Pension plan holders will have until 2027 to apply the 40% reduction

The redemption of pension plan benefits constitutes earned income for Personal Income Tax (IRPF) purposes. In this context, there is a transitional regime that allows for a 40% reduction on the portion of the benefit corresponding to contributions made prior to December 31, 2006.

What the DGT has ruled

The Directorate General of Taxes (DGT) has clarified the temporal scope of this tax benefit. The criteria establish that, in order to benefit from the 40% reduction, two concurrent requirements must be met:

• The benefit must be received as a lump sum.
• The collection must take place within the period established in the twelfth transitional provision of the IRPF Law.

For contingencies occurring during the year 2025, the tax administration determines that the maximum period to opt for this final transitional regime ends on December 31, 2027.

What it means for you

If you are a pension plan holder and have contributions made before 2007, you have a tax opportunity to reduce the tax burden of your redemption. However, this right is not indefinite. The key lies in the moment the contingency occurs and the method of collection. If the contingency occurs in 2025, the window of opportunity to collect as a lump sum and apply the reduction expires at the end of 2027. Once this limit has passed, contributions made up to 2006 will be taxed as earned income without the possibility of applying said reduction.

What you should do

It is necessary to analyze the composition of your pension plans to identify which part of the benefit corresponds to contributions made before 2007. Since the deadline to apply this benefit is approaching, it is fundamental to evaluate the method of redemption (lump sum or annuity) and the timing of the collection based on your particular situation and current regulations.