Withthe 2014 reform of pension plans by Royal Decree 62/2018, from 2025 onwards it will be possible to redeem a pension plan without having to wait for a special event such as retirement, disability, or long-term unemployment. It will only be necessary that more than 10 years have passed since the contributions were made to the plan. The accumulated capital that meets this condition can be redeemed without giving any explanation to the financial institution.
We would like to remind you that Royal Decree 62/2018 amended the Regulation on the implementation of pension commitments by companies to workers and beneficiaries, and the Regulation on pension plans and funds, which lowers the maximum fund management fees and, in turn, increased the liquidity of this savings alternative by allowing participants to withdraw, from 2025 onwards, without limitation, contributions that are at least 10 years old.
From 2025, it will be possible to withdraw contributions to pension plans with a minimum tenure of ten years, without needing to meet exceptional conditions such as retirement or disability. This increased flexibility, resulting from the reform implemented by Royal Decree 62/2018, will significantly transform the liquidity regime of these savings instruments, allowing savers to access their capital without time restrictions, provided that at least ten years have passed since their initial investment.
Until now, pension plans only allowed withdrawals in specific situations: retirement, long-term unemployment, disability, serious illness, or the death of the policyholder, in which case the beneficiaries could receive the funds as earned income. This new regulation introduces an exception, applicable from 2025, which will give participants greater flexibility.
The reform of pension plans
The regulations establish two fundamental changes in the operation of pension plans. The first is the possibility of redeeming contributions older than ten years, starting with those made before 2015. Therefore, from 2025 onwards, contributions made up to 2015 can be accessed, while contributions from 2016 will be available from 2026, and so on.
The second significant change is the reduction in management fees. These will decrease from an average of 1.5% to 1.25%, and for funds linked to fixed income, fees can be reduced to as low as 0.85%. This adjustment in management costs has been in effect since 2018, and its aim is to make pension plans more attractive and accessible to savers.
How to recover contributions
The regulation stipulates that investors can recover their initial investment plus any appreciation gained during the 10-year period they remain in the fund. To calculate the redeemable amount, the number of units acquired at the time of contribution and their current value will be considered. This measure aims to make the plans more dynamic and liquid, making them a more versatile option for long-term savings planning.
Taxation of the 10-Year Redemption
Although the liquidity of these products is increasing, the taxation of withdrawals remains the same as in traditional scenarios such as retirement. The withdrawn money is considered earned income and is taxed under the general income tax bracket. Depending on the total amount and the progressive tax scale, the applicable rate will range from 19% to 47%. This means that the withdrawn money will be added to salary and other income, which could affect the applicable marginal tax rate.
It is important to remember that redeeming a pension plan also counts as a second payer in the personal income tax return, which could affect the obligation to file the annual return if the total redeemed exceeds certain limits.
Rescue options
Upon reaching the 10-year term, participants will have three redemption options: annuity, lump sum, or a combination of both. Choosing the annuity option allows for periodic payments, which, from a tax perspective, can be more advantageous, as the tax will be applied progressively and adjusted to the different income brackets. Conversely, opting for a lump sum redemption can significantly increase the taxable income, thus raising the applicable marginal tax rate.
An interesting option for those who made contributions before December 31, 2006, is the possibility of applying a 40% tax reduction to the amounts withdrawn. This means that if, for example, €50,000 is withdrawn, only €30,000 will be added to the taxable income. However, it should be noted that, given the large amount involved, this could move the taxpayer into a higher tax bracket and result in a higher tax rate.
Tax considerations and investment alternatives
From a tax perspective, withdrawing from a pension plan before retirement can mean paying more taxes, since income tax on wages tends to be higher than on pensions. Therefore, it's crucial to evaluate not only the tax implications but also the associated opportunity cost. Keeping money in a pension plan means leaving it in a product with variable returns and specific fees, whereas it might be more profitable to invest in other instruments such as investment funds or indexed portfolios.
In conclusion, the possibility of redeeming pension plans older than 10 years, starting in 2025, represents a significant step forward in the flexibility and accessibility of these products. However, it is important for participants to carefully consider the tax implications and investment alternatives before making a decision, in order to maximize the return on their savings and optimize their long-term financial planning.
You can contact this professional office for any questions or clarifications you may have.
Warm regards,
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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