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What are contributions to pension plans?

'Contributions' refer to the amounts that are periodically paid into a pension plan. The total amount of these contributions can never exceed 8,000 euros per year and unit holder. This limit is connected to the tax advantages of pension plans, because the money contributed is the maximum amount that can be deducted from the tax base. It can therefore be viewed as a saving.

The maximum amount you can deduct per year depends on the contributions you have made and your tax base. For example, if your tax base is 30,000 euros and you contribute €3,000 to your pension plan, in the eyes of the Treasury you will only have earned 27,000 euros and that is the figure you will pay tax on.

The sooner you start, the better

Another point to bear in mind is that the sooner you start contributing to your pension plan, the greater the benefits. Remember, a pension plan is a long-distance race, meaning that it's a long-term financial product. The return will be higher the longer you have until retirement, because you will have more scope to take advantage of compound interest and will benefit from higher tax relief.

To understand this concept, let's compare two people of different ages. A is 36 years old while B is 46, and they both make the same monthly contribution of 100 euros to their pension plan.

Thirty-six-year-old A contributes 100 euros every month until the age of retirement and obtains 75,114 euros when the plan matures, of which 37,200 euros correspond to contributions and 37,915 euros to the return generated over the years. A also saves 11,160 euros in tax. 

Meanwhile, 46-year-old B draws 35,087 euros in total from their pension plan when they retire, of which 25,200 euros correspond to contributions and 9,887 euros to the return generated. The tax saving in this case amounts to 7,860 euros.

In other words, with a difference of only 10 years, A has managed to double their capital even though their contributions were only one third higher than B's contributions.


How do pension plans work?

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