As time goes by and we continue with our work activities, we often think about how our pension plan will be taxed. Although it may seem far away now, the truth is that the time to retire is coming and it is best to be informed in order to comply with the different procedures in due time and form. Read on to find out all the details.
At a certain point in life, it becomes necessary to make the preparations that will allow us to live comfortably once we reach retirement age. Retirement is often a long-awaited time when we look forward to living in peace and enjoying a new phase of life. To make sure that nothing can overshadow this event, the key is to have a thorough understanding of how the retirement pension works, how to calculate it and what you need to take into account.
Retirement pension: how is it calculated?
The first thing you should know is that the last 15 years you have paid Social Security contributions will determine the amount of your retirement pension, as your earnings during that period of time will be taken as a contribution base. This does not mean that they are the only ones that will count, as the whole of the worker’s career is taken into account, but the last 15 years worked will be of the utmost importance.
When calculating how much you will receive once your retirement begins, there are some key points to bear in mind. To help you keep in mind the different scenarios, we have developed a guide that will allow you to calculate the pension for all the types of retirement pensions that are currently in force. To arrive at this result, it is necessary to consider several important aspects such as the contribution bases, the reference period and the so-called regulatory base. Other data such as the actual age of the person and the accumulated years of contribution are also taken into account.
To make it easier, we divide the pension calculation into five steps that apply to each type of pension:
- Contribution bases: Start by requesting your Social Security contribution information. You can do this directly online or by mail by making the corresponding request.
- Reference period: This information represents the years that will be taken into account for the calculation of the regulatory base. This period nowadays corresponds to 24 years from the date of cessation of employment or from the time at which you apply for retirement, in the case of more than 3 months having passed.
- Updating contribution bases with CPI: Before making any calculation, you must update the contribution bases with the CPI. You can do this simply and quickly with the INE’s online income update tool.
- Add up all the bases: The fourth step, bearing in mind that the months to consider (present in 24 years) are 288, will be to add up the contribution for each of these 288 months.
- Calculate the regulatory base: To calculate it, you must take the result of the sum of the contribution bases and divide it by 336. This will be your regulatory base.
In conclusion, what you will receive in retirement will be 100% of the regulatory base as long as you meet the current contribution requirements for ordinary retirement, i.e. you must have contributed for at least 37 years. If you do not reach this number, you should be aware that you will receive less than 100%. From 15 years of contributions onwards, you will receive 50% of the regulatory base and a percentage progression is established according to the number of years in each case.
Frequently asked questions: Pension plan taxation
What should I do if I want to take early retirement?
Workers can stop working and apply for early retirement as long as they meet a series of requirements. At present, a worker can take early retirement from the age of 61, although for each year of early retirement, a 5% reduction is applied to the total contribution.
How is the calculation for the self-employed?
The contribution bases for self-employed workers are stipulated taking into account the monthly social security contributions they pay. The calculation is made in the same way as for other workers, but some restrictions must be taken into account, such as not being able to increase their contribution base after the age of 49.
Is it advisable to take out pension plans?
A pension plan is designed to provide additional capital to the retirement pension. The most common is to use plans that work in principle like a fixed-term deposit, which means that the money will end up earning an amount of interest that the individual will know in advance when he or she takes out the plan. They are also guaranteed by the Guarantee Fund so that, in the event that the institution suffers a liquidity problem, the holder can recover the amount deposited up to a maximum of 100,000 euros.
Can I work when I am retired?
Until a few years ago, it was not possible to continue working once you had applied for retirement, but this has gradually changed over time. It is now possible to work as a self-employed person or as a dependent while receiving a retirement pension. Of course, this will result in some pension deductions depending on the circumstances. In order to be able to do so, the first thing to do is to inform the General Administration and find out about the different ways in which being in active employment is compatible with continuing to receive a retirement pension.
If you still have any doubts, don’t keep crunching the numbers, contact us. At Blegal we are dedicated to advising, solving and managing all kinds of tax, labour, commercial and legal problems for individuals, the self-employed and small and medium-sized companies. At our law firm you will find experienced lawyers, tax experts and insurance brokers registered with NewCorred who will help you throughout the entire pension plan taxation process.