Pension plans have traditionally been a very popular savings instrument in Spain. Although the proposed tax reform is currently receiving a lot of attention in the press, up to now pension plans have been considered a good option to consider as a complement to retirement.
However, the health crisis caused by COVID-19 has also left its mark on the savings scenario in our country, pension plans being one of the main protagonists in recent months. Although it should not be forgotten that, as a long-term product, they are not so severely affected by annual volatility, some of those holding pension plans have had to resort to their savings sooner than expected.
Previously, incapacity for work, the death of the holder, serious illness and long-term unemployment had been among the exceptional circumstances that allowed plans to be redeemed. From 2025, contributions to pension plans and the returns generated can be redeemed, if the plan is at least ten years old.
However, the delicate situation the country has been in recently, with shops and work centres closed, and workers consequently affected by temporary redundancy plans, led the government to allow pension plans to be redeemed if certain requirements were met. Royal Decree-Law 15/2020 on complementary urgent measures to support the economy and employment thus established that pension plan holders could only redeem the amount that they were not receiving as a result of the state of alarm.
As a result, 31,000 self-employed workers and employees received early pension fund benefits between April and July, as a measure to counteract the drop in their income. The Directorate-General for Insurance and Pensions (DGSP) calculated that €60 million were redeemed from pension plans by workers affected by temporary redundancy plans between April and July.
As in any crisis, there is another side to the coin. In this case, Spanish people whose purchasing power was not altered could save more than normal and pay money into their pension plans.
At the end of July, net contributions to pension plans were positive for the first time in 12 years, according to the Association of Collective Investment Institutions and Pension Funds (Inverco). Holders of pension plans increased their contributions by 7% in the second quarter of the year and the average cumulative yield exceeded 5.6%.
In August, individual pension plan assets grew by €967 million, to €74,993 million, up 1.31% on July, according to consulting firm Vdos, undoubtedly welcome news in a year marked by uncertainty.
After a period of economic difficulty, the full consequences of pension plan volatility in 2020 are still to be seen. Holders who have opted for redemption will see their income for retirement reduced. Furthermore, with regard to the income tax declaration for 2020, it must be borne in mind that, if a pension plan has been redeemed, the total withdrawn will be taxed as earned income. However, the tax authorities apply a 40% reduction to contributions made until 31 December 2006. On the other hand, taxpayers who have been able to contribute extra capital this year will benefit from a reduction in the general tax base for the 2020 income tax return. All contributions will reduce this tax base subject to a maximum limit: 30% of net earnings from work or 8,000 euros per year. In the long term, these additional contributions will also increase the amount payable at retirement.
Unfortunately, coronavirus has left no one untouched, also leaving its mark on countless saving and investment products.