What are savings plans

We explain to you what these long-term saving and investment products consist of

In the market there are several saving and investment products that allow the customer to gradually build up a good financial 'cushion' which we will be able to access upon reaching retirement age.

Among these products are long-term savings plans, guaranteed benefit plans and traditional pension plans. Each of these forms of saving has particular characteristics that make it more or less suitable for different profiles of savers. 

Savings plans are saving and investment products, also known as Savings Plans 5, that are especially designed for small savers that want to have access to their money in the medium term - 5 years. These plans have two formats:

  • Individual Life Insurance or Long-Term Savings Plan (SIALP): this method of saving is carried out through a life insurance policy. In this sense, SIALPs are taken out with an insurer and are particularly recommended for those seeking long-term returns with a low level of risk. If life insurance is taken out, the policyholder and the recipient are the same person.
  • Individual Long-Term Savings Account (CIALP): this is carried out through a deposit contract which involves the customer and a financial institution. Upon taking out a CIALP, an account is opened into which the gains that the money deposited by the customer generates will be paid. On of the most interesting characteristics of Savings Plans 5 is the security they offer to the saver, since both SIALPs and CIALPs guarantee the repayment of at least 85% of the invested capital. 
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On the other hand, the customer may only take out one of the two – a SIALP or a CIALP – and in order to qualify the tax advantages it provides, they are required to keep their savings in the plan for 5 years, although they will have the possibility to withdraw them whenever they need to.

Differences compared with pension plans

Pension plans are a long-term saving and investment method intended for customers that do not need to have access to their money for a long period of time. There are different types of pension plans according to the contributions and the benefits received, the company that manages the plan and the assets in which they invest.

A common characteristic of pension plans is the tax advantages they offer, as well as the term. These plans require holding the investment until retirement, except for some exceptions which we will look at later.

Let's now analyze the main differences with regard to the assets they invest in, the contribution limits, how each product is taxed and how the contributed capital is recovered.

Assets that can be invested in:

Generally, savings plans usually invest in fixed-income assets, such as Treasury bills, Bonds and Treasury bonds, whereas pension plans have a much wider spectrum of underlying assets. Pension plans can therefore include in their portfolios both fixed-income securities issued by companies and governments, and national and foreign equities, always in accordance with the concentration limits established by the Pension Plan and Fund Regulations and the plan brochure. The investment in a wider range of assets means that pension plans also have a higher potential return.

Saving limits

Both the SIALP and the CIALP have a limit of 5,000 euros per year. In turn, pension plans have an annual limit of 8,000 euros or 30% of the net proceeds from work and business activities — whichever is smaller.

Taxation:

In SIALPs and CIALPs, the contributed capital is exempt from the generated incomes, provided that the aforementioned limit of 5,000 euros a year is not exceeded. 
Contributions to pension plans qualify for tax deductions by lowering the taxable base for Personal Income Tax, by the amount mentioned in the previous paragraph, although when they are redeemed, all of the capital obtained (invested capital + yield) will be subject to Personal Income Tax as employment income.

Ways of recovering the capital:

Long-term savings plans – in both formats – have a 5-year limit during which the customer cannot redeem the contributed capital if they wish the incomes generated to remain exempt. However, unlike pension plans, the money will be available for the customer to withdraw it at any time, although in the event of a withdrawal it will be subject to Personal Income Tax with tax being withheld at 19%.

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This possibility to recover the capital before the set date, albeit losing the tax advantages provided by the savings plan, is not available for pension plans.

As a general rule, a pension plan can only be recovered under different contingencies, including:

  • Retirement.
  • Long-term unemployment.
  • Disability.
  • Severe dependency or high dependency.
  • Severe illness.
  • Death.
  • 10 years after each of the individual contributions have been made, starting from 2015. 

At BBVA, we inform you about these and other savings products for your future.

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