I am self-employed: how can I increase my retirement pension?

If you are self-employed, you will be interested in knowing these important facts about your retirement pension

The public retirement pension that corresponds to self-employed workers is based on two factors: The amount of time that contributions have been made into the Social Security system, and the contribution base that has been selected. A self-employed worker who wants to improve his or her pension must take these two concepts that we are briefly reviewing here into account, while remembering that a supplement to the public pension does exist: the private pension plan, which is described in more detail later.

The minimum period for making contributions in order to receive a public pension is 15 years, and 2 of these years must fall within the last 15 years. After that, the longer the time during which a self-employed worker makes contributions, the larger his or her pension will be. Currently a self-employed worker can retire at age 65 if he or she has made contributions for at least 36 years. Otherwise, the age of retirement will be 65 years and 6 months. In 2027 the ordinary retirement age will be 67 years, but you will be able to gain access to your pension at age 65, as long as it can be verified that you have made contributions for at least 38 years and 6 months. It is also possible to retire early (two years in advance of the ordinary age), as long as it can be verified that you have made contributions for at least 35 years.

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To determine the final amount of the pension, you also need to know how much has been paid in as contributions. In this respect, the minimum contribution base is €919,80 per month and the maximum €3,751,20. Again, making more contributions will result in the right to receive a larger public pension after retirement. However, it must also be remembered that following the most recent legislative changes, the number of contribution years counted when calculating the pension changed in 2018, from the last 15 years to the last 21 years, and in the year 2022 this will be set at the last 25 years.

Thus, according to the 2018 data from the Secretary of State for Social Security, the average pension of a retired self-employed person is €718,75 monthly, 40% less than that of a retired wage earner. According to information from Spain's Social Security Institute, this situation occurs because 86% of Spanish self-employed workers make contributions for the minimum base.

Given this scenario, a pension plan can represent a supplement for self-employed workers who want to maintain their quality of life beyond retirement.

A pension plan suitable for self-employed workers

There is no specific pension plan for self-employed workers existing on the market, but there are certain aspects to which any self-employed worker must pay special attention when deciding on whether to sign up for one of these financial products: the time over which money will be contributed to the plan, the amount to be contributed, and the saver profile.

The age to open a pension plan

The sooner you begin to save, the more income you will be able to get back when you retire. For example, if a self-employed worker opens a pension plan at the age of 50 and begins to contribute €100 monthly, at the time of their retirement at the age of 65 years they will be able to enjoy an estimated capital of €24,076 with a moderate-type investor profile.

However, if you begin to pay the same amount into your pension plan at age of 40, you will have an estimated capital of €45,891. If you begin saving even earlier, at the age of 30 years, the estimated capital would be €75,042.42.

Periodic contributions

Pension plans are flexible in terms of requiring a periodic payment and the majority do not have a stipulated minimum, although the maximum allowed by law is €8,000 a year.

A self-employed worker can choose what type of periodic contribution to make (usually monthly or yearly). This amount can be increased or decreased at any time if a change in income requires it. Again, the larger the contributions made into the pension plan, the higher the estimated amount of capital you will be able to benefit from later.

Returning to the self-employed person of the previous example, if, instead of having paid in €100 a month from the age of 30, they had contributed €150, their estimated available capital would have increased to €112,564. €50 more a month would have made a difference of €37,521.58.

The investor profile

The figures we have just seen are subject to an important factor that the self-employed worker must decide upon: which investor profile to adopt. There are three main profiles: conservative, moderate, and resolute. Depending on this profile, the savings you deposit into the pension plan will be invested in various types of variable-income assets or similar (stocks, derivatives, etc.), as well as in fixed-income assets, issued in different currencies.

As the investor profile goes higher, the higher is the associated risk of not receiving the expected returns. At the same time, however, the potential for earnings is higher.

Looking for the last time at the self-employed person in the previous example, who finally decided to pay in €150 a month. At first they thought about taking a conservative profile, but they saw that with a moderate profile their estimated capital rose from €77,259.46 to €112,564. Finally, since he is still very young he decides to take a little more risk and he chooses a resolute profile; in this way, their estimated capital at the time of retirement became €208,935.

A self-employed worker can invest in the type of pension plan he or she chooses, but it is important to remain consistent with the level of risk that can be assumed. The farther away from retirement you are, the more “room for maneuvering” you still have, and you can therefore take on more risk in pursuit of higher returns. As time goes by, these risks need to be moderated until they have been eliminated in the years leading up to retirement, when preserving the capital needs to be the priority.

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Other information to consider

One of the advantages of pension plans is that they qualify for tax deductions in the annual tax return up to a maximum of €8,000 yearly or 30% of the total amount from wages and economic activities earned individually during the financial year.

However, you must remember that when you redeem your pension plan, you will be taxed on the money you receive, whether you are receiving it in the form of income or capital. The amount redeemed will be considered as earned income.

Here again, the most important thing is to become adequately informed, so that you can redeem your pension plan in the optimal manner.

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