In this post we complete the previous article on pension plans on the blog, you can see it here where we explain its main characteristics, what it is, how to redeem it, when it can be redeemed, etc.
In this article we will focus on the taxation of pension plans, retirement plans, PPAs, private retirement plans or the multiple names they go by. If you have any doubts or you are interested in knowing more, please contact us, click here, we are your insurance agency in Mallorca.
How is the pension plan tax deductible for personal income tax purposes?
First of all, a definition: what is tax relief? In a nutshell, tax relief means saving tax, the amount I deduct (it is an expense, the contribution I make) is subtracted from my income and at the end of the year I pay less tax because I have earned less.
In 2024 the maximum tax-deductible contribution to a pension plan is 1500 euros per year, or 30% of the net income from work and economic activities. It does not matter whether the contribution is made monthly throughout the year (125 euros per month) or all at once before the end of the year, to save tax in the year it must be made no later than 31 December of the year.
Please note that when filing your 2024 tax return, you are declaring your 2023 income and subtracting the contributions to the plan made in 2023. This deduction is made automatically in your tax return; normally, it is not necessary to include the contributions.
This year 2024 there is a new type of pension plan, exclusively for the self-employed, called a simplified occupational pension plan (PPES), click here for details.
The tax advantages of pension plans have changed many times, the government can modify them at will, some years ago these savings products were much more tax deductible than today, although today they are still well accepted by the public and are a good product both for the self-employed and for employees, and many companies even include them in the salary paid to the employee, known as employment pension plans.
How much can you save with a private pension plan?
It depends on the income bracket you are in, that is, you must pay a percentage of your net income at the end of the year, and that percentage will depend on the amount you have earned in the year, the higher the income, the higher the percentage you have to pay, here you have a simulator to see it well.
As these are products with very little liquidity (we explained the conditions for taking it out in the previous article), it is normal not to contribute more than the amount that is tax deductible, although if you contribute more than the maximum limit, nothing really happens, that money is inside your plan, although it does not save you tax. My advice is that if you want to save more, you should contribute it in other types of products (savings insurance, investment funds, etc.).
In short, these savings products can be an ideal product if we understand that we are saving for retirement and not for the short or medium term, bearing in mind that part of their profitability is tax savings and always contracting a product with a level of risk in accordance with our experience and knowledge.
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