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What is a pension plan and how does it work?

A pension plan (PP) is a financial savings product aimed at retirement, into which the investor makes periodic contributions that allow them to have access to capital or an income at the moment of retirement or in the event of suffering a disability or death.


Pension plans are included under the category of pension funds, through which managers invest in variable or fixed-income securities to obtain an additional return on the savings deposited. 


Pension plans are subject to the supervision of the Directorate-General of Insurance and Pension Funds, an agency dependent on the Ministry of the Economy. This agency is in charge of overseeing the solvency and proper operation of any financial institutions which market pension plans.


When can a pension plan be redeemed?

As in the case of contributions, pension plan redemptions are also flexible. Once a holder has retired under the Social Security system, it is they who decide how they wish to redeem the money, either in the form of financial revenue through an income whose amount and periodicity the customer decides or in the form of capital; that is to say, all the consolidated cumulative rights are redeemed in a lump sum.


Nevertheless, the pension plan can be redeemed early, provided the following circumstances are met:

  • Death of the holder
  • Permanent total occupational disability, permanent absolute disability and severe disability
  • Severe illness proven by a Social Security medical certificate or from an affiliated entity
  • Long-term unemployment, where the holder is unemployed for a period equivalent to or exceeding 12 months, provided they are registered at the employment agency (INEM) and do not receive any contributory benefits.


The income received will be taxed as earned income.

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