Retirement Insurance: The practice of saving for retirement, something that every worker should keep in mind if he wants to ensure a future comfortable retirement, can be carried out in various ways.
There are certain practices that can mean a common denominator and that we should not ignore, such as initiating savings as far in advance as possible (ideally when entering the labor market), be very consistent, do not underestimate the saving of small amounts at times when you do not We can make large contributions or carry out periodic monitoring to ensure that we are always invested in the right assets at all times.
What is a pension plan?
Let’s go then in parts. A pension plan is characterized as an instrument in which the participant makes periodic contributions that are invested in the markets. Depending on the type of investments made and the risk that the client of the entity that markets the product is willing to assume, there will be more or less bulky benefits.
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The money contributed to a pension plan and the returns of the investment are recovered in a single payment, in the form of periodic payment or, even, in a mixed form, when the beneficiary retires. There are also other cases in which the plan can be charged, as in cases of long-term unemployment, serious illness or disability.
What is a retirement insurance?
With retirement insurance, also known as a retirement plan, the goal is the same; that is, we intend to have a cushion that will ensure economic stability in the event of retirement or others. However, this product would be within the family of the policies. In short, it is life insurance with which we protect ourselves against illness, we ensure an economic amount to family members in the event of death and, of course, it can also be valid in case of retirement.
The regular operation consists of the payment of a periodic premium that the receiving company invests. A fixed minimum return can be assured. Everything depends on the contracts.
What are the main differences?
There are and can make decant the balance to one or the other side. The most important aspects have to do with the payment of taxes, the assumptions in which we can rescue and profitability.
Regarding taxation, we will say that the tax authorities respond differently if they have a pension plan or retirement plan or insurance.
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On the one hand, there is the treatment of contributions. It is possible to reduce the tax bill in the income statement by the contributions made to a pension plan up to the limit of € 8,000 / year. You can also access this type of reduction for the money contributed to the spouse’s pension plan, with a limit of € 2,500 / year. However, with a retirement plan or insurance, the periodic contributions do not entail any type of fiscal benefit in our income tax return.
Conversely, when the rescue of a pension plan occurs, taxes are paid, as if a labor income was received. The amount charged increases the tax base and, depending on this, we must respond to the tax authorities. However, with a retirement plan or insurance, when we redeem it, we will only pay for the profitability obtained in the savings base, that is, for the difference between the rescue capital and the premiums contributed.
As for the rescue, there are also notable differences. In the case of pension plans, this is possible in the case of retirement and, as mentioned, others such as illness or unemployment.
With the insurance or retirement plan, there are fewer restrictions. There is no prohibition to rescue him, although it is possible that if certain conditions of the contract are not met, a commission has to be paid.
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Finally, we must also point out the issue of profitability. As a general rule, more risk is assumed, although it is also possible to regulate it, with pension plans. That means that the returns can be higher. In summary, the benefits are obtained from the investments and the success of these. But with retirement insurance, things change and profitability can be low.
Now it’s time to study the details, which is convenient depending on the investor profile in which we fit and the needs that we have.
Regarding the channeling of these savings, there are different ways: one of the most common is to save through pension plans, vehicles specifically designed for these long-term savings and that are also tax incentives, with which can get an interesting tax saving from the contributions made.
But in addition, there are products such as insured pension plans (practically similar to pension plans with the fundamental difference that they are used in insurance instead of in a pension fund), Voluntary Social Security Entities (EPSV), which are equivalent to pension plans but only available to residents of the Basque Country, Individual Systematic Savings Plans (PIAS) , investment funds or savings insurance , to name a few.
Pension plan and the retirement plan: are they the same?
Although they try to solve the same need, generate savings to have in retirement to supplement the public pension, there are important differences between pension plans and savings plans, two products that are often confused.
In the first place, it is important to bear in mind that the pension plan is a collective saving financial instrument instrumented in a pension fund, while the retirement plan is based on insurance.
Another important difference relates to the liquidity of savings: in the case of the pension plan, it is restricted to certain contingencies. Retirement is the main one, but there are others that allow early redemption, such as professional disability, unemployment or serious illness.
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If one of the situations contemplated in its regulations is not proved, it is not possible to have the savings. In the case of the retirement plan, it can be redeemed at any time depending on the agreed conditions. Some penalty may apply to do it outside of deadlines.
Regarding the investment vocation, the retirement plan is more conservative, since it will offer a minimum return known in advance, while the pension plan will invest in financial markets of greater or lesser risk (and therefore potential return) depending on of the type of plan. For a saver at the beginning of his working life, a pension plan will be more convenient for him, given that he is at an ideal moment in which he can take risks looking for greater profitability.
Regarding taxation, the pension plan offers the advantage of having tax incentives, something that does not happen in the case of the retirement plan. The latter, however, enjoys very favorable taxation at the time of the rescue, especially if we perceive it in the form of annuities.