What to do with your pension plan with a war in between?

One lime and one sand. That has been the tone of the markets during the first quarter of 2022. The last week the volatility has been reduced, although the open fronts that installed panic in the stock markets they still plan in the background: the Russian invasion of Ukraine, the constant rise in inflation and the markets discounting rate hikes.

Pension plans are one of the most popular products among Spanish savers. And they are no strangers to anxiety. A financial product whose main characteristic is that the contracting party undertakes to maintain his investment until retirement, when he is redeemed. There are very few cases that allow them to be withdrawn before the holder finishes their employment stage: serious illness, long-term unemployment and, from January 2025, shares older than 10 years can be redeemed.

For this reason, a low-liquidity product such as a pension plan is a cause for concern for individual savers in this volatile context. The experts consulted by Finect agree on some basic features: staying calm and avoiding drastic decisions are the most correct way to proceed.

“War, a pandemic, Lehman Brothers, the dotcoms, inflation or any other crisis should not modify a well-designed investment plan according to the profile, and which, therefore, has considered a defined time horizon, the financial situation and personal tax and tolerance or aversion to risk”, highlights Francisco Martínez, financial advisor at Andbank.

Eduardo Suárez Méndez, financial advisor at Mapfre Vida, recommends that people with a contracted pension plan opt for regular contributions. Even more so in the current fragile context for diluting risks: “Regular contributions allow us to distribute savings systematically. We avoid the risk of entering a bad moment in the market, volatility is better controlled, since the contributions materialize in different times of the year and the economic cycle”.

“The first impulses of many of them will be to put aside the savings you have and wait for the markets to improve and the volatilities to be more stable, but that is a very common mistake. They have already lost part of their savings and it is normal to have fear, but it is in these moments where more returns can be achieved”, explains Miguel Camiña, co-founder of MiCappital.

The reduction of the maximum amount of contributions to pension plans that can be deducted in the income statement is a burden on the investor’s ability to make regular contributions, a formula that MiCapital also recommends to protect savings. “In pension plans the contribution is limited, so you probably have to contribute to investment funds so that the global portfolio is perfectly stabilized,” adds Camiña. Adjusting to the appropriate level of risk and obtaining high-quality international investment products to complement a pension plan are other keys cited by the financial consultant to weather the current environment.

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Martínez points out that if the personal financial plan is correctly planned, the current situation should not drag us to make big changes: “A well-designed plan will consider the optimal vehicles (pension plans, savings funds or insurance) to channel investments in the most appropriate way. more efficient. If the initial decision contemplated partially or totally investing through pension plans, it should be maintained as long as it continues to be the optimal formula”.

People who can already redeem their investment from the pension plan should avoid the first thought in times of decline: withdraw the money so as not to fit the falls in the markets. “Here the fiscal impact is important and ‘not falling into the trap’ of withdrawing all the money from your coup plan: when you rescue it you will have to pay taxes on the ‘expensive income tax base’, which has a marginal rate between 19% and 47%, equivalent to one more salary”, details Suárez. A gradual withdrawal in the form of a life annuity is a more appropriate option, according to the Mapfre adviser.

Andbank’s adviser, for his part, maintains that “exiting the market due to the latest episodes of volatility is a mistake, whether we are positioned in plans or through any other vehicle.”

Hire a pension plan now?

Pension plans have lost some of the appeal of yesteryear. The maximum contributions to deduct from the personal income tax base were reduced again at the beginning of 2022 and is now 1,500 euros. However, its popularity remains high in Spain: there are 9.45 million participating accounts (a saver can have several pension plans), according to Inverco data at the end of 2021.

Beyond the progressive loss of its fiscal attractiveness, is the war in Eastern Europe an extra reason that should keep savers away from this vehicle to plan for retirement?

“Those people who are thinking of signing up for a plan right now should follow the same strategy: regular contributions and good quality international products. In fact, since they have not had negative returns due to the drop, everything is an opportunity. They should take into account mind that the markets are going to recover and that everything that recovers will be benefits for the pocket, but also the limitations of the pension plans”, they detail from MiCappital.

Choosing a pension plan, regardless of the economic situation, must meet certain requirements, according to Mapfre’s financial adviser: “The time horizon you have left until retirement is important.” Suárez Méndez recommends maintaining a high percentage in equities, an investment that “is proven to give you profitability in the long term” and avoids the loss of value of savings due to the effect of inflation. “As retirement approaches, the percentage of equities should be adjusted and reduced and the profile of your portfolio should be more conservative to protect your capital,” he concludes.

Do you know how much you will have in pension when you retire?