Savings & Pensions

SIALP

The SIALP is a Life Savings Insurance policy whose returns are exempt from taxation as investment income. As a life insurance product, the SIALP offers liquidity that pension plans do not provide.

The main tax advantage of this long-term savings vehicle lies precisely in its tax treatment. The individual who takes out a SIALP is exempt from taxation on the returns generated by the policy, provided two conditions are met: the investment must be maintained for a minimum of 5 years and annual contributions must not exceed €5,000 per person.

If these requirements are met, the policyholder will benefit from a tax exemption on the interest generated by the SIALP.

What happens if I withdraw the SIALP before five years?

Taxation will apply as follows:

• Up to €6,000: 19%
• From €6,000.01 to €50,000: 21%
• Over €50,000.01: 23%
• Contributions are not eligible for Personal Income Tax (IRPF) deductions.

Pension Plans

Pension Plans are a long-term savings instrument through which policyholders, by making regular and/or additional contributions, build up capital intended to supplement the Public Pension system.

How does the taxation of contributions to a pension plan or insured pension plan work?

The contributions you make to your pension plan or insured pension plan during the year will be deducted from your Personal Income Tax (IRPF) taxable base up to the lower of the following amounts: €2,000, or up to 30% of your net employment and economic activity income. Conditions valid for residents in common territory. However, the financial limit (as a maximum contribution) has been €1,500 since 2022.

Is it possible to recover your money before retirement?

Yes, Law 26/2014 allows the redemption of contributions to pension plans or insured pension plans that are 10 years old, counted from 2015. For example, if you took out a plan in 2015, you may redeem the amount contributed in 2015 from 2025 onwards, the amount contributed in 2016 from 2026 onwards, and so on.

Cases in which a pension plan can be redeemed

Although pension plans are intended to supplement retirement pensions, there are special circumstances in which beneficiaries may redeem the funds in the event of:

• Disability.
• Death.
• Long-term unemployment.
• Serious illness.
• Eviction from the home.
• After 10 years from the first contribution: this provision came into force in January 2015 and, pending regulatory development, establishes that contributions made before that date may be redeemed from 2025 onwards

There is not only one way to redeem a pension plan and it is advisable to be aware of them all because each entails different taxation:

• In the form of capital: all the funds are received in a single payment.
• In the form of income: a specific amount of the funds is received periodically. The frequency may be monthly, quarterly, half-yearly or annually.
• In mixed form: part of the funds are redeemed as capital and part as income.
• In the form of withdrawals: the funds are received at the beneficiary’s request without a regular periodicity, subject to the limitations established in the pension plan specifications.

Tax treatment of redeeming a pension plan

The taxation of redeeming a pension plan is basically the opposite process to that of contributions. When a pension plan is redeemed, the funds obtained are considered employment income and, as such, increase the IRPF taxable base, resulting in higher taxes payable.

The current IRPF brackets are:

• €0 to €12,450 = 19%
• €12,451 to €20,200 = 24%
• €20,201 to €35,200 = 30%
• €35,201 to €60,000 = 37%
• More than €60,001 = 45%

This is where the way in which the pension plan is redeemed influences its taxation. If a lump-sum redemption is chosen, the entire redeemed capital must be added to the income for that financial year. This will significantly increase the IRPF taxable base

For example, if the person concerned declares €25,000 per year and has €80,000 in the pension plan, which they decide to redeem in one lump sum, their taxable base will amount to €105,000. In this way, they will move from a 30% tax rate to being taxed in the highest bracket of 45%.

The significant increase in taxes resulting from redeeming the plan in one lump sum makes the option of redemption in the form of income more relevant. Suppose the beneficiary of the pension plan agrees to receive €1,000 per month from the funds available in the plan. In this way, only €12,000 per year will need to be added to the general taxable base.

Income insurance

Income insurance is especially recommended for older people who wish to receive periodic income with more favourable interest and taxation than that offered by deposits. In this regard, life annuity insurance stands out, which guarantees, in exchange for a single premium, periodic income (generally monthly) to the insured until death.

At the same time, death cover is taken out, under which the beneficiaries will receive the single premium originally paid. Temporary income, or fixed-term income, consists of periodic payments over a period lasting between five and ten years.

On the other hand, in life annuity insurance, the amount to be paid will depend on a series of factors, such as interest rates, age, the portion of savings that beneficiaries will recover in the event of death, and whether or not beneficiaries receive income.

Tax treatment of income insurance

Origin of the premium: Reinvestment arising from Capital Gains

In accordance with current regulations, capital gains arising from the transfer of assets by taxpayers over 65 years of age may be excluded from taxation in IRPF, provided that the total amount obtained from the transfer is allocated within six months to the establishment of an insured life annuity in their favour.

The maximum total amount that may be allocated for this purpose to establish life annuities shall be €240,000. The life annuity must be arranged within six months from the date of transfer of the asset.

Taxation table

Life Annuities, depending on the age of the annuitant at the time the annuity is arranged.

Age of the Annuitant — Exemption — Percentage

Under 40 years old — 60% — 40%
Between 40 and 49 years old — 65% — 35%
Between 50 and 59 years old — 72% — 28%
Between 60 and 65 years old — 76% — 24%
Between 66 and 69 years old — 80% — 20%
Over 69 years old — 92% — 8%

Temporary Annuities, depending on the duration of the Annuity, part of the income received is considered investment income.

Duration of the Annuity — Exemption — Percentage

More than 15 years — 75% — 25%
More than 10 and up to 15 years — 80% — 20%
More than 5 and up to 10 years — 84% — 16%
Up to 5 years — 88% — 12%