How the withdrawal of a pension plan is taxed in 2026

# How the withdrawal of a pension plan is taxed in 2026

The withdrawal of a pension plan is always taxed as earnings from work in the IRPF, regardless of the payment method you choose. This means that the amount received is added to your other earnings from work for that year and can significantly increase your marginal tax rate. It is not income from savings—as is the case with investment funds or dividends—but general income. Understanding this difference is key before deciding when and how to withdraw your plan.

In 2026, the three available withdrawal methods are: in the form of capital (single payment), in the form of an annuity (periodic payments), and in a mixed form (combination of both). Each has distinct fiscal implications, and the optimal choice depends on your personal situation, other income sources, and whether you have contributions prior to January 1, 2007 (source: AEAT).

The three withdrawal methods and their fiscal impact

Withdrawal in the form of capital

You receive the entire accumulated balance in a single payment. It is the simplest method operationally, but fiscally the most aggressive: the full amount is added to your earnings from work in a single tax year, which typically spikes the applicable marginal tax rate.

However, there is a 40% reduction for contributions made before January 1, 2007, provided the withdrawal occurs in the year of the contingency (retirement, disability, death, dependency) or in the two following tax years. This is called the transient reduction, regulated in the twelfth transitory provision of the IRPF Law, and only applies to the portion of the capital corresponding to those old contributions (source: AEAT, BOE).

Practical Example — Withdrawal in capital with 40% reduction:

Suppose you retire in 2026 and have accumulated 120,000 € in your pension plan, of which 40,000 € correspond to contributions before 2007 and 80,000 € to contributions after.

• On the 40,000 € before 2007, you can apply the 40% reduction: you only pay tax on 24,000 €.
• The remaining 80,000 € are taxed in full.
• Total taxable base of the withdrawal: 104,000 €, which is added to any other earnings from work you received that year.

The effective tax rate will depend on your overall earnings. If you already receive a public pension of, for example, 18,000 € annually, the total earnings from work would reach 122,000 €, placing a significant portion in the higher brackets of the IRPF. That is why withdrawing in capital for large amounts is usually the least efficient fiscal option, unless the balance is reduced or the taxpayer has no other significant earnings.

Withdrawal in the form of an annuity

You receive the balance in periodic payments: monthly, quarterly, or annually. Each payment is taxed as earnings from work in the year it is received, but because it is spread out over time, the impact on the marginal tax rate is much lower.

This method is especially efficient when the taxpayer is already retired and their only income is the public pension and the annuity from the plan. If the sum of both does not exceed the higher brackets of the IRPF, the effective tax rate can be significantly