How are pension plans taxed?

Find out how to declare your pension plan in your personal income tax.

In light of the uncertainty generated by the future of pensions, more and more people are looking to generate supplementary savings for retirement. In this sense, pension plans have become one of the most widely used savings and investment products for individuals.

By taking out these instruments, the holders voluntarily agree to make a series of contributions that are invested according to the plan's investment policy. The goal of these investments is to generate the maximum possible return within the investor's tolerated risk margins. In this article, we give you a step-by-step explanation of the tax treatment of pension plans and the repercussions that these can have on your taxes.

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Tax treatment of contributions to pension plans

One of the greatest advantages offered by pension plans is the ability to enjoy certain tax benefits from the contributions you have made. Contributions to pension plans can be made both regularly and on an ad hoc basis and are limited to a maximum amount established by law: €8,000 per year (in common territory). Once the time has come to file the annual Personal Income Tax return, the total amount corresponding to these contributions can be deducted directly from the tax base. This way, the relevant tax percentage is applied to a lower amount, thus reducing the amount that the taxpayer must pay.

It is also possible to make contributions in favor of the spouse's plan if the spouse does not have income or their annual income does not exceed 8,000 euros. The maximum contribution is 2,500 euros, in addition to own contributions.

Tax deductions for contributions to pension plans are also limited by law; accordingly, the taxpayer can deduct the lesser of the following amounts: €8,000 or 30% of net income from work and economic activities. However, if this deduction limit is exceeded, the tax payer can declare the excess over the next 5 tax years.

Contributions to pension plans should be reflected in the “Reductions in tax base” section of the Personal Income Tax (IRPF) declaration.

Taxation related to redemption of a pension plan

Funds redeemed from a pension plan are taxed as earned income for the total amount of the redemption. However, on a temporary basis, it is possible to reduce the redemption by 40% in the form shareholdings acquired on 12/31/2006 or before.

In general terms, redemption can only be carried out after the participant has retired. However, there are other exceptional liquidity contingencies and situations that allow for collection, such as long-term unemployment, dependency, serious illness, or inability to work, among others. Starting on January 1, 2025, it will also be possible to redeem any contributions that are at least 10 years old.

As is evident, tax upon redemption has an opposite effect to that of the contributions, increasing the taxes that the taxpayer must pay in the fiscal year in which the fund is redeemed. In this sense, the increase in the tax base and, consequently, in taxes, depends on the method of redemption chosen. If you choose to redeem the funds in a single payment, the increase can be significant and may boost you into a higher Personal Income Tax bracket. On the other hand, redemption in the form of income allows the share capital to be divided between several years, potentially reducing the total amount of taxes to be paid. Furthermore, redemption in the form of the monthly income is closer to the true purpose of pension plans, which is nothing more than generating supplementary income for Social Security pensions.

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Tax treatment when transferring pension plans

Transferring between pension plans consists of redeeming the invested capital from the original plan and investing it to a new plan managed by the same entity or by another. This process means that the capital is not in the hands of the holder at any time, rather it is simply transferred to a new product. Consequently, transferring between pension plans incurs no tax repercussions. For tax purposes, the age of the original plan is preserved. This way it is not taxed until it has been completely redeemed.

At BBVA we want to help you plan your retirement. That's why we offer you the pension plan simulator, which allows you to choose the plan that best suits your needs. Visit and discover more information on the wide range of pension plans that we offer. If you still have questions about how pension plans are taxed, don't worry: our team of experts will help you through all stages of the process.

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