Antonio was a sales representative for a pharmaceutical company in Seville. At 64 he retired and went to live in Panama City with his partner. He left behind in Spain an individual pension plan with 60,000 € of accumulated rights, of which about 18,000 € come from contributions made before 2007. He calls the plan manager to cash it all in at once and is told tax will be withheld "under the non-resident scale". He does the sums on his phone calculator and is stunned: almost a third of the plan would be lost on the way.
The figure Antonio worked out may be correct. It may also be completely wrong. It depends on two things the manager did not ask him: what the treaty with Panama says and in what form he wants to be paid.
What cashing in a plan is for tax purposes
For Spanish law, what you receive from a pension plan is not a gain on an investment: it is employment income, just like a pension. When the beneficiary is not resident in Spain, the Spanish non-resident income tax act treats it as a pension or similar benefit: its article 13.1.d) treats pensions and similar benefits paid by a resident entity as obtained in Spain, and expressly includes pension plan benefits among the latter.
The consequence is that, if Spain can tax it, the pension scale in article 25.1.b) applies: 8 % up to 12,000 € a year, 30 % between 12,000 and 18,700 € and 40 % above that. And there is a detail that changes things a great deal: article 24.1 of that act calculates the base on the gross amount, "without applying" the IRPF (Spanish personal income tax) reductions.
Lump sum or income: the same plan, two results
The scale is applied to the annual amount. That is why taking it all in one year or spreading it over several produces very different results. Let us look at Antonio's case on the assumption that Spain could tax the payout.
Payout as a lump sum, 60,000 € in one year:
- Up to 12,000 € at 8 %: 960 €.
- From 12,000 to 18,700 € at 30 %: 2,010 €. Running total: 2,970 €.
- From 18,700 to 60,000 € (41,300 €) at 40 %: 16,520 €.
- Total: 19,490 €, 32.5 % of the plan.
Payout as income, 6,000 € a year for ten years:
- Each year, 6,000 € at 8 %: 480 €.
- Over ten years: 4,800 €, 8 % of the plan.
| Form of payment | Spanish tax on that assumption | What reaches Antonio |
|---|---|---|
| Lump sum, a single year | 19,490 € | 40,510 € |
| Income, ten years of 6,000 € | 4,800 € | 55,200 € |
| Mixed: 12,000 € in the first year and the rest as income | Depends on the split | Calculated case by case |
The difference is not a trick: it is the progressivity of the scale acting on a concentrated amount. Before signing the payout request it is worth having this table prepared with the real figures. For each year that income is received, the residence certificate must also be kept current so that the manager applies the correct withholding.
The treaty may bring all this down to zero
Everything above assumes that Spain can tax. But Spain has a treaty with many countries, and the treaty takes precedence over domestic law. In the OECD model, pensions and similar remuneration for past employment in the private sector are taxed only in the country of residence. Many treaties include pension plan benefits there, especially when they are paid as periodic income. Lump-sum payouts raise more doubts: depending on the wording of each treaty, they may fit under the pensions article or under another, such as the one for other income.
What has to be read, therefore, is the treaty between Spain and Panama, checking where each form of payment fits. If the treaty gives the benefit to the country of residence alone, Antonio can prove his residence to the manager with a certificate from the Panamanian administration that refers to the treaty, and the Spanish withholding should be zero. How Panama treats that payment is another question, which depends on its law and which Antonio's adviser there confirms. Thinking only about the Spanish withholding and forgetting the country of residence is another frequent mistake.
If you do not provide the residence certificate referring to the treaty before the payment, the entity will foreseeably just apply the scale, and on a lump-sum payout that can mean very high withholding. The excess can be claimed afterwards with a refund return, but the money is tied up for months and the claim has a deadline. Handing in the document beforehand costs less.
The reduction for old contributions
Many members with contributions made before 2007 have heard of a reduction for taking the money as a lump sum. It exists: the twelfth transitional provision of the IRPF act allows the reduction provided for in the consolidated text in force at that date to be applied to the part corresponding to contributions made up to 31 December 2006. But it has two limits that matter for Antonio:
- It is an IRPF reduction, the tax paid by residents. As a non-resident, article 24.1 of the non-resident income tax act excludes reductions: he cannot apply it to his 18,000 € of old contributions.
- It has a time window. For recent contingencies, it can only be applied to amounts received in the tax year in which retirement occurs or in the two following years. After that it is lost, even if the person becomes resident again.
For someone thinking of returning to Spain soon, this means doing the sums with a calendar: cash in as a non-resident, without the reduction, or wait until becoming resident and apply it, if still within the window. It is a decision that depends on the year of retirement, the date of return and how the payout is taxed in the current country of residence.
If you are in Antonio's situation, you can send us the certificate of accumulated rights, the date of retirement and the country where you live through the pensioners form. With that we prepare the comparison between forms of payment before you sign anything.
What to ask the plan manager before deciding
| Document | What for |
|---|---|
| Certificate of accumulated rights | Total amount of the plan |
| Breakdown of contributions before and after 2007 | To know which part could carry the reduction as a resident |
| Payment options offered by the plan | Lump sum, income, mixed, payment calendar |
| Withholding approach it will apply | Whether it already has your residence on file and with which document |
Also ask them to confirm in writing which residence certificate they accept and how long before the payment it must reach them.
When the plan is an occupational scheme or a mutual society
Company plans and mutualidades de previsión social (mutual provident societies) follow essentially the same logic: a benefit classed as employment income, the pension scale for non-residents, and the treaty above it all. What changes are the payment options, which each plan's rules set, and sometimes the entity that withholds. And if you also receive a public pension from Spain, the two are analysed separately, as we explain in I receive a pension from two countries.
The decision on when and how to cash in a plan while living abroad, with the Spanish withholding and coordination with the adviser in the country of residence, is one of the enquiries covered in the Salama Tax section for pensioners abroad. If the plan is paid out when you come back, also read what happens for tax in the year I return to Spain.