It is important for anyone who doesn't qualify for a state pension or who will receive only the minimum state pension to contribute to a supplementary or private pension fund. 

• Note that you must contribute to Spanish social security for 15 years before you're entitled to a state pension. 

There are a wide range of private pension funds in Spain (many provided by the banks) and it's also possible to continue to contribute to a personal pension plan abroad or to an offshore fund. However, contributions to foreign pension schemes aren't tax deductible in Spain, although many major European private pension companies have offices or agents in Spain.

Most experts advise that the best pension scheme for most people is one that doesn't require fixed monthly payments, but allows you to pay irregular lump sums. In Spain there is usually a minimum monthly payment, possibly as low as €50 a month and lump sum contributions are usually from €600. 

A pension should be index linked to insure that it keeps up pace with inflation. With an index linked policy, capital is tax free after contributions have been made for 15 years, with an increasing scale of tax penalties for early surrender. If you have an offshore pension, there's no tax relief but all the benefits paid are tax free. Where applicable, annual pension contributions to a company pension plan are tax deductible for Spanish tax payers with maximum amounts ranging from €8,000 to €24,250 depending on the age of the policy holder. Pensions paid to foreign residents in Spain are taxed as regular salary income and a one-time payment is taxed as regular income. 

The exceptions are civil service pensions, which are taxable in your home country and don't usually need to be declared to the Spanish authorities (this doesn't include United Nations pensions as the UN cannot tax its former employees). Note, however, that civil service pensions are usually taken into account when calculating your Spanish tax rate if you have another income which is taxable in Spain.

Extract from Living and Working in Spain 2005 (5th Edition) 
by David Hampshire
Published by Survival Books Ltd, Survival Books, P.O. Box 3780,Yeovil, Somerset, BA21 5WX, United Kingdom. Tel/Fax: (+44) 01935-700060
Copyright © 2005 Survival Books Ltd All Rights Reserved

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