Tax treatment of private pensions in Spain

Tax relief for pension contributions in Spain

1. Spanish tax relief available

Contributions to private pension schemes can be offset against taxable income in Spain up to certain annual limits, currently:

10.000€ for taxpayers up to 50 years of age

12.500€ for taxpayers over 50 years of age

- The relief is limited to 30% of the tax payer's income for the relevant tax year (50% for the over 50s)

- the limits apply annually for a calendar year

- the taxpayer can save their highest rate of marginal tax (i.e. up to 43% currently)

- additional contributions (up to 2.000€) can be made to the plans of spouses who have between 0 and 8.000€ taxable income

- contributions made to a spouses pension do not count towards gift or inheritance tax limits

- higher limits are available for people with disabilities (up to 24.250€)

- direct relatives can contribute 10.000€ to plans of people with disabilities

Examples:

35 year old person has 20.000€ of taxable income.  They can offset up to 6.000€ (30%) of their pension contributions against this income before calculating the tax.  They will save at the basic rate, 24%.

55 year old person has 80.000€ of taxable income.  They can offset up to 12.500€ of their pension contributions against this income before calculating the tax.  They will save at the higher rate, 43%.

2.  Types of plan covered

It is not just pension plans that are covered by this treatment.  Also plans which cover the insured in case of death, illness or incapacity are also included.

You can only access benefits under these plans at certain points:

- in the case of retirement plans, normally when you retire in the state system or (if you are not in the state system) the "normal" retirement age, currently 65 but rising.  There are early retirements at 60 (45 if disabled) allowable under certain conditions.

- incapacity benefits are paid out in line with the rules for the social security system

- serious illness.  Usually policies limit claims to illnesses that prevent the claimant from ever working again or, in the case of temporary absences, those lasting at least 3 months.  In either case medical certificates are required exactly as for the state system.

- death.  Life insurance policies which pay out to named beneficiaries on the death of the insured are available as stand-alone policies or as part of a pension plan.  The beneficiary doesn't pay inheritance tax on the payout.

3. Pension payout options

Pension contributions are rolled up in the scheme until retirement when they can be taken, at the option of the contributor, in the following ways:

- a one off capital payment

- regular monthly or quarterly or semi-annual payments

- a combination of these

OR by buying an annuity which guarantees a regular income for life

If the contributor dies before retirement the accumulated funds are paid onto the named beneficiaries.

Note that (with some exceptions) all of these forms of taking the income from plans is taxable as income in the hands of the recipient during the tax year in which it is received.  Also it is treated as earned income from employment and not investment income.  This is like the UK system - contributions to pension plans gets tax relief but the income on retirement is taxed; more like "tax deferred" than "tax free".

4.  Comparison with social security pensions

Some self-employed clients have asked whether it is better to start a private pension plan such as the ones talked about here or to increase the rate of contribution to the state social security system (most autonomos pay the minimum monthly contribution possible).  It is practically impossible to compare the two, particularly as the benefits "bought" under the state system can and will be changed many times by the government over the years before retirement.  However, for a younger autonomo particularly, they might feel better having a private and a public pension rather than putting all their eggs in the state basket.

5.  Charges and performance

For a pension plan to be a successful investment, care must be taken to ensure that the private pension provider doesn't take too much in charges and that you choose a good investment vehicle - there are hundreds of different types: guaranteed return, fixed income, equities, emerging markets, Spanish, European etc  Easier said than done.  Most providers seem to charge similar levels and it is not always clear what those costs are.  Also the performance of funds has come under criticism.  This is the translated comment of an economics professor who studied 17 years of pension plan performance :

between 1991 and 2007, in the boom economic, only two pension plans exceeded the performance bonds and any index beat the Madrid Stock Exchange. " The disappointing result is due to the high commissions , the portfolio composition and management, "say the authors. "In many cases, investors lose the tax relief via commissions and inefficiencies in the management," they say.

 

Other pensions articles: Spanish pension benefits