If one takes into account, on the one hand, the increase in life expectancy (and the desire to maintain the usual standard of living), and on the other, the poor health of the public pension system, early planning of the savings .
In this way, upon retirement , monthly incomes are guaranteed complementary to the public pension that allow a good quality of life during a period that is increasingly tending to be longer.
For this, it is necessary to have a certain habit of saving (making periodic contributions) and deciding what is the best alternative to invest and diversify money . In this way, adequate profitability can be obtained in the long term, minimizing risks.
Currently, the traditional bank deposit is unpaid and, in fact, many banks are beginning to charge for it. Also keeping money under the mattress carries the risk of losing purchasing power over the years. Faced with the risk of investing directly in listed stocks, in this article we list three long-term savings options accessible to the average profile of the population:
Unit linked, life insurance through which you can invest in a basket of mutual funds, bonds or stocks.
At the end of 2020, in Spain there were 7.52 million participants in PPP , 1.26 million in unit linked and 884,000 in PPA , with assets under management of 82,000 million euros for individual pension plans, 16,000 million for individual pension plans. unit linked and 12,000 million for PPAs.
The taxation of personal pension plans
Personal pension plans are a very popular savings product thanks to their tax appeal. In PPPs, contributions generate a tax advantage as they can be deducted in personal income tax , reducing the tax base to a maximum of 2,000 euros per year ( before January 1, 2021 , the tax deduction limit was € 8,000). Thus, the PPP investor pays less taxes than would correspond if he did not allocate any amount to a pension plan.
However, this saving is only a tax deferral because at the time of the reimbursement or redemption of the PPP (whether it is carried out by the holder or if they are the beneficiaries or heirs), it will be taxed not only for the capital gains obtained , but also for the contributions made in their day.
In addition, this taxation falls under the heading “income from work”, which is why it is subject to a marginal tax rate ranging from 19% to 47%. The percentage varies depending on the money received in concept of income from work (including that from the PPP), the year in which the investment is recovered. Therefore, it is usually more interesting to redeem these savings throughout retirement in the form of periodic repayment (until the money runs out) instead of recovering it in a single repayment.
Redeem funds deposited in a PPP
Except for exceptional situations ( unemployment , death, serious illness, widowhood, dependency, orphanhood, permanent disability …), contributions made to a PPP cannot be recovered until retirement is obtained by Social Security . From that moment on, the accumulated savings can be redeemed (after paying taxes).
Between March 14 and September 14, 2020, and as a result of the pandemic, the Government of Spain established a temporary assumption that allowed the unemployed by ERTE and the self-employed whose activity had been reduced by at least 75% to have of accumulated savings in their pension plans .
To encourage long-term savings, in 2018 the liquidity assumption was introduced, which will take effect from January 2025. This will allow the recovery of the contributions made to a PPP with the only requirement that they be at least 10 years old .
Periodic contributions can be made (which can be suspended at any time) or a single extraordinary contribution .
You can invest in various plans (depending on the investor profile of the participant at each vital moment, and taking into account the return / risk ratio and expenses and commissions).
Transfers can be made between plans of different management companies without having to pay for it (the “consolidated rights” of the PPP are transferred, consisting of the contributions made and the capital gains generated up to the date of the transfer).
The main risk of this savings instrument is that it does not guarantee the saver the maintenance of the invested capital or the earning of interest , except in the case of guaranteed PPPs (which only insure the capital).
The profitability of PPPs depends on various factors such as:
The PPAs are constituted through an insurance policy that guarantees not only the initial capital, but also an interest rate during the term of the contract (this can be fixed for the entire life of the product, or periodically reviewable).
The way in which PPAs and their tax advantages are taxed, the limitations on redemption and the conditions for making contributions are the same as those for personal pension plans (including the possibility of redemption due to force majeure).
It is also possible to transfer between PPAs managed by different entities without any tax penalty, and the consolidated rights can even be transferred from a PPA to a PPP , and vice versa.
The differences with personal pension plans are, fundamentally:
The legal form . In PPAs the contributions are integrated into an insurance policy, while in personal pension plans the investment vehicle is the pension fund.
The assurance of the contributed capital .
They offer a minimum return , which in the current context of low interest rates is even lower.
‘Unit linked’: what are they, characteristics and taxation
The unit linked are thought safe for long – term savings generate . They were very popular in Spain a decade ago and it seems that they are going through a good time again. In the unit linked, the contributions are structured around two products:
Although unit linked units are implemented through insurance, such as PPAs, they do not guarantee capital or a certain profitability. On the other hand, they enjoy a liquidity that neither pension nor provident plans have . The insured has the possibility of redeeming his money at any time , without being subject to any type of regulatory restriction. What’s more:
The insured decides where to invest their money among a set of funds or assets linked to the unit linked (which can be of different types and even from different managers).
At any time, transfers can be made between the funds or groups of assets linked to the unit linked. As in PPPs and PPAs, contributions can be periodic or one-off.
Unlike pension plans and prevention plans, in unit linked the contributions do not deduct personal income tax . However, at the time of redemption (total or partial and when the insured wants), the capital gains will be taxed in personal income tax as income from movable capital and, therefore, at a maximum rate of 26%.
In the event of the death of the insured, the rescue corresponds to the beneficiaries or heirs. These will pay inheritance tax (not personal income tax) for the accumulated savings plus the capital insured due to death.
Laura Núñez , director of the Observatory of Family Savings at IE Foundation and Fundación Mutualidad Abogacía, and Marta Olba, collaborating researcher at the Observatorio del Ahorro Familiar IE Foundation and Fundación Mutualidad y Abogacía.