Types of contributions to pension plans

There are two types of pension plan contribution, we'll advise you which is best for you

When you take out a pension plan, you build it up by making contributions. Depending on their frequency, these contributions can be of two types: periodic or one-time.

Periodic contributions are made regularly with a specific frequency. Such contributions are normally made monthly or quarterly, although other frequencies may be chosen. It is also possible to suspend programmed contributions and take them up again at any time.

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On the other hand, customers can also make one-off contributions whenever they can afford to pay a certain amount or at specific times of the year. These contributions are normally concentrated in two specific periods, in which the participants remember the fiscal benefits of paying into pension plans: in the months of the personal income tax campaign and in the last few weeks of the year or the end of the fiscal year when the opportunities to add to the pension plans and deduct the amount from the tax base end.

When contributing to a pension plan, which of these two options is the best choice for the customer?

The benefits of making regular contributions to a pension plan

When a customer decides to start contributing to a pension plan, the best option is to make periodic payments. And there are more than a few reasons for this.

The first has to do with the economic effort entailed in contributing to the plan regularly and periodically, in small amounts that do not signify a major dent in the domestic economy. On the other hand, paying out a large amount of money once or twice a year to maintain the level of savings and investment may not always be possible, due to unforeseen economic circumstances.

Banking organizations will facilitate periodic contributions to a pension plan through automatic monthly or quarterly payments. As a result, the customer does not have to worry about contributing to their plan. In this way, each contribution can be counted as another expense –although in reality it is an investment– in the personal or family economy and as part of the everyday accounts. It is also possible to program periodic revaluations of contributions by making an order for them to be revalued automatically every January to keep abreast of inflation.

However, the biggest advantage of making regular contributions to a pension plan lies in the diversification of the risk. It is worth remembering that, as a pension plan is an investment product, every contribution means you are acquiring shares in it. And the value of those shares, the so-called net asset value, varies from day to day; as such, if the customer only makes a contribution to the plan once a year, it means they will be buying all their shares at the same price, which may be higher or lower than in the previous months. In other words, it increases the risk of buying at an unfavorable price.

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However, with monthly or quarterly contributions the risk is diluted with the purchase of shares at varying prices. You obtain what is known as the “average price”, which helps compensate for price peaks. In the long-term, this option can be safer for the investor.

Finally, it is worth reminding ourselves that contributions to pension plans have a yearly maximum limit currently set at €8,000, which is not to be confused with the annual tax deduction limit, which is set at the lower of the following amounts: €8,000 or 30% of net income from work and economic activities.

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