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PENSIONS

How self-employed workers in Spain can get a better pension

The average 'autónomo' in Spain gets a pension which is below minimum wage and considerably less than contract workers. What are the best ways for self-employed workers to counteract this and better prepare for retirement?

Published: 18 December 2023 14:16 CET
How self-employed workers in Spain can get a better pension
Some self-employed people choose to invest in financial products to compensate for that pension gap without having to raise their contribution base.(Photo by DOMINIQUE FAGET / AFP)

Self-employed people in Spain (known as autónomos) are a group of around 3.3 million workers. They could be freelance coders or graphic designers, or small business owners like your local bar or bakery. Autónomos make up around 16 percent of the total number of social security contributors in the country.

Retired self-employed people, however, often receive far lower pensions than salaried workers. On average, a self-employed person in Spain receives a pension of around just €916 – an amount that is below the minimum wage in Spain.

READ ALSO: What we know so far about Spain’s next minimum wage increase

Incredibly, the average pension former self-employed workers in Spain receive is around 40 percent lower than that of salaried workers, who get €1,533 (a whopping €617 more).

This largely boils down to the fact that the vast majority of self-employed people in Spain (over 80 percent, according to government statistics) contribute to their pension pot at the minimum contribution quota. For many self-employed people in Spain, life (and their income) can be rather unpredictable, with some months being better than others and others with no work at all.

Add to this the extremely high cost of simply being self-employed in Spain, and life can be tough for freelancers and self-employed in Spain. Not only do they pay income tax, but also the highest monthly social security fees in Europe, far higher than the UK’s €14/month (minimum fee), the Netherland’s €50 a year, and Germany’s €140 for those earning more than €1,700 a month

For many self-employed in Spain, the dilemma is money now or money later; that is to say, stay afloat financially in the present or save for the future.

So, what can self-employed workers in Spain do to get a better pension?

PPES pensions

To try to close this gap between self-employed and salaried retirees, Spain’s Ministry of Social Security recently introduced new pension plans (known as PPES) to which self-employed workers can sign up and contribute in the same way contracted workers can, but so far its impact has been limited.

One advantage of this new pension plan is that the self-employed gain flexibility in terms of when and how much they want to contribute to their pot, which can now be done periodically or in one-off contributions, and they have the option of adjusting their contributions according to their financial situation at any time.

Many Spanish banks have joined the PPES scheme and launched their own private pension schemes for the self-employed, but they have also failed to really take off yet.

Part of it is about awareness. Celia Ferrero, vice president of the National Federation of Self-Employed Workers’ Associations (ATA), told El País that many self-employed workers just don’t know about the different pension options available: “Now we have to do some educational work,” she says. “We need to make the self-employed more aware of the need to have additional support in the future.”

ATA is one of the only self-employed organisations actively marketing these pensions, through VidaCaixa (a PPES), but only around 1,000 people have signed up in the first year.

This is the also case for the Association of Financial Educators and Planners (AEPF), which, together with Cobas Asset Management, has a pension scheme to which just one hundred people have signed up so far, but to which they have already contributed – in the handful of months it has been in force – €2.2 million.

BBVA recently announced that it will also launch its own pension together with the Agrupación Nacional de Asociaciones Provinciales de Administraciones de Loterías (Anapal).

READ ALSO: Everything that changes for self-employed workers in Spain in 2024

Raise your contribution base

If you don’t want to contribute to the PPES scheme, you could just increase your contribution base on your existing pension.

Though this will mean less money in the short-term, increasing your base better prepares you for retirement.

Self-employed can change their pension contribution base up to twice a year. Increasing it might make things more difficult in the short-term, upping your base will mean more of your money goes into your pension pot and will be saved for the future.

Sadly, the unpredictability and costliness of life as an autónomo in Spain means that self-employed people very rarely do this.

Invest

Some self-employed people choose to invest in financial products to compensate for that pension gap without having to raise their contribution base.

If you take a look at your contributions and how much it’ll likely work out to, you may (as many do) realise that that is not going to be enough for the quality of life you want to live, but your current financial constraints could mean you are not able to increase your contribution quota.

Therefore, the option of saving and investing to supplement your pension is an alternative that requires less short-term economic sacrifice — think ISAs, stocks, and bonds, and so on.

These sorts of investments pay off in the long-term based compound interest, for which the initial capital invested grows exponentially over the years as profits accumulate.

READ ALSO: Long hours and little pay: What it’s like to be self-employed in Spain

Let’s take an example, if you invested €10,000 in a financial product (say in an ISA) with an average annual interest of 7 percent, it would mean that in the first year you would get €10,700, which would then keep reinvesting the profits over time.

The way compound interest works means that, depending on the interest, after a while your capital doubles. This is known as the 72 rule or formula, by which dividing this number by the interest rate gives you the time it takes to double the investment.

So returning to our example, if you have invested in your 7 percent rate ISA, it will take a decade to double it. If the rate was 10 percent, it would take a little more than seven years, and if it was a lower rate, say 4 percent, 18 years.

