A pension plan is basically a savings plan implemented by a company or an individual to capitalise the retirement pension, but it can also cover other contingencies such as disability, death and dependency.

Its main purpose, when we carry out surrender of the pension plan, will be materialised as a top-up to the retirement pension which we may be paid by the department of social security, or a self-employment mutual plan we may have taken out if we have not paid in to the social security system.

It is important to know about taxation on the surrender of a pension plan because, as mentioned, tax deductibility is one of its virtues, and one of the attractions of this product. Any contributions we make to our pension plan directly reduce the base for our tax return.

Tax on surrendering a pension plan

Although it is not true that pension plans do not generate any obligation to pay taxes, as we may have heard from time to time, taxation is deferred or is delayed until the pension plan is surrendered. This crucial moment emerges on retirement, although in certain circumstances described as particular vulnerability, such as unemployment, illness or eviction, this time may be moved forward. There is also a new possibility of requesting reimbursement of the holdings with minimum age 10 years.

If the time has come to surrender our pension plan we must consider that  the sums we will obtain will be considered as employment income by the tax authorities and this will increase our income tax base. The direct consequence of this is a logical increase in the tax payable.

To give us an idea, the current income tax brackets are as follows: 19% up to EUR 12,450; 24% up to EUR 20,200; 30% up to EUR 35,200; 37% up to EUR 60,000, and 45% thereafter.

Ways of surrendering your pension plan

A pension plan may be surrendered in a number of ways:

  • As capital. Obtaining the full amount in one go.
  • In instalments. Receiving a sum every month, quarter etc.
  • Mixed. A combination of the two, part of the sum as capital, and another portion in instalments.
  • Life annuity. The life annuity delivered to us by the plan manager.

We can use a pension plan simulator to give us an immediate idea of how our pension plan will function in practice.

When to surrender the plan

In relation to when to surrender the pension plan, it is important to consider that the sums we will obtain from our pension plan will be eligible, for tax, along with any amounts from our retirement pension, or earnings from employment, and so we will be eligible for a higher or a lower rate, depending on these amounts.

In terms of what is the least damaging from the point of view of the tax payable on surrender of a pension plan, in order to enjoy our savings, in general we may conclude that the most practical system is to receive the surrender in regular instalments.

When sums are received periodically, the earnings obtained will be less than if we receive them in a lump sum, and so the tax rate applicable will be much lower than a capital-based surrender.


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