How a pension plan works and what are the keys to save more

How a pension plan works and what are the keys to save more

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Currently, Spain has more than 6 million people who receive the retirement pension, a public benefit that, on average, amounts to 1,156.26 euros. Upon reaching the legal age, in 2020 stipulated at 65 years and 10 days, the workers who want to can retire and they then receive the pension, which is paid by Social Security based on the contributions currently made. However, for years different entities and experts have warned of the danger of the sustainability of the pension system.

This situation of uncertainty, together with the savings that many people want to have for their retirement, means that many hire so-called pension plans. They are savings products from contributions that are made during the labor stage and that are obtained when retirement is reached. Thus, to public retirement is added the income from the rescue of these plans. But how exactly do they work and what are the keys to greater savings?

As we have indicated, it is a savings product in which capital is invested. This capital is constituted from the contributions made by users, either periodically or strut. However, the contributions have a limit of 8,000 euros per year. In addition, a maximum of 2,500 euros can be contributed in favor of the spouse who has no income greater than 8,000 euros. That income is deducted from personal income tax, as long as it does not exceed 30% of the net income from work.

The contributed capital is invested in the so-called pension funds, which, like any other investment fund, invests the money in fixed income and variable income. This investment has a profitability for the user. Both the return, as the percentage in fixed or variable income depends on the risk profile that each investor can assume, as well as in any investment product, the higher the risk, the higher the return.

There are several types of pension plans and their operation is the same, so their main difference is who promotes them. Thus, they can be promoted by a single individual, individuals, by a company aimed at its workers, employment, or by an association or association, associates. The most popular are private pension plans, which currently have tax deductions of up to 8,000 euros from the personal income tax base. However, from the Government they intend to transfer this incentive towards the company pension plans, he argues, more profitable and less expensive.

Maintaining a pension plan involves paying the management and deposit fees. The first of these, may not exceed 1.50% per year, will be charged by the fund manager that invests the capital and the second, at most 0.25% each year, will be charged by the bank. Generally, employment plans have lower fees than individual pension plans. These lower costs therefore translate into better profitability.

According to Inverco data, less than 2 million Spaniards have an employment plan, that is, only one in ten employed workers had this type of pension plan with contributions from their employer company at the end of 2019, with the leading role of officials, banking professionals and the energy sector. The total equity of the employment plans at the end of last year was 35,710 million euros, a growth of 5.6% compared to December 2018 and the highest number in its historical series since 1990 that Inverco records. However, they are still not close to the assets of private pension plans, which have assets of 79,849 million euros, that is, more than double. Regarding profitability, only six out of 100 pension funds beat the Ibex 35 in the last 15 years.

Once retired, the owner of this plan will be able to rescue him, so that he will receive the invested capital. Profitability is not always positive, so recovering less money than invested is a possibility to keep in mind. To avoid this risk there are also guaranteed pension plans, which ensure the contributed capital and some even agree on a minimum of profitability. In exchange, loyalty is usually required, so that the link to the product and even to the entity will be greater, or a greater interest

The loyalty That it is agreed is an important question since in many cases it implies maintaining the plan until the moment of retirement without being able to change entities, for example. Or if you need the money invested before retirement, the agreed redemption date, the guarantee may not take effect and you may not get back the money invested prematurely.

The redemption of the plans is generally carried out at the time of retirement, however, there are extraordinary situations in which the entity would allow the redemption. These exceptional cases are the total and permanent incapacity for work, absolute or great disability, whenever determined by Social Security; dependency situations; or by death, in which case rights will be generated in favor of the spouse or relatives. In case of a liquidity problemIt also allows rescue when there is a situation of serious illness or long-term unemployment.

On the other hand, regarding the redemption, as of January 1, 2025, the rule that makes the recovery of the money invested more flexible, so that investors can recover the shares with a minimum age of 10 years.


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