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Financial Dictionary - Pension plans

Pension plans

A pension plan, is a long-term saving and investment product, the purpose of which is to cover certain contingencies of the party which takes it out: retirement, occupational disability, long-term unemployment or even the death of the holder.

Spain has two pension systems:

On the one hand, the public pension system, which is a monthly payment provided by Social Security to all workers who meet certain criteria over the course of their working lives. For certain groups such as lawyers or doctors, there are also Professional Pension plans.

On the other, the private pension system, a savings plan designed to complement the income we would receive from Social Security when we retire. 

These plans are funded by the client's one-time or periodic contributions over the course of the plan's life.

The plan managers invest these contributions based on profitability and risk criteria, and when the customer withdraws his plan, he receives the money that has been contributed over the years, as well as the profit that has been earned. These contributions are tax-deductible for personal income tax purposes. When the plan is redeemed, the money gained is taxed as capital gains as well.

Features of private pension plans  

In the case of public pension programmes, there can be significant differences between countries. Private plans, on the other hand, share a number of features that apply to all of them globally:

  • They are long-term investment tools that encourage people to save and provide a return on their investments. 
  • They are voluntary and supplement the public pension plan, but do not replace the social security system: they are in addition to it.  
  • As we have said earlier, the contributions to the plan reduce the taxable base, resulting in a tax savings on the income tax return. 
  • Their benefits are also taxed as employment income for personal income tax purposes.  Lastly, people can also use them to improve their financial position before they retire. 

There are many different types of plans within private social security systems, which are formed based on various criteria. Thus, depending on the investment policy, we can find Plans of ...

Equity

This type invests in equity assets. It provides a higher rate of return than fixed income programmes and so carries a greater risk.  

Mixed equity.

Combines fixed income investment with equity investment up to a maximum of 75% of the capital.

Mixed fixed income

This type of pension plan combines investment in equities up to a maximum of 30% with investment in fixed income. 

Guaranteed

This type carries a very low risk and ensures the return of the entire investment as long as the money is kept until the maturity date.  

If taken out with a financial institution by clients in their personal capacity, plans can be individual, depending on the sponsor. They are the most common and are what most people understand a pension plan to be; employment, if they are sponsored by companies and corporations in which the holders are the employees themselves; or associates, if sponsored by trade unions, guilds or associations. In this case, the holders are the partners or affiliates themselves.

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