HEALTHPLAN MAGAZINE

In this article, we'll take a closer look at how pensions work in Spain. There are three types: state, occupational, and private pensions. We'll discuss what each one means, who can get them, and why planning is important for a secure retirement.

The Structure of the Spanish Pension System

Spain's pension system is structured into three distinct layers:

1. State Pension

The state pension is an integral part of Spain's social security system. It is accessible to all employed residents of Spain once they reach the official retirement age, which is currently set at 66 years and 2 months.

The amount of pension received is determined by the individual's contributions to the social security system. For instance, contributing for a minimum of 15 years (including the two years preceding application) guarantees a basic state pension rate.

A full pension rate is granted to those who contribute for 37.5 years, enabling retirement at the age of 65. Starting from 2027, a minimum of 38.5 years of contributions will be required for the full pension rate.

The state pension is divided into two categories:

• Contributory Pension (Pension por Jubilacion Ordinaria): Both employees and employers contribute to this pension fund. Employees contribute 4.7% of their salary, while employers contribute 23.6%. Self-employed individuals are responsible for their own contributions.
• Non-Contributory Pension: This pension is available to low-income families and people with disabilities who have not met the contribution requirements. To be eligible, one's yearly income must be less than €5,639.20. Qualification for the non-contributory pension is subject to being 65 years old and having resided in Spain for a minimum of 10 years, with the last two years being consecutive. A non-contributory invalidity pension necessitates five years of residency in Spain, with the last two being consecutive.

2. Occupational Pension

Occupational pensions are retirement plans established and financed by companies. Employers set the conditions, such as age thresholds and income prerequisites, for these pension schemes. Larger corporations and international enterprises often provide such plans to their employees. There are two primary types of occupational pensions:

Defined Benefit (DB): Employers alone cover all aspects of these pension plans.
Defined Contribution (DC): Both employees and employers contribute to this pension scheme. Employers typically bear a substantial portion (65%-80%) of the contribution burden, with employees covering the remainder. Individuals can select a pension rate level (minimum, moderate, or maximum) based on their contributions.

3. Private Pension

Private pensions, also known as individual pension plans, serve as a means to save funds for retirement. Contributions of up to €1,500 per year to a private pension plan are tax-deductible, while any amount exceeding this threshold is taxable. These plans offer numerous benefits, such as tax-free savings and compound interest accumulation. Contributions to private pensions are capped at 30% of one's annual net income.

Retirement Age and Options in Spain

The current retirement age in Spain is 66 years and 2 months, gradually increasing by two months each year until it reaches 67 by 2027. Several retirement options are available beyond standard retirement age:

• Early Retirement: Individuals can retire at age 63 if they have contributed to social security for 35 years.
• Partial Retirement: If you haven't reached the official retirement age, but are over the age of 60, you can integrate a part-time work agreement with receiving a portion of your retirement pension. This pension arrangement should be associated with a handover contract, which involves hiring a part-time unemployed worker. However, if you've already attained the legal retirement age, there's no necessity for a handover contract.
• Flexible Retirement: Once you're retired, you have the option to blend partial pension receipt with part-time employment (reducing your full workday by 25% to 50%). This results in a proportional reduction of your pension amount.
• Special Situations Retirement: Certain professions such as disabled workers, railway workers, firefighters, and flight personnel can retire at age 60 (or even 52 in some cases).

State Pension Amounts and Regional Variations

In March 2023, the Spanish government increased pension spending by more than 10%.

The average state pension varies by autonomous community within Spain. While the exact figures differ, the maximum monthly state pension across the nation is €3,059.23, and the minimum is €783.10. On average, individuals receive slightly over €1,372 per month as a state pension.

Taxes and Deductions on Pensions

Pension payments are subject to income tax in Spain, ranging from 8% to 40%. Residents receiving pensions from other EU countries, the UK, or the US are subject to income tax only in Spain, thanks to double tax treaties. Tax deductions are influenced by both the autonomous community of residence and the individual's age. An age-related deduction of €1,150 is applicable at age 65, increasing to €1,140 at age 75.

How to Claim and Required Documents

The process of applying for retirement is straightforward. Individuals can initiate their application three months before or after the termination of their employment contract. The necessary documents include:

- Resident card
- Passport
- Application form
- NIE number

Additional eligibility documentation is required for early retirement or disability pension applications.

You will need to complete an application form and then take this with the documentation above to your nearest INSS social security office.

Note that you will need to make an appointment with the INSS office.

Eligibility for Pensions in Spain

Eligibility for a pension in Spain is contingent on factors such as nationality, employment history, and country of employment. Entitlements to receive pensions from multiple countries are possible in some cases. Pensions are distributed based on the minimum legal retirement age of the respective countries.

Transferring your Pension to Spain

1. EU/EEA Citizens Working in Spain

Individuals who have worked in both Spain and another EU country can receive pensions from both countries. The payment amount depends on the years of work and contributions made to each country's pension system.

2. Non-EU Citizens Retiring in Spain

Depending on the years of work in Spain, retirees may be eligible for the minimum national pension rate after 15 years or the full pension rate after 36 years.

3. Retirees Moving to Spain

Transferring pensions to Spain is possible based on the individual's country of origin. EU citizens can transfer their pensions, while UK citizens can do so through the Qualifying Recognised Overseas Pension Scheme (QROPS). Non-EU citizens should consult their national pension institution for transfer options.

4. Non-EU Citizens with Pension Treaties

Non-EU citizens who worked in Spain and have pension treaties may be eligible to receive pensions from both countries.

In Conclusion

Understanding the Spanish pension system is crucial for effective retirement planning. The system encompasses state, occupational, and private pensions, each with its own requirements and benefits. Initiating retirement planning early, considering supplementary private pensions, and accounting for taxes are essential steps for ensuring financial security in retirement.