointment of beneficiaries. When the pension plan is contracted, the participant can choose one or more persons as beneficiaries. In that case, they also have the authority to define different percentages to be inherited by each of the beneficiaries.

If the participant did not appoint a beneficiary when taking out the pension plan, those indicated in the will (if there is one) will apply. It should be emphasized that, in the case of a discrepancy between the express designation and the will, the designation with the most recent date will take precedence. If no one is explicitly designated in the will, the beneficiaries of the pension plan will be those indicated in the specifications or regulations of the plan, normally the legal heirs. In other words, the spouse and descendants. And lastly, heirs named in the will or the holder's interstate heirs.

How is the inheritance of a pension plan taxed?

Before explaining how beneficiaries pay tax on pension plan proceeds, we must understand what happens with personal income tax on the deceased holder of the plan. In the case of the deceased, the corresponding amount to be paid or refunded will be calculated from January 1 to the date of death.

However, the beneficiary of the inherited pension plan, when receiving consolidated rights, must know that the benefits of the plan are never subject to inheritance tax. The amount received from the plan will always be considered as earned income for the purposes of personal income tax. Therefore, the beneficiaries will have to declare that income on their tax return at the corresponding rate, as it may raise your general tax base.

If the beneficiary is a legal entity, the proceeds of the inherited pension plan be treated as another stream of income that would be included in their annual accounting profit. In this case personal income tax would not apply, as tax would be paid under the corporate tax regulations.

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What documents do the beneficiaries of a pension plan inheritance have to submit?

In order to redeem the funds of the pension plan, the beneficiaries must provide the following documentation:

  • Application for benefit due to death. If there is more than one beneficiary, each will have to submit an application.
  • Photocopy of the beneficiary's ID.
  • Photocopy of the deceased's ID.
  • Original death certificate of the holder of the pension plan.
  • Documentation that accredits the beneficiaries as such the last beneficiary designation bulletin, will or declaration of heirs, certificate of final testament, inheritance deed, official Family Book (Libro de Familia) and, if applicable, the partition of succession statement.
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