What does the law say about pension plans?

Pension plans are subject to laws that have changed over the years to adapt to new circumstances
Pension plans are an important savings product as they guarantee the well-being of future retirees by allowing them to supplement the public pension granted by the Social Security system with a capital payment or additional income. This is one of the main reasons why pension plans, which are savings and investment instruments, are subject to legislation that has been changing over the years to adapt to the new realities and circumstances, the latest modifications to which took place with the legislative reform of 2015. 
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Workers included in the Regime of Ex-civil Servants of the State

One of the best known features of pension plans is that you cannot withdraw the money contributed unless you meet the contingencies or exceptional circumstances that allow this. One of these circumstances is the so-called “liquidity circumstance”, which came into force on January 1, 2015 and allows shares more than 10 years old to be redeemed, always counting from this date, meaning the first withdrawals will be able to be made from January 1, 2025.

This form of release of funds is included with those already in place, established by law, including release due to retirement - the most common reason - as well as funds released due to specific contingencies, which include:

  • Long-term unemployment.
  • Employment disability.
  • Situations of severe dependency or high dependency.
  • Severe illness.
  • Death of the plan holder.

How much can you contribute to a pension plan?

The law also stipulates a maximum – but not a minimum – for contributions you can make to a pension plan. This is the case because, as we will see later, contributing to a pension plan has significant tax benefits which customers of this kind of product can access.

Going into detail, the law sets a limit on contributions to the plan of €8,000 a year. In the same regard, customers whose spouse does not have net earnings from work and/or whose financial activities are less than €8,000 per year, can contribute to the spouse's plan up to a maximum of €2,500 per year.

Furthermore, the law states that, for people with a physical or mental disability recognised as being 65% or more, the maximum annual limit of contributions can reach up to €24,250, including contributions made by third parties, which cannot exceed €10,000 per year.

What tax advantages do pension plans have?

The limits imposed on the maximum amount of contributions to pension plans are due to the tax relief available for these products. Specifically, all contributions made to a pension plan are tax-deductible for Personal Income Tax purposes, which helps to reduce the taxable income base and provides significant financial saving to the participant of the plan, the amount of which will depend on their marginal rate. The annual deduction limit will be the lower of the following amounts: €8,000 or 30% of net income from work and economic activities.

When unlocking a pension plan, the money recovered must be taxed as employment income through Personal Income Tax, hence the corresponding taxes must be paid. To minimize the tax bill at the time of redemption, it is important to optimize the manner in which it is done. In general, it is more tax-efficient to make withdrawals in the form of income.

What fees are charged in pension plans?

Just like other banking products, pension plans also entail the payment of a series of fees, which are regulated by law. In fact, following the tax reform of 2015, the maximum fees have been reduced to the following percentages:

  • Management fee: it has a maximum of 1.5% per year of the value of the accounts. Optionally, the above limit may be substituted for the limit of 1.2% per year of the value of the accounts plus 9% of the income statement.
  • Deposit fee: it has a maximum of 0.25% per year of the value of the accounts.
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The sustainability factor

As you can see, the law lays down strict rules for pension plans. Among others reasons, this is because this type of financial product helps workers to maintain their standard of living after retirement, as public pensions in the future may not be enough to ensure that pensioners can enjoy the same standard of living as they have during their working life.

This concern is addressed in the legislative reform of 2013, which includes the so-called sustainability factor when calculating the amount of public pension retired workers will receive.

Specifically, this factor addresses the increase in life expectancy of the population and the decreasing number of Social Security contributors, as a result of the ageing population.

The sustainability factor will adjust the amount of the pensions to the life expectancy, so that the overall pension of two workers that have contributed in equal proportions but have retired at different times is the same. This means that the monthly amount of the pension will be reduced according to the rise in life expectancy.

In this situation, it is important to analyze what public pension you can expect upon retirement and what amount of savings will be necessary in order to maintain your standard of living.

At BBVA, we have pension simulators that will help you to find out your retirement pension and will explain how you can improve it using a pension plan.

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