Our journalists at The Local Spain are not financial or pension experts. Whenever making decisions about investment or pension plans, it is always recommended to seek the advice of a qualified expert who is familiar with the Spanish system.

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PENSIONS

Irish pensions in Spain: What you need to know

If you're an Irish pensioner who's thinking of moving to Spain, here is what you should know about where your pension will be taxed, which pension plans are tax liable in Spain and how much Spanish tax rates are.

Published: 14 May 2024 14:18 CEST
Irish pensions in Spain: What you need to know

Go to any popular tourist resort in Spain and you’ll likely bump into some Irish people. The Irish have long come to Spain, particularly the Alicante, Andalusia and Canary Islands areas. But many Irish are increasingly making the move over to Spain full-time. 

According to population data from Spain’s National Statistics Institute (INE), as of the end of 2022, the latest available data, there were 19,491 Irish nationals living in Spain. 

READ ALSO: Where do Spain’s Irish residents live?

Many of the Irish in Spain are retirees, who, like retirees from around the world, have come to Spain for a change of pace, the climate, cuisine, and (relatively) cheap cost of living combined with high standard of living.

Often, they are living off their pensions alone. Keep in mind as well that even though being an Irish national makes it fairly straightforward to retire to Spain because of your shared EU rights, you still have to register as a resident after 90 days in Spain and that you may be asked to prove an income of €600 per month (pension or otherwise) as well having private healthcare or public through the S1 health form.

So how does receiving an Irish pension in Spain work?

Irish pensions in Spain

Ireland and Spain have a double tax agreement, signed in 1994. This essentially removes the possibility of paying tax twice on your pension, and in most cases the tax responsibility is ceded to the country where the recipient is a resident, in this case Spain.

However, it can depend slightly on the type of pension you receive, and whether it’s an occupational pension (otherwise known as a private pension plan) or a public sector pension from a public sector, government, or civil service career.

Let’s have a look at what the treaty says:

Article 19:

(a) Pensions paid by a contracting state or by one of its political subdivisions or local authorities, either directly or out of constituted funds, to a natural person in respect of services rendered to that state, subdivision or local authority may be taxed only in that state.

(b) However, such pensions may be taxed in the other contracting state only if the individual is a resident and a national of that state.

Legal jargon aside, what does all this actually mean? 

Essentially, if you get an Irish public sector pension (this is what ‘a contracting state or by one of its political subdivisions or local authorities’ seems to mean) it will be taxed in Ireland as before unless you are both a Spanish national and tax resident in Spain.

So, if you’re an Irish national resident in Spain, your public sector pension will be taxed in Ireland unless you have acquired Spanish nationality.

This is confirmed by the Irish government here: “You may be receiving an Irish pension from the Government or a local authority. In general, this pension is taxed in Ireland regardless of your residence status. Refer to the Government Services article of the Double Taxation Agreement between Ireland and the country you intend to be resident in.”

Private/occupational pensions

Now, what about private or occupational pensions? Generally speaking, if you receive a private pension from an Irish company, you’ll be taxed in whichever country you’re tax resident in.

Per the Irish government: “If you receive an Irish occupational pension from a private sector employer, your pension will be taxed in the country that you are tax resident in if you are both:

To make sure you aren’t taxed in Ireland, you can request a PAYE Exclusion Order.

How much are Irish pensions taxed in Spain?

As stated earlier, state pensions from any country are treated as earned income by the Spanish system.

Therefore, Irish pensions in Spain are subject to progressive tax rates ranging from 19 percent to 47 percent:

Up to €12,450 in pension funds received in a tax year: 19 percent
€12,451 – €20,200: 24 percent
€20,201 – €35,200: 30 percent
€35,201 – €60,000: 37 percent
€60,001 – €300,000: 45 percent
Over €300,000: 47 percent

The amount of tax you need to pay on an Irish pension can also depends on other factors, especially the fact that the threshold changes depending on whether it is the claimant’s only source of income or not.

According to Spain’s Article 96.3 of the Income Tax Act, when a foreign taxpayer resident in Spain earns a pension from a foreign source but has other sources of income, the threshold to declare this income is €15,000 a year. However this changes if their pension money is their only source of income and it’s from a single source, in which case it’s €22,000.

There can be exceptions such as when combined earnings from non-primary sources of income are no higher the €1,500 a year, but it’s advisable to check this with a tax expert to analyse your specific circumstances.

READ MORE: The charms and challenges of life in Spain for its Irish residents

What about ARFs and PRSAs?

If you withdraw money from either your Approved Retirement Fund (ARF) and Personal Retirement Savings Accounts (PRSA), you will be taxed at source regardless of your residence status, so in Ireland.

According to the Irish Tax Institute, “owners of ARFs, vested PRSAs and AMRFs who are not resident in Ireland may be subject to taxation on this income, both in Ireland and their country of residence and subsequently tax relief may be available under the terms of a DTA (Double Taxation Treaties)”, which Ireland has with Spain.

Please note, we are at The Local are not financial experts. The information above is designed to help, but if you are unsure of what steps to get yourself in order tax-wise, seek professional advice.

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