There are four ways of redeeming a pension scheme: in the form of capital, in the form of income, in the form of an annuity or in mixed form.

Pension schemes are taxed in the same way as earnings, but they can be subject to a 40% tax reduction if certain requirements are met. Firstly, the redemption must be in the form of capital. However, this reduction only applies to contributions made up until 31 December 2006 (a transitory 40% tax reduction was established for contributions made up until then, which was removed with the 2007 tax reform). This reform does respect a transition period for individuals who have retired or are about to, as follows:

  • Individuals who retired in 2008 and did not redeem their savings before 31 December 2016 will have missed out on the possibility of applying the tax reduction.
  • Individuals who retired between 2009 and 2014 will have eight years to redeem their savings from their pension scheme and apply the tax reduction.
  • Individuals who retired in 2017 and thereafter can redeem their savings within three years from the date of retirement and apply the 40% tax reduction.

There is only one exception to this rule, in the Basque Country, where the 40% is still applied to the tax base.

It is important to point out that this 40% reduction will only apply to the first pension scheme redemption because the following redemptions will not be considered redemptions in the form of capital. However, when you redeem your savings for different reasons, this reduction can be applied. For example if you redeem your savings due to incapacity and apply the 40% reduction, and then later on redeem your savings due to retirement, you can apply the tax reduction again because they are different contingencies. You can also apply this reduction in the case of different pension schemes, where the only requirement is that the redemptions in the form of capital take place at the same time or within the same tax year.




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Álvaro Morales Sousa, Partner, TempleCambria Lawyers

(+34) 956 440 172


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