Pension plan holders may apply the 40% reduction on early withdrawals

The application of the 40% reduction on pension plan benefits has raised doubts in situations involving early withdrawal. The Dirección General de Tributos (DGT) has recently clarified the applicable tax treatment when requesting funds from consolidated rights that possess the necessary seniority to qualify for the transitional regime.

What the DGT has ruled

The advisory body determines that the 40% reduction is applicable to amounts received as capital when it concerns the early withdrawal of consolidated rights that are at least ten years old. For this tax benefit to be effective, the requirements established in the twelfth transitional provision of the Personal Income Tax Law (LIRPF) must be met.

Regarding the timing for computing the receipt of funds, the DGT establishes that the early withdrawal scenario occurs in the tax year in which the seniority period of the contributions is completed and the express request for withdrawal is made. Likewise, it is clarified that if a contingency (such as retirement or disability) and an early withdrawal occur at the same time, the benefit will be understood for tax purposes as the benefit corresponding to the contingency.

What this means for you

This criterion has a direct impact on individuals who maintain pension plans with contributions made prior to 2007. If you plan to withdraw your funds early, you may benefit from this reduction provided you can prove that the contributions subject to the withdrawal have the minimum ten-year seniority period required by the regulations.

What you should do

If you intend to withdraw funds from a pension plan, it is necessary to verify the exact seniority of each contribution made. Since the tax year in which the withdrawal is requested is decisive for the calculation of seniority, it is fundamental to perform a detailed analysis of the pension plan's composition. It is recommended to assess each particular situation to ensure that compliance with the requirements of the LIRPF and the TRLRPFP is exact before formalizing the request for capital.