Starting 1 January 2025, Spain has introduced a significant reform to its pension system, allowing individuals to withdraw funds contributed to their pension plans over 10 years ago. This change unlocks €64 billion – half of all the funds currently held in these plans.
For some, this offers a lifeline. Pilar, a teacher struggling with debt, is one such beneficiary. “Soon I’ll be able to withdraw a substantial amount from my pension plan and clear several loans,” she says to CincoDias. “It will be a huge relief.”
This new policy was originally legislated in 2014 under the government of Mariano Rajoy and aims to provide greater financial flexibility to pension holders. With €64 billion now potentially available for early access, Spain’s approach draws comparisons to the UK’s 2015 pension reforms.
What does the reform entail?
Under the new Spanish rules, pension holders can withdraw savings and accrued returns for contributions made up to the end of 2015. This withdrawal timeline will extend annually, enabling access to funds contributed in 2016 by 2026, and so forth. This shift in how Spaniards can approach their retirement savings is raising questions about the potential financial and economic impacts.
While industry bodies remain sceptical, banks fear a potential wave of withdrawals. However, previous exceptions to withdrawal rules – for serious illness or long-term unemployment – have not triggered large outflows. This overhaul comes at a challenging time for pension savings plans, which are already under pressure due to caps on annual contributions.
Key uncertainties include how many individuals will opt for early withdrawals and what they will do with their released funds. Will they reinvest, spend, or save for future needs? According to an article in Infobae it’s worth examining the UK’s experience to anticipate these dynamics.
Lessons from the UK’s 2015 pension freedom reforms
In April 2015, the UK implemented its “Freedom and Choice in Pensions” reform, granting individuals over 55 complete control over their defined contribution pension funds. Options included withdrawing the entire sum at once, setting up an annuity, making scheduled withdrawals, or combining these methods.
Initially, a majority of UK pension holders opted for lump-sum withdrawals. During the first nine months, more than 60% chose to withdraw their savings entirely, a figure that settled at 52% by year-end. Interestingly, those with smaller pension pots—less than £10,000 (€12,100)—were the most likely to cash out fully. Larger fund holders exhibited more conservative behaviour, preferring to leave their savings invested.
Financial and behavioural impacts
The UK’s reform revealed several trends. Many individuals used their withdrawn funds for immediate needs such as paying off debts or making significant purchases. While 25% of withdrawn funds were tax-free, the remaining amount was taxed as income, creating unexpected liabilities for some. Furthermore, the mandatory purchase of annuities had been abolished, leading to an 80% drop in annuity sales by 2016 compared to 2013 levels. Additionally, individuals began exploring other financial products and investment options, though these often came with added complexity and cost.
What could Spain expect?
Spain’s adoption of a similar policy will likely mirror some of these trends. Immediate consumption may surge, as individuals seize the opportunity to access their savings. However, as in the UK, tax considerations might temper enthusiasm, especially for higher-income earners.
Financial institutions could also see shifts in demand, with traditional pension products giving way to more flexible, but potentially riskier, investment options. Policymakers should closely monitor these developments to ensure financial stability and safeguard retirees’ long-term security.
Also read: Concerns over gradual privatisation of pensions in Spain