Approximately 45% of people living in Spain contribute to a private pension. For someone who is from another Western, perhaps non-Latin country, this would seem remarkably low. Many years ago, in the UK pensions were almost guaranteed as part of an employer package, and a while back it became compulsory for anyone working in a company aged over 22 and earning more than £10,00 a year to contribute to one. But that figure of 45% in Spain could be about to get even lower…..why?
Spain has decided to lower the amount of private pension contributions you will receive tax relief on, from a low €8,000 per year (the UK has an amount you can contribute annually to of £40,000) to a measly €2,000 from 2021 onwards.
I have an open-minded view about pensions; I do not see them as essential, which may seem strange coming from a Financial Adviser. For me, a retirement plan does not need to include or solely be a pension, as long as there is planning in place. The only things I see as good value for the saver with a pension is that employees may contribute into this for you, and the potential tax savings received. I say potential tax savings here, because yes, you may receive tax relief when adding to these pensions, however, more often than not, unless you can mitigate your tax situation, will pay taxes when taking the money out, so more commonly they are a tax deferral system (which is still some kind of potential benefit).
So, if you take away employer contributions, for me private pensions, certainly as an international person living and working away from your country of residence, doesn’t seem all that attractive. If you ever leave that country the pension stays there, under that country’s rules, and you cannot access this money until age 67 (in Spain) and invariably, in my opinion but seen through clients and performance charts, Spanish private pensions are generally not that good. Look at most Spanish banks’ pension funds and you will find high commissions, too much investment in the Spanish market, and not enough advice.
What should a retirement/pension plan look like? Well, it’s about having a plan/strategy, regularly reviewing and understanding it doesn’t have to be a ‘pension’. It can be property; indeed, one of the reasons private pension contributions are so low in Spain is because culturally they are property lovers, often not just one, but several. These are usually structured within a Spanish company and passed down through the generations, and can be a very attractive investment and also tax efficient. Buying property in Spain is expensive, approximately 13% in Catalunya for example, however if you rent this out as a long-term rental, up to 60% of that annual income is tax exempt.
What this doesn’t give you though is liquidity, so, if there is a property slow down, you could be stuck with that investment unless you want to take a loss on it, or you may have to leave it behind if you move on. It can also be a big hassle, with Okupas (a common problem in Spain of people unlawfully living in your property, and who are very difficult to get rid of, indeed sometimes it can take years to do so and cost a lot of money). Many people working now are almost in a ‘golden generation’ to think about their pension planning. Many of their parents have assets/properties that have grown very well, and will more often than not leave them a considerable amount of money (see my article on inheritance planning for a potential tax problems there!) They seem less worried about their retirement, than perhaps their parents were. Therefore, they don’t necessarily see the benefit of saving money into a pension when they might not need one, with the money being blocked until then and it restricting their current lifestyle.
A more popular and arguably better strategy for someone, perhaps like me for example, living away from my country of birth, is to make my money work by having it invested in a medium term strategy, say 5-10 years, but have more flexibility should I need it, say for school fees, or, in a few years time, buying a property, or anything else my plan entails (maybe even early retirement).
So, build your strategy on a mixture of property, investments and emergency funds where possible, and always review regularly to see which type of these suits you best at any given moment. Some people really don’t want the hassle of having property, so a well managed investment portfolio could be better for you.
I can help with all of this: the planning, helping set up a property investment structure, and organising savings that will be invested and work for you. Alongside this, we can set it up with access to the money should you need it, making sure you have a clear strategy and advice along your journey.