The advantages of a pension plan

The nature and advantages of a pension plan make them an ideal tool to help you save for a comfortable retirement

A financially worry-free retirement is everyone's goal. This objective, added to the forecast that public pensions in the future will be lower than now, is leading more and more people to make strategic investments to guarantee their future. A frequent way to channel such an investment is through a pension plan. This allows flexible long-term savings and the accumulation of capital that can be used on retirement to complement the income from the state retirement pension.

You don't have to be an economist to have a pension plan, as these are managed by experts whose aim is to maximize the return on the investment, while respecting the risk profile defined in the investment policy.

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Choosing the most advantageous plan

As there are different types of pension plan, it is advisable to analyze the options available according to your investor profile in order to ensure the maximum return. Depending on your willingness to assume risk, in other words, if you are more conservative or more resolute in your investments, you will have the opportunity to choose the best plan for your needs from among the dozens available.

The main criterion to take into account when choosing a plan is the risk you will have to assume, which at the same time is linked to the remaining time horizon until your retirement. People who are decades away from retirement can be more daring and seek additional profitability, even if it means assuming greater risk. People halfway along the road should be moderate in their risk acceptance. And those who are close to retirement should maintain a conservative position, as the priority at this time is to preserve the capital and not to earn extra money.

It is important therefore to manage the evolution of the risk profile as the years go by. If you do not want to be concerned with this type of management, you can choose a "life cycle" pension plan that automatically includes it. The participant only has to choose a plan with a maturity close to their retirement age.

As you will see in the BBVA product catalog, the general trend is for a pension plan to emphasize its flexibility, which provides the opportunity to take advantage of diverse and dynamic investment. And, moreover, with added tax benefits.

The benefits of tax-free savings

One of the main advantages of a pension plan is its tax benefits. The contributions you make to the plan can be deducted when you file your annual tax return, reducing your personal income tax base. In other words, your pension plan allows you to decrease the amount you pay to the Inland Revenue up to the limits provided for by law, which are the lower of the following amounts: €8,000 per year or 30% of the net yield from work and economic activities.

If you have more than one pension plan, all the contributions will be counted together for the purpose of these limits. In addition, if the spouse of the investor has an income from work or economic activities of less than €8,000 euros a year, they may make contributions in their favor and deduct them in their own annual tax return up to a limit of €2,500 euros a year.

Likewise, if you cannot deduct the total amount of the contributions because the amount contributed is higher than the deductible amount, the surplus amount can be transferred to the following five fiscal years. BBVA offers a pension plan calculator so you can calculate and plan the tax savings you would obtain, based on the contributions made and your situation as an investor. This useful tool will help you choose the most suitable plan and achieve the best return.

In other words, by saving in a pension plan you obtain an additional saving that will multiply if you reinvest it in the plan. Another benefit of pension plans is that you have the freedom to change plans in search of a better return or a more suitable risk profile, and without paying tax. In fact, it is possible and recommendable to diversify between different pension plans to reduce the risk.

Flexibility in contributions

The system of contributions to a pension plan also has advantages. Unlike other products, the investor is not duty bound to pay a fixed amount periodically, but has complete freedom to make payments in keeping with their situation and objectives. Again, flexibility appears as a key factor, as you can choose the amount of your contribution at any time and decide whether you want to make periodic and/or sporadic contributions (monthly, quarterly, half-yearly).
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Redemption suppositions

Although pension plans are designed to generate savings for you to use when you retire, you can also withdraw funds before you retire in any of the following circumstances: if you are unable to work, if you are in poor health, in a situation of dependency, the death of the holder, long-term unemployment, after holding the plan for ten years (from January 1, 2015) or mortgage foreclosure. This means that you can take advantage of the benefits of the plan early in specific circumstances.

When the time comes to redeem your pension plan, there are different ways to receive your money: as income, as capital or as a combination of these two options. Depending on the characteristics of the plan, this allows to the investor to recoup their benefits in a single payment, periodically in various payments, or both at the same time, depending on their objectives or plans. It is important to consider the best way of redeeming the plan to minimize the amount of tax that will have to be paid, given that payments from pension plans are taxed as earned income on your personal income tax return. It is normally more advantageous to take the payments in the form of a regular income.

The fiscal advantages and flexibility offered by a pension plan make this option one of the main savings vehicles for ensuring your future.

Learn about the different types of BBVA pension plans and the bonuses you are eligible for. See all our products in bbva.es and use the tools we provide to do your calculations and find the most suitable pension plan for you.

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