Are you thinking of taking out a pension plan?
In this post we will give you the keys to choosing the right one among the best, so that you can make the most appropriate choice according to your point of view and economic and personal situation.
If you want to see a complete guide to the best pension plans, read on!
What is a pension plan and why do I need one?
A pension plan is a retirement savings product, complementary to the public pension, which can also offer significant tax advantages.
The reasons for needing one can be many, from living with peace of mind for the economic future to maintaining the economic level we have before retiring.
The difference between a pension plan and a pension fund
These two terms are often confused, but they are not the same.
The funds are funds that have been created to fulfil pension plans. They are made up of the contributions of the members of the plans that comprise them and the returns obtained on their investments.
How do pension plans work?
Basically by means of periodic or one-off contributions from the people who subscribe to them, generating a return over time that can increase the amount saved and also depending on the type of plan that has been subscribed to.
Types of pension plans
There are three types of pension plans: individual plans, associate plans (promoted by guilds, associations, trade unions, etc.) and employment plans, which are mainly promoted by companies.
Focusing on the individual pension plans, we can classify them into several groups according to their investment policy:
Fixed-income, which involve little risk and a lower return; variable-income, which offer a high return but involve a significant risk; and mixed, which mix fixed-income and variable-income investments.
There are also other types, such as money market funds, whose investment is focused on fixed-income securities with a short redemption period; guaranteed funds, which offer the holder the guarantee that they will receive all the money they have invested, with an obviously very low return; and indexed funds, which invest their members’ money, mainly or exclusively, in funds that copy the composition and evolution of international fixed-income and equity stock market indices.
What is the taxation of pension plans?
When talking about the taxation of pension plans, it should be remembered that the amounts contributed annually to each plan can be deducted from personal income tax, reducing the taxable base and thus offering significant tax savings (as is also the case with health insurance in some specific cases).
In addition, when the plan is surrendered, the capital obtained will be taxed as income from work, regardless of the situation that generates the right to surrender. In the event of the death of the holder, the beneficiaries or heirs will pay IRPF tax as earned income.
Best pension plans
What are the best pension plans? It depends on what the contracting party is looking for: peace of mind and security or high returns.
In this respect, a pension plan comparator can always help you choose, as can a pension plan simulator.
It is also a good idea to get information from reliable sources, such as the best pension plan according to the OCU at the present time, as offers can change rapidly over time.
A good plan in this type with almost no risk is one that manages to offer almost any type of return, bearing in mind that this will not exceed 5% and that the most common is that it does not exceed 2%.
The best plans can give a return of between 10 and 20% over five and ten years, and some even go as high as 30% per annum. Needless to say, these plans are very risky.
A good plan is one that, within a moderate risk, offers a high return without going nearly as far as an equity plan.
As with fixed income, but with the added bonus that the funds are withdrawn as soon as possible. Any return is welcome, although it will not exceed 1%.
These have no emotion; the client receives without risk practically the same amount of money that he/she would have invested, except for a minimal positive or negative fluctuation.
Anything that adds up, however little, is good news.
As these plans invest the money in funds that copy the composition and evolution of international fixed income and equity stock market indices, the results can be very diverse.
In hindsight, the best will of course be the most profitable. A return of between 3 and 5% would already be great news.
What to take into account when taking out a pension plan?
Basically one aspect: to be clear about what balance we want between risk and return, based on our economic and family situation and individual perspective.
And also take into account whether we want to have the money available in the short, medium or long term.
Frequently asked questions about pension plans
When can a pension plan be withdrawn?
The pension plan can be recovered when one of these contingencies occurs: retirement, incapacity for work, situations of dependency and death. Also, in exceptional cases, the pension may be withdrawn in the event of serious illness, long-term unemployment, long-standing contributions (from 2025 onwards) and extraordinary and serious situations.
How much tax relief can I get for my pension plan?
The maximum annual tax allowance is EUR 2,000 or 30 % of the sum of the net income from work and business activities received individually in the year. If the allowance limit is exceeded, the excess can be carried forward to the income tax return for the following five years.
When is it advisable to set up a pension plan?
On numerous occasions and for various reasons: from not wanting to get into financial difficulties to maintaining a certain standard of living while obtaining a return. The best time to do so will depend on the vision of each client, the type of plan they opt for and whether they are planning for the short, medium or long term.