Deadlines for applying the 40% reduction on pension plan payouts

The payout of pension plans constitutes earned income for Personal Income Tax (IRPF) purposes. For those taxpayers who hold contributions made prior to December 31, 2006, there is the possibility of applying a 40% reduction to the portion of said contributions, provided that the timing requirements established in current regulations are met.

What the DGT has ruled

The Directorate General of Taxes (DGT) has clarified the scope of the transitional regime for applying this reduction. For the benefit to be applicable, two fundamental conditions must be met: at least two years must have passed since the first contribution, and the payout must be made within the established legal deadlines.

Regarding the timing of exercise, for contingencies that have occurred from 2007 onwards, the transitional regime can only be applied in the tax year in which the contingency occurs or in the following two tax years. It is important to note that the retirement contingency is understood to occur at the moment retirement is effectively accessed before the Social Security system.

What this means for you

If you are a holder of a pension plan with contributions made prior to 2007, you have a limited window to exercise this tax right. You cannot postpone the payout of the portion of old contributions indefinitely. The possibility of applying the 40% reduction expires in the year of retirement and the two subsequent years.

This criterion requires precise management of payout timing, as failure to comply with these deadlines would result in the loss of the right to the reduction on the portion of contributions made until the end of 2006.

What you should do

It is necessary to verify the composition of your pension plan to identify the volume of contributions made before December 31, 2006. Since the application of this benefit depends strictly on the date of the contingency and the subsequent tax years, it is recommended to assess the situation of each plan individually to determine the optimal moment for payout within the permitted legal limits.