A pension plan defers your tax, it doesn't cut it

Putting 10 000 € into a Spanish pension plan cuts this year's tax bill. Yes. But the money hasn't become invisible to the tax office: you've only deferred the bill. Three numbers to see the trick.

1. You put in 10 000 € this year. If your marginal rate —the percentage the tax office charges on your last euro earned— is 25 %, your bill drops by 2 500 €. 2. Ten years later you withdraw the 10 000 € plus whatever it has grown to, say 6 000 € (a modest net return). The tax office treats the full 16 000 € as employment income. If your rate on withdrawal is still 25 %, you pay 4 000 €. 3. Net: you deferred 2 500 € and later paid 4 000 €. The maths only works if your rate drops sharply by the time you withdraw.

The tax break really exists when your gross retirement income will be clearly lower than today's, or when you withdraw in small doses spread across low-income years. It's a tool for smoothing tax across time, not for erasing it. An index fund with the same return only pays 21 % on the 6 000 € gain: 1 260 €. Before contributing, estimate the tax rate you'll face on withdrawal.