Participants may apply the 40% reduction when redeeming pension plan contributions made before 2007

The redemption of pension plans presents complex scenarios when there are contributions made under regimes prior to current regulations. A key question is whether the amounts obtained through the early withdrawal of consolidated rights can benefit from the 40% tax reduction provided for in the Personal Income Tax (IRPF) Law.

What the DGT has resolved

The Dirección General de Tributos (DGT) has determined that amounts received from the early withdrawal of contributions that are at least ten years old are taxed as pension plan benefits. In this sense, if the participant has already accessed the retirement contingency, the amount received is considered a benefit due to said contingency.

Consequently, the binding body establishes that the 40% reduction may be applied to the portion of the benefit corresponding to contributions made until December 31, 2006. For this benefit to be effective, two fundamental requirements must be met:

• The redemption must be made as a lump sum.
• The receipt must take place within the period established in the twelfth transitional provision of the IRPF Law.

What it means for you

If you are a participant in a pension plan and have contributions made before January 1, 2007, you have a tax opportunity to optimize the tax burden of your redemption. The regulations allow that part of the capital accumulated during the period prior to the 2007 reform to not be taxed entirely as employment income, but rather to benefit from the 40% reduction.

This criterion is relevant both for those who decide to redeem their funds upon retirement and for those who opt for the early withdrawal of consolidated rights that meet the ten-year seniority requirement.

What is advisable to do

When intending to redeem a pension plan, it is necessary to verify the seniority and the breakdown of the contributions made. It is essential to distinguish which part of the capital comes from contributions made before 2007 to ensure the correct application of the reduction. Since compliance with deadlines and the form of receipt (lump sum) are decisive for the right to the reduction, it is recommended to analyze the particular situation of each pension plan before requesting the redemption.