The Basque Country has its own laws and also its own pension plans: these are the EPSV or Voluntary Social Security Entities.
Should you take out an EPSV? How do they work? What are their advantages and disadvantages? Let's take a look!
What is an EPSV?
EPVS stands for Voluntary Social Security Entity, a term that may not ring a bell. Things will certainly change if we tell you that it is a collective savings instrument, similar to a pension plan, but limited to the Basque Country.
That could be a good initial definition of EPSV. In reality, an EPSV is a savings and investment instrument that pools the money of many small savers to invest it. It's that simple.
What are the differences with a pension plan? On the one hand, EPSVs are regulated by Basque regulations. On the other hand, they are entities without legal personality (pension plans do have one). This means that investors in the EPSV are partners instead of participants and they do not need a management company to administer the assets, which a plan does need.
Furthermore, the investment limits in an EPSV are higher than in a pension plan (precisely because it is subject to Basque regulations) and the same applies to taxation when recovering the money.
What does not change is that EPSVs are also a common product in subsidized mortgages . Many financial institutions will improve the interest rate of the mortgage if you take out an EPSV.
Characteristics of EPSVs
The characteristics of EPSVs are those that best define them as a long-term investment alternative. These are the most important:
Allows you to deduct income tax
Contributions to EPSVs, like pension plans, are tax deductible in personal income tax. Specifically, they reduce the taxable base, so that the money invested is subtracted from what you have earned and you therefore pay less tax. In the case of EPSVs, the maximum deduction is 5,000 euros.
The following table summarises how much you can save depending on your tax base and your contributions (the IRPF brackets of Vizcaya have been taken as a reference):
Input | Salary of €16,000 | Salary of €25,000 | Salary of €40,000 | Salary of €65,000 |
1.000 € | 230 € | 280 € | 350 € | 400 € |
2.500 € | 575 € | 700 € | 875 € | 1.000 € |
5.000 € | 1.150 € | 1.400 € | 1.750 € | 2.000 € |
They can be transferred without penalty
You can transfer your EPSV to another EPSV within the same entity or a different one whenever you want. This transfer is free, with no fees or taxes.
This means that you will not have to pay income tax on the profits you accumulate by changing plans. You will have to do so when you recover the money.
Low liquidity: your money is 'held up'
One of the characteristics and disadvantages of EPSVs is their lack of liquidity. In other words, you will not be able to recover your money whenever you want.
An EPSV can be recovered in the following cases:
- Retirement
- Permanent disability
- Death
- Serious illness
- Long-term unemployment
- After 10 years from the date of the investment. For example, in 2023, investments from 2013 and previous years can be recovered.
Limited investment
On the one hand, the amount of money you can invest in an EPSV is limited to 5,000 euros per year.
On the other hand, EPSVs only operate in the Basque Country. If you stop being a Basque tax resident, you will not be able to benefit from the contributions in the personal income tax. To get a tax deduction in the rest of Spain, you will need a pension plan or an insured pension plan (PPA).
Taxation of EPSV rescue
One of the key points of this product and of pension plans is that unlike other investment alternatives such as funds, EPSVs have more complex taxation when recovering the money.
The first thing you need to know is that this money is taxed as part of your work income. When you withdraw the EPSV, this capital will be added to the pension you receive or your salary when filing your tax return. In fact, it is even considered a second payer.
With this clear, you can choose to recover the EPSV in three ways:
- In the form of capital: all at once, so you can enjoy a 40% reduction. On the other hand, if the amount is very high, it is easy for you to pay taxes in the highest tax brackets. Remember that the IRPF is progressive, so those who earn more pay more, including the EPSV.
- In the form of annuity: this involves dividing the money in the plan over time. There are EPSVs that allow you to recover the money as a life annuity.
- Mixed form: This is a combination of the two previous forms and is the most common way to recover the EPSV. This way, you have an initial amount of money for whims without paying so many taxes and you are guaranteed a supplement for your pension for several years.
How an EPSV works
The operation of an EPSV is simple. As a saver, you invest money which, in turn, is invested in a series of assets in accordance with the EPSV policy. This can be more or less aggressive or conservative depending on the objective and policy of the social security entity.
The document where you can consult this policy is in the statement of investment principles.
From then on, the EPSV's assets and yours will increase or decrease depending on the assets in which they are invested. As an investor, you can change EPSVs as many times as you want.
When the time comes, you will be able to recover the money when one of the contingencies you have already seen occurs (retirement, unemployment, disability, etc.) and you will have to pay taxes on that money in the personal income tax.
Advantages and disadvantages of EPSV
The characteristics of EPSVs summarize quite well their strengths and weaknesses compared to other investment alternatives.
On the advantages side of EPSVs, the following stand out:
- Contributions are tax deductible.
- Double benefit, firstly due to the return on investment and secondly as tax profitability due to the difference between taxes saved when investing and those paid when withdrawing.
- Limited liquidity, which can be an advantage for people who find it difficult to save and invest. Since they cannot withdraw the money, they will be ensuring that it is a long-term saving.
On the disadvantages side of EPSV are:
- Complexity in the rescue. If you don't do the math, you can pay up to 40% in rent.
- Lack of liquidity, because if you need the money, you will not be able to freely recover it.
- The amount to invest is limited.
- They are only tax deductible in the Basque Country.
- These are the key points of EPSV that you should know before counting them, even if it is as a subsidized mortgage product.
