Spanish Private Pension Plans and Annuities

If you’ve decided to live in Spain permanently, you need to plan for your future during retirement. A private pension plan or an annuity may seem like a good idea, but be aware of the pros, cons and tax implications before you sign on the dotted line.

Know your income during retirement

Before deciding whether you need a private pension plan or an annuity, calculate first of all what your income will be during retirement and whether this will be enough to cover your needs.

Check your state pensions from any countries that you have worked in, private pensions from companies where you no longer work and all your investments and savings. Ensure that all providers have your up-to-date information (address and phone number) to avoid not receiving any monies due.

Take into account that your income from abroad will also depend on the exchange rate; make a conservative estimate of your future income rather than overestimating.

Private Pension Plans in Spain

Types of private pension plans

There are three main types of private pension plans in Spain:

  • Work pensions: offered by companies to their employees.
  • Associate pension plans: offered by trade associations, professional bodies and others.
  • Individual pension plans: contracted directly with a financial provider such as a bank. 

Here we will just be looking at individual pension plans.

How to choose an individual pension plan

When looking at pension plans these are generally graded by risk: low, medium and high. The actual risk will depend on future markets and the management of the plan, results are not guaranteed. In all cases it’s necessary to read carefully the documentation that describes the pension plan and the associated risks. You will also need to take into account any annual commission charges or other fees, if applicable.

There are pension plans that allow you to invest a single lump sum investment and/or regular amounts.

Some pension plans may have a guaranteed return (on the total or part of the money invested). However, they are not covered by the Deposit Guarantee Scheme. It’s essential to consider the risks of losing part or all of your money if the company ceases trading.

Cancelling a private pension plan

Be aware that you can only cancel a pension plan and recover your money in exceptional cases such as invalidity, unemployment or an embargo on your property.

There have been several changes to the law regarding private pensions. In an upcoming change from 2025 payments made at least 10 years earlier can be recovered.

Tax implications

Depending on when a private pension plan was taken out, the tax implications will differ. You should ask the provider for advice based on your personal tax situation in Spain.

Once you retire, amounts received from the pension plan are classed as taxable income. Due to this it is normally recommended to receive the amounts periodically rather than in a lump sum in order to reduce the amount of tax payable.

Annuities in Spain

To find information about annuities, you’ll have to look for “renta vitalicia”. These financial products are sold mainly by banks and insurance companies and provide for a regular income from a fixed date.

Types of annuities

In order to contract an annuity, you’ll have to place an amount of money (capital) with the financial institution you’ve chosen. Some contracts allow you to top-up the capital either with regular amounts or on an ad-hoc basis. 

There are two basic types of annuity:

  • Immediate: Starts to pay out as soon as the contract is signed.
  • Deferred: Starts to pay out from an age specified in the contract.

Normally you can choose whether to receive your payments monthly, quarterly or yearly. The amount paid will depend on the capital invested, your age, sex and the return on your investment. Payments will be made until your death.

Tax implications

In all cases it’s worthwhile to speak with a tax professional or financial advisor before deciding on an annuity.

As most annuities require you to deposit a large amount as capital, it’s often the case that people decide to invest part of the money obtained from the sale of a property; in these cases you should check your tax liability beforehand.

Amounts received from an annuity are treated as taxable income in the annual Spanish tax return. However as the age of the policy holder increases, the amount taxable is reduced. By the age of 70 only 8% of the income received from an annuity is taxable.

Annuity risks

One of the main risks associated with an annuity is that the amount invested is NOT covered by the Deposit Guarantee Scheme. However unlikely it may be that the financial institution ceases to trade, if the worst happens you would not be entitled to get your money back automatically.

You should only take out an annuity if you are absolutely sure that you will not need the capital invested. If your circumstances change, cancelling the contract will normally mean that you’ll receive less than you put in originally. An additional drawback to cancelling is that you’d have to pay tax on the amount received on your next tax return in Spain; depending on the amount this could increase your tax rate considerably for that specific year.

Annuity returns don’t tend to be high, especially taking into account the current low rates of interest in Europe. You may be better off diversifying your investments to increase the return on your cash.

Take into account…

All companies that offer annuities must supply their potential clients with detailed written information about the associated risks. You should only buy an annuity if you are aware of the risks but still consider it to be what best meets your requirements.

Some annuity plans allow for payments to be made out to another named person when the policy holder dies. If this is not the case, your will should state clearly the name of the beneficiary to receive the remaining capital. The formula to calculate the amount of capital that remains will be detailed in the policy.

If you think you may leave Spain in the future, check with the company how payments would be made both to you and to your beneficiaries.