The sustainability of pensions in Spain is a serious cause for concern. The Intergenerational Equity Mechanism designed by Minister José Luis Escrivá will not only fail to meet its objectives, but will also cause a cut in pensions.
In this environment of greater uncertainty, the question that savers systematically ask themselves revolves around the convenience of having a pension plan contracted.
It may seem that the bleak future towards which the system is headed leaves no other alternatives to ensure retirement.
However, saving for tomorrow can be channeled in many different ways, such as investment funds, direct purchase of shares, life insurance or the real estate sector. In fact, they are often a more interesting option.
While the best variable income pension plans in Spain offer a profitability of up to 57 percent, according to data from Inverco, the best funds in the same category exceed 80 percent.
The first question: do I need a pension plan?
The real advantage of a pension plan is its taxation. Therefore, the first question that investors should ask themselves is whether they need these products to lower their tax bill, in the event that it pays them.
And it is that contributions to pension plans reduce the general tax base of IRPF, that is, the income declared by all taxpayers. For this reason, the less amount is declared, the lower the tax bracket that is applied will be.
Until 2020, all contributions to the plans were tax-deductible up to a limit of 8,000 euros or 30 percent of income. In 2021, this regimen is not so generous. Contributions will deduct up to 2,000 euros.
As long as there are still tax advantages, the plan is still attractive, but much less so than before. Therefore, those who seek this tax benefit will have to refine the calculations and think that at most their marginal rate can be deducted from 2,000 euros.
Types of pension plans
Once the decision to hire a pension plan has been made, it must be borne in mind that not all products are the same. As with mutual funds, they are divided by asset class.
For example, there are equity plans that invest in the stock market. They can do it by markets, regions or sectors, and normally, they have more risk although they also generate more profitability.
There are also fixed income plans that invest in money market assets, bonds, and long-term debt. Despite their name, they can be at a loss, as is the case with the vast majority of plans in this category in 2021. They are hurt by expectations of rate hikes.
In the middle of both plans are mixed products, which combine the stock market and bonds. The most aggressive tend to have a higher percentage of equities. Finally, guaranteed plans usually offer a guaranteed minimum return and a capital guarantee at maturity.
How to make contributions
As with all products, pension plans require financial management. Hiring the product to kill it is a bad idea.
The normal thing is to contract a single plan, if not several, and distribute the contributions according to the age of the participant.
A fairly practical rule is to calculate the contribution in the equity plan by subtracting the age of the saver from 100.
For example, a 25-year-old participant would invest 75 percent of his total contribution (100-25 = 75) in a stock plan and the remainder, 25 percent, in a fixed income plan.
This rule makes sense up to a certain age, usually set by financial advisers at 50. From here, it is convenient to overweight the contributions in fixed income more, because retirement is closer.
To balance contributions, Angel Faustino, author of the book ‘Investing your savings and multiplying your money’, proposes that the part that goes to fixed income be multiplied by 1.5, and the rest, to the stock market.
Thus, a 60-year-old saver would have to invest 90 percent in fixed income (60 x 15.5) and 10 percent in equities.