The taxation of a pension plan is one of the main attractions of this type of savings. If we usually look at the tax variable when deciding on the subscription of any financial instrument, in the case of pension plans this aspect becomes more important, due to the possibility of combining savings for the future with present tax relief.
It is not a novelty that these savings mechanisms focused on retirement have a privileged tax treatment,since the possibility of deducting the contributions made to pension plans is a classic of personal income tax returns.
Its power as a tool to reduce the income bill has been minimized somewhat in recent years, but the 2016 income pension plan box is still very attractive.
What is a pension plan?
There are few things that the ordinary citizen does not know about the usefulness of pension plans. In a context of growing fear about the viability of the public pension system, the recommendation to save for retirement appears from almost the beginning of a professional’s working life.
That is a pension plan: savings of an individual invested by a financial institution to return to its holder a return on retirement.
Another favorable factor for pension plans is their flexibility,since the contributions to them can be fixed or periodic,depending on the will to save or the economic possibilities of their owner.
And in addition, the plans fit the age profile of the contractor,with a higher tolerable level of risk the farther away the retirement age is. They are, in that sense, a tailor-made suit.
The possibility of the rescue of the amounts contributed appears as a safeguard clause in case of insurmountable difficulty for the holder, the most common being the situation of prolonged unemployment over time or serious illness, as well as obviously the death of the holder of the pension plan, in which case the heirs of the same may recover the amounts contributed.
Taxation of a pension plan: Calculating tax savings
From here, we enter the taxation of pension plans, and in this aspect, a frequent question is: how much does the Treasury stay from a pension plan?
And in this case the numbers are very clear.
When making the income tax return, the taxpayer may deduct up to 8,000 euros of limit on its impossible basis through contributions to pension plans. With a cap: no more than 30% of the work income can be deducted.
With these principles, the citizen who has subscribed a pension plan finds it easy to schedule his annual contribution based on the tax savings that will result from it. Taking into account that the limits are generous, because a contribution of 8,000 euros per year, a limit set by the Treasury, is well above any average contribution.
The same can be said of the other limit set, 30% of the total amounts received for income from work or other economic activities.
To give an example, a contribution of 3,000 euros per year for a taxpayer whose marginal rate of personal income tax is 40% will save 1,200 euros in their annual return.
As a particularity, it is also it is possible to deduct the amounts contributed to a pension plan in the name of the spouse, up to the limit of 2,500 euros,although this assumption is only applicable in the event that the spouse does not receive income from work activity or these are less than 8,000 euros per year.
Flexibility in contributions to pension plans
A very important incentive of pension plans from the point of view of the taxpayer is their flexibility. That is why it is so common to make numbers at the end of the year and make unique contributions in December to make the most of the income tax relief,provided that resources are available for it.
Of course, all these tax advantages are subject to certain conditions. And the main one, it is necessary to keep it in mind, is the tax bill that must be paid at the time of the rescue, because in that case all the amounts collected are incorporated into the tax base, both those from the contributions and the benefits derived from the management of the plan.
The main consequence of this fact is that the taxpayer, at the moment he rescues his pension plan, is at the same time forced to a marginal rate higher than that which would correspond to him in his personal income tax return.
The impression that may remain is that you have to pay at once not only the tax savings you enjoyed for years, but also that the punishment is even harsher.
In conclusion, pension plans are an excellent instrument for saving, and appear as a wild card saved from the point of view of tax efficiency. But, as with almost everything, you have to plan and do numbers before deciding.