Limit on applying the 40% reduction for pension plans

The redemption of pension plans containing contributions made prior to January 1, 2007, allows for a 40% reduction on the portion of the benefit received as a lump sum. However, the application of this tax benefit is subject to strict conditions regarding frequency and the contingency triggering the redemption.

What the DGT has ruled

The Dirección General de Tributos (DGT) has responded to a query regarding whether it is possible to apply this reduction to several partial redemptions of the same pension plan in different tax years. The criteria establish that the 40% reduction applies exclusively to the portion of the lump-sum benefit that corresponds to contributions made until December 31, 2006.

The resolution determines that if several benefits derived from the same contingency are received from the same pension plan, the reduction may only be applied to one of them. It is not possible to fragment the benefit to apply it to each partial redemption if all of them stem from the same triggering event.

What this means for you

If you are the holder of a pension plan with contributions made prior to 2007, you must be aware that this tax benefit is unique per contingency. This directly affects individuals planning to make partial or deferred redemptions of their capital. If the redemption is carried out successively under the same contingency, you may only benefit from the reduction in one of those operations.

What you should do

Since the interested party has the power to choose in which tax year to apply said reduction, it is fundamental to analyze the amount of the benefits and the tax impact of each one. The choice must always be made within the period established in the twelfth transitional provision of the Personal Income Tax (IRPF) Law. It is necessary to assess each particular situation to determine the most appropriate moment for the redemption to optimize the use of this tax right.