Dept. of Correction And Clarification: Annuities

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Q. What is the tax rate on an annuity in Spain?In the Euro Weekly News (Issue 1430), we were asked for a definition of annuities in Spanish tax law. The questioner was in dispute with the Spanish Tax Agency regarding whether his income was an annuity or a pension.

The difference is important because pensions are usually taxed more than annuities. Unfortunately, a small editorial slip changed the meaning of the final example in our answer.

The original text stated that only 24 per cent of the income from an annuity would be taxed. The version finally printed said that all annuity income would be taxed at 24 per cent. There is a big difference. Let’s try to make it clear.

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A.  The basic definition of annuity is a financial product which you purchase with money you already have in exchange for the guarantee of a lifetime income at a fixed rate. In Spanish this is called Renta Vitalicia. This is not the same as income received from a pension plan.

The Spanish Tax Agency taxes income from a pension at the normal income tax rates. This is because most contributions to a pension plan have been free of tax previously, so they are taxed now. This would be a tax rate of 24.75 per cent for an income up to €17,000, or 30 per cent up to €33,000 before any deductions are taken.

Income from an annuity is taxed less because the money to buy it has already been taxed. If you start receiving your payments between the ages of 60 and 65, you are taxed on only 24 per cent of your income instead of the whole amount.  This percentage varies with age.

So we see that if your pension income is €32,000, you face a Spanish tax bite of about 30 per cent before deductions, or a little under €10,000.

If your annuity income is the same €32,000, you are taxed on only about one-fourth of it, or €8,000.  This means that, after deductions, you will probably pay no tax at all.

 

By DAVID SEARL

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