Guaranteed pension plans: how they work

They allow you recover 100% of the money invested upon redemption, as long as certain conditions are met

The options available to you when you choose a pension plan include one that is specially indicated for conservative profiles, in other words, client who want savings with minimal risk: these are guaranteed pension plans. This product works in a similar to way to other pension plans but with an important difference: the holder of the plan is guaranteed to recover 100% of their investment upon redemption, as long as the plan is held until maturity. In the event of early redemption, the guarantee will not apply and the redemption will be made at the market value on the redemption date.

Moreover, the participant can obtain a return on that capital contributed, which can be fixed or variable, depending on the type of guaranteed pension plan in question.

This guarantee of recovering all the investment contributed does not exist in other types of plans, and it is accompanied by a series of characteristics and particularities which we set out below.

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The guarantee offered by these guaranteed pension plans comes from the bank that sells the plan. In the event that the plan taken out by the title holder does not achieve the stipulated return, it will be the company itself that pays out the necessary capital until all the money contributed by the customer is recovered.

However, in order to apply the guarantee on a guaranteed pension plan, the customer needs to maintain his/her position in it, at least until the pension plan reaches maturity. If the plan holder decides to move or transfer their pension plan to another banking institution, they automatically lose that guarantee or protection on their investment.

Likewise, guaranteed pension plans do not ensure recovery of 100% of the investment is the plan is cancelled due to a contingency envisaged in law:

  • Disability of the title holder.
  • Dependency or high dependency.
  • Severe illness.
  • Death.
  • Long-term unemployment.
  • Situation of eviction from their main residence.

If one of these contingencies occurs, the pension plan holder will be entitled to recover their investment and any possible earnings accrued to date, although if any losses occur, the guarantee will no longer apply and the redemption will be the liquidation value on the date of request.

Contributions and taxation of guaranteed pension plans

Unlike other pension plans, in guaranteed plans a one-off contribution is made when the plan is taken out, which will be limited to specific dates.

Guaranteed plans are taxed in the same way as all other pension plans, with a single exception: if at the maturity of the plan it has not achieved the returns that had been guaranteed and it is the bank that pays us the difference, this money will not be taxed as employment income but as capital gains, with the corresponding withholding of taxes being applied.

Types of guaranteed pension plan

There are two types of guaranteed pension plans, depending on the financial products they invest in:

  • Fixed income: these pension plans invest in fixed-income assets such as bonds and treasury bills, so the returns involve less risk than in other types of products, but they are also usually lower.
  • Equities: these pension plans invest in equity instruments, such as the shares of companies listed on the stock exchange. With this type of guaranteed pension plans, the potential profit is greater than those of fixed income, although the investment also entails a greater risk. 

Redemption of guaranteed pension plans

Just like in other pension plans, guaranteed plans offer the possibility to recover the money in three different ways:

  • As a lump sum: a lump sum payment is received upon the pension plan reaching maturity.
  • As income: a monthly income is received for the number of months that has been agreed with the banking institution, until all of the money guaranteed by the plan is withdrawn.
  • As a mixture of both: on the pension plan's maturity date, a set amount of capital is redeemed, and a periodic income is subsequently received.
  • In a flexible way: the payee freely chooses the dates and amounts of the withdrawals, without any set frequency.
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Fees and expenses

There are two types of fees associated with pension plans, whether guaranteed or not:

  • The arrangement fee, which by law cannot be 1.5% annual on 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, with a legal limit of 0.25% per year on the value of the accounts.

Additionally, and depending on the management company, guaranteed pension plans can have subscription and redemption fees, which in any case will be specified in the regulations and the marketing fact sheet.

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