How to get 40% more from tax savings in your pension plans

In the middle of the Government’s offensive to get support that will enable it to implement its proposal to promote company pension plans, the government has seen investors withdraw from individual system pension plans.

How to get 40% more from tax savings in your pension plans

In the middle of the Government’s offensive to get support that will enable it to implement its proposal to promote company pension plans, the government has seen investors withdraw from individual system pension plans.

Since April, net outflows from individual pension plans have reached 270 million euros due to the Executive's decision not to limit contributions at 1,500 euros per year. There are still people who believe in this retirement savings formula. However, it is often only because they must contract it as a product that is linked to another, such as the mortgage.

Employers in the Inverco sector remind them that they can make the most out of the relief provided by individual system plans on tax base personal income tax. This applies to all contributions. Employment, provided it does not exceed the contribution of the business.

Inverco says that only tax deferral of 20, 30, or 40 years is an important tax advantage. This is because, even though the benefits are subject to the marginal rate personal income tax, they are received in retirement, which has lower taxes than the active phase.

The tax deferral allows tax credits to be profitable for all years. It also increases yields because of the compound interest, which accumulates yields from previous yields. It is the interest added to the initial capital. This generates new interest and multiplies the effect of compound interest (because the interest applied at the end each period is on an increasing capital base).

Employers calculate that the 40% increase in retirement savings is due to the fact that the tax savings are generated each year in the form of lower payments in the declaration and higher returns.

Inverco is an example of a participant who contributes 1,000 euro per year to his pension plan. He will accumulate a capital amount of 26,870 euros over 20 years if the deductions are not reinvested each year. The final accumulated balance after reinvestment would be 37,326 euro.

The example assumes a return of 3% per year, despite the fact that Spanish 25-year pension plans have an average return of 3.1%. A worker with a tax base between 20200 and 35,200 euro is used for the simulation. To this, a marginal rate 30% is applied.

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