Tax treatment of pension plan benefits and the 40% reduction

The Dirección General de Tributos (DGT) has issued a relevant ruling regarding the tax nature of benefits derived from pension plans and the necessary conditions to access specific tax benefits under IRPF.

What the DGT has ruled

The administration has confirmed that pension plan benefits are considered earned income. Therefore, they must be mandatorily included in the general taxable base of Personal Income Tax (IRPF).

Regarding the possibility of applying a 40% reduction, the DGT points out that this is only applicable when the benefit is received as a lump sum. The benefit is limited to the portion of the benefit corresponding to contributions made until December 31, 2006. For this right to be effective, two temporal requirements must be met:

• At least two years must have passed since the first contribution.
• The benefit must be received within the period established in the twelfth transitional provision.

It is important to highlight that, for contingencies occurring in the 2022 tax year, the deadline to apply this transitional regime ends on December 31, 2024.

What this means for you

If you are a beneficiary of a pension plan and decide to receive your benefit as a lump sum, its tax impact will depend on the age of your contributions. If you have made contributions before 2007, there is a possibility of reducing the tax burden on that specific portion of the capital, provided that the aforementioned legal deadlines are respected.

If the benefit is received periodically (as an annuity) or if the contributions are exclusively made after 2006, the full amount will be taxed as earned income without the possibility of applying the 40% reduction.

What you should do

Given the approaching end of the transitional period in December 2024, it is necessary to verify the date of your contributions and the method of receiving the benefit. Each situation presents technical particularities that require a detailed analysis of your contribution history to determine the exact tax treatment that applies to you.