Life expectancy in Spain is just over 81 years. Also, according to the latest demographic projections of the INE, in 2050 the adult age group of 64 years set to double and constitute 32% of the population in Spain.
Life expectancy in Spain is just over 81 years. Also, according to the latest demographic projections of the INE, in 2050 the adult age group of 64 years set to double and constitute 32% of the population in Spain. These figures, together with the reform of the pensions system, are causing greater interest in complementing the public pension.
More than 70% of contributions to pension plans in Spain are made in the last quarter of the year (2010 figures), which is why Aviva Vida y Pensiones is placing at the disposal of its brokers an updated retirement calculator with the changes of the reform of the pensions system, and is publishing a practical guide to understand the factors that citizens should take into account when selecting their pension plans.
1. First step, to calculate how much money I shall need after my retirement
Three out of every 10 people approaching retirement age don’t know or have not asked how much money they will need when they retire. Taking into account the fact that the average loss of purchasing power after retirement stands at 40% in Madrid*, it is important to calculate what resources we shall have during our retirement years.
The retirement calculator set up by Aviva Vida y Pensiones is a tool that allows people to simply define the standard of living they would wish to maintain once they reach retirement age. By entering their personal data into the calculator, they are given an estimated forecast of the sources of financing that they can count on after retirement age, and an estimate of the amount they would need to save every year in order to reach the defined standard of living.
2. What is a pension plan?
Pension plans are the favourite savings instruments used by citizens when planning their retirement, especially because they are the products that allow the maximum tax saving in the income declaration. These are long-term savings products, in which the participant continues to contribute a periodical sum which they can withdraw in the form of an annuity or capital in order to complement the State retirement pension.
These forecasting instruments do not replace, but rather complement the Social Security scheme, and a specific financial and fiscal scheme is applied to them.
Pension plans manage long-term savings and are illiquid by their nature. This means that the participant cannot dispose of his money until the moment of retirement, and his consolidated rights will only be made effective for integration into another pension plan.
Access to the money invested in a pensions plan takes place at retirement age. In addition to this, there are other suppositions that make it possible to withdraw savings such as death, widow or orphan status or invalidity, serious illness or long-term unemployment.
3. How much to save and when to start saving
The best option would be to start at the beginning of one’s working life, because the earlier you start, the less effort has to be put into savings. A study carried out by Aviva states that in Spain, an average citizen who starts to save at 30 years would have to save on average, every year, approximately 9% of his available income in order to maintain the standard of living that he enjoyed before retirement.
4. What happens if I don’t enter money into my pensions plan for one month?
Pension plans are very flexible. You can choose the amount you want to contribute and vary it quite freely if you don’t have this amount in any one month. You can also establish how much money to contribute to the plan or interrupt and resume the contributions as and when it suits you. In fact, most contributions are made in December, when people do the calculations for their income declaration for the following year.
5. And what about tax advantages?
All contributions made to pension plans reduce the taxable base of the IRPF. If you are less than 50 years of age and contribute to the plan the maximum permitted annual amount (€10,000) you can deduct up to 30% of your income. Anyone over 50 years of age can contribute up to €12,500 and deduct up to 50% on the income declaration.
6. What are the costs of a pension plan?
The money we contribute to our pension plan is invested in a pensions fund in order to generate profitability. Therefore, the organisation that manages this money collects a series of management and maintenance charges. These maximum commissions are fixed by law at 2% for management and 0.5% for the depositary.
7. In view of the avalanche of promotions of pension plans, I have to find the one that is best suited to my needs
Composition of the fund
Pension plans are financial instruments that present different terms and conditions of investment in accordance with the risk aversion profile of the person in question. So there are guaranteed pension plans that guarantee a type of interest at the end of a certain period, which are the best suited to the most conservative of clients, and at the other extreme there are pension plans that invest the entire amount of the funds in variable income, which are the best suited to the highest risk profiles among people willing to undertake higher risks in exchange for higher profitability.
Between both of these extremes, there are pension plans that combine different investment options to suit each client in accordance with the risk that they wish to undertake. For this reason, even in situations of maximum volatility of the markets, it is possible to find a pension plan that suits our saver profile. What is important is to have the right consultancy in order to get to know all the details of its characteristics and select the product best suited to the necessities of each client.
Each person has investment preferences in accordance with their requirements and saver profile. With this in mind, some people prefer to invest their savings in pension plans that invest a high percentage of their portfolio in variable income with the idea of maximising their profitability, even though this entails a higher risk of loss. This is usually the case of people of an age far from the time of retirement, or aggressive investment profiles.
Other people, close to retirement age or with more conservative saver profiles, prefer pension plans with a portfolio that mainly or totally consists of fixed income with the idea of protecting their capital even at the expense of relinquishing higher profitability.
Historic profitability
Pension plans manage long-term savings, so it is important not to focus exclusively on the results that the plan achieves in the short term and/or on the gifts or financial incentives offered upon embarking on the contract, but in addition to considering these aspects, one must base one’s choice on stable management that aims for long-term profitability.
In the short term, management decisions can be taken with a view to protecting the capital of the fund, which makes its profitability not excessively attractive, however the analysis of the historic evolution of profitability of the fund will tell us if the management has achieved sustained profitability over time.
The historic profitability of the plans does not guarantee future ones, but we can use them as a reference as to how the plan has behaved, particularly if it is compared with the situation of the market at that time.
Duration of the assets of fixed income in which the fund is materialised
Fixed income is also volatile. Its evaluation depends on the evolution of the types of market interest. Anyone who participates in pension plans is conservative by definition. In situations of rising interest rates, it will be preferable to opt for short-term fixed income plans with a view to protecting your capital, and the opposite applies to situations of low interest rates.
Foreign currency
As we have said, the assets in which a pension plan is invested may be classified into fixed or variable income. This fixed or variable income may be in foreign currency or in Euros. In order to make a choice that agrees with his preferences, the participant will have to select a pension plan considering that investments in foreign currency have derivative effects based on variations in the exchange rate.
8. What risks are there?
Each saver has different necessities at any moment in time and presents a different position as regards the expectation of profitability of his contributions and the risk to be undertaken with his investments. These two variables will determine the type of pension plan that he will select.
So, for example, there are savers willing to risk some or all of their money in pension plans of variable income with the idea of obtaining higher profitability. These are the profiles of aggressive savers who seek high profitability while being aware that they could lose money. On the other hand, a fairly high percentage of savers prefer more conservative and safe investments, that is, they prefer less profitable investments but with a higher guarantee of not losing their money.
The risk level will always depend on our choice and, given that the offer of the plan is broad, the most important thing is to have a good assessment in order to take a decision that adapts to each person.
*Estimation drawn up from the figures of the Annual Inquiry of salary structure (CNAE-2009), series 2008-2009 of the INE and the latest figures published on the monthly average of pensions of the Ministry of Employment and Immigration.
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About Aviva Vida y Pensiones
Aviva Vida y Pensiones is a company that specialises in the marketing and consultancy of life insurance, savings, health and pension plans, and distributes its products exclusively by means of insurance brokers.
Aviva Vida y Pensiones belongs to the Aviva Group, the sixth largest insurance group in the world which serves 44 million clients. In Europe, it is the leader in the life and pensions market.
www.avivavp.es
For further information:
Beatriz Egido Requejo
Telephone: +34 91 556 0154
Email: beatriz.egido@edelman.com
Laura Villuendas
Telephone: +34 91 297 18 17 / +34 696 576 921
Email: laura.villuendas@aviva.es