Guaranteed Benefit Plans: Guaranteed benefit plan

Get to know this way of saving and discover how it is different from other pension plans

When you think about savings instruments for retirement planning, most people automatically think about individual pension plans (PPI). However, there are other less known products used for the same purposes. One of these is the guaranteed benefit plan (PPA). Next we are going to learn what they entail, how they work and what their main features are.

A guaranteed benefit plan is long-term savings insurance product designed to complement the social security retirement pension scheme. Being an insurance product, its main feature is that it guarantees the customer a rate and therefore a specific amount of capital on the maturity date for the interest's guarantee. That maturity date for the interest's guarantee will look for a time frame in connection with the customer's retirement.

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Differences between a guaranteed benefit plan and a pension plan

These are two vehicles to build savings for retirement with multiple similarities, which are governed by the same legislation.

The primary difference among both plans is that, as indicated earlier, a guaranteed benefit plan must guarantee an interest rate through actuarial techniques, whereas returns on a pension plan depend on how the assets you invest in perform. In other words, an insured benefit plan offers certain returns, whereas a pension plan does not.

Legal and tax features for guaranteed benefit plans

Guaranteed benefit plans are designed for when a policy holder/insured party retires. Nevertheless, there is a series of contingencies established in the plan under which you can redeem the consolidated rights of the plan before retirement. These are: work disability, high dependency, severe illness, long-term unemployment, eviction and death. Furthermore, you can arrange in advance the amount for vested rights that correspond to the contributions made that are at least 10 years old starting from the 2015 tax reform.

Contributions to a guaranteed benefit plan have the same limit as pension plans. This maximum annual contributions limit is €8,000 or 30% of earned income and economic activities of the policyholder — whichever is the smaller amount. If you live in Basque Country or Navarre the following yearly contribution limits apply to you:

  • Basque Country: €5,000 for individual contributions, €8,000 for contributions from the developer and €12,000 as a set limit.
  • Navarre: €3,500 or 30% of the sum of income earned and business activities for those younger than 50. €6,000 or 50% of the sum of income earned and business activities for a those older than 50.

Contributions made on behalf of spouses: Besides the contributions to a PPI/PPA, if a spouse (unmarried couples are included in Basque Country) does not gain net yields from work or from business or professional activities, or if these are lower than €8,000 yearly (Navarre €8,500), then contributions to the pension plan will be able to be reduced, with a maximum limit of €2,500 (Navarre €2,000; Basque Country €2,400). These contributions will be exempt from taxation as per the inheritance and donations tax, regardless of the profit system they have.

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Contributions made on behalf of people with a disability: This is the case if the account holder with a disability has a physical disability equal to or more than 65% or a mental disability equal to or more than 33%, as well as for people that have a legally declared disability. The maximum contribution that can be made to your PPI/PPA is 24,250 €, regardless of your age.

The plan holder can make contributions to the plan, as can their direct family members (children, parents, grandparents...) or extended family members (brothers, aunts and uncles, nieces and nephews), as well as spouses or guardian or foster parents.

Contributions made by each person who is not the plan holder cannot be more than €10,000 (Basque Country €8,000), regardless of the contributions they make to their own plan.

The benefits of the guaranteed benefit plan are considered as work income, which is why they form part of taxable income for personal income tax (IRPF). The plan's accrued rights benefit from freedom of mobility towards another guaranteed benefit plan or towards another private plan, as a pension plan may be.

If you want to receive more information on guaranteed benefit plans, do not hesitate to visit your BBVA BRANCH. They would love to assist you and answer any questions you have, as well as offer you other alternative products so that you can choose the one that best suits your needs and preferences.

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