Many people look forward eagerly to retirement while others view it with trepidation. At all events, 65 is a major milestone, especially for those keen to end their working lives after years of hard work. But the current economic climate, demographics and the job market mean the pension system we have known to date may change in coming years.
We are all affected by pension issues. In the business world, however, employees close to reaching retirement age are especially aware of the great difference between their salary and their pension entitlement, causing many middle and senior managers to postpone retirement. Spanish managers often continue working after 65 to avoid losing spending power: the maximum pension in Spain in 2019 was 2,659.51 euros, so it is not surprising that people on considerably higher salaries prefer to extend their working lives.
But the decision to keep working can have a not insignificant effect for the rest of society.
Spain has the second highest unemployment level in the EU
There has been more bad news recently: Spain again has the second highest unemployment level in the EU and the highest levels of youth unemployment in the eurozone.
It has to be said that one solution to this problem must be for older employees to make way for younger workers.
So, what is the answer?
Companies introducing plans to reduce the average age of their workforce could soften the blow by taking out collective insurance policies to provide retirees with temporary or life-long top-ups to their state pensions. The company determines the amount and contribution requirements, ensuring rights under the policy are guaranteed at all times. This gives employees a substantial incentive to take early retirement, guaranteeing a future without financial worries while successfully lowering the age of the workforce.
Unlike standard collective pension plans where the contributions are irrevocable, this type of plan links benefits to effective retirement at a certain age. The concept is simple. The company sets up an insurance policy for managers that will pay out a deferred remuneration in the form of a top-up to the state pension to be received by employees, thereby encouraging them to retire. A pension commitment to the employee is thus established in accordance with Article 7 of Royal Decree 1588, governing the contributions that may be paid by the company and/or the worker. Current legislation allows the company to treat premiums up to 100,000 euros per year as tax deductible.
If the insurance premiums are not treated as deductible because the commitment to the employee is contingent on retirement, the company has the option of offsetting the premiums paid when the employee retires. This creates a win-win scenario for both the company and the employee. In addition to supplementing the employee’s state pension, the company’s salary bill is reduced, along with the average age of its workforce, improving the working climate. Other advantages to setting up this plan include its flexible format and benefits, the fact that there is no cap on contributions, and its potential financial performance.
For example, a 63-year old on a salary of 90,000 euros who continues working to 67 would cost the company 486,000 euros. But topping up their maximum state pension by 25% to 50,722 euros a year would cost 127,797 euros over 10 years, 180,860 euros over 15 years or 330,719 euros for a lifelong supplement. Incentivised retirement, a plan to rejuvenate the workforce.
