A pension plan is an investment product designed to guarantee a future income and supplement your state pension. Its main purpose is therefore to generate a long-term investment for retirement.
It's a simple product with the features described below.
- A pension plan is: an instrument to get a return on the money you save over a long period of time.
- A way of getting used to investing with a view to ensuring a better financial position when you reach retirement.
- A product that delivers savings on your annual tax return
- A product that adapts to all types of investors, from the most conservative to the most aggressive.
- A pension plan is not: You should not think of a pension plan as savings that you can use for unexpected expenses because you don't have instant access to your money.
- You should get used to the idea that the money you pay into a pension plan is designed to be recovered when you retire.
- It's not an instrument designed for the short term. Although there are circumstances in which you can redeem a pension after 10 years, it's precisely from that point on that it generates a higher return.
How pension plans work:
When you take out a pension plan, you undertake to make regular or one-off contributions to it, which will then be invested in a pension fund based on pre-defined risk, investor profile and plan policy criteria.
This fund moves the money around and manages the capital, buying and selling assets to get a higher return. As a result, when the plan matures, the subscriber gets back the money paid in over the years as well as the return that the plan has generated.
In the long term, a pension plan helps you create a saving habit with your sights on the future and ensure a better financial position when you retire.
In the short term, although you can't access the money invested, it generates immediate benefits because you can deduct your contributions when you file your annual tax return.
Other long-term investment products that are not pension plans: Although pension plans allow you to pay less tax when you file your annual return, their disadvantage is the lack of liquidity in the short term.
The money invested can usually only be recovered in the following cases: after at least 10 years, on retirement, or if a special situation arises.
However, there are other options for those who want to grow their money and are not convinced that a pension plan meets their needs.
Investment funds: These function in a similar way to pension plans. Based on pre-defined set of guidelines, your capital is invested with the aim of obtaining the maximum return. These guidelines define how the capital will be invested, what assets will be bought or sold, and so on. The main disadvantage compared to pension plans is that investment funds are not tax-deductible products so there are no tax savings.
Broker: There are some very attractive investment portfolios for investors with a more advanced knowledge of equity markets. In this case, the investors themselves decide how to move their money around, buying and selling shares. Unlike pension plans, they offer instant liquidity. Since the risk is higher, this type of investment is only recommended for those which a good knowledge of the financial markets.
Like funds, investments in equity markets do not deliver any tax savings.
Real estate: Using savings to buy a second home is a classic solution. However, the outlay is very high and there is no guarantee that the income obtained (either from rent or the resale of the property) will compensate the investment made. It's important to remember that the acquisition of real estate entails certain expenses and taxes, on top of the initial investment, which you will need to substract from the profit if you resell the property. Another disadvantage is that if you need short-term liquidity, this product does not deliver instant access to your money.
Whether you are clear that you need a pension plan or whether instant liquidity is more important to you than long-term investment, at Bankinter you'll find products adapted to all needs and risk profiles. Discover our range of pension plans and investment funds, and feel free to discuss your specific needs with us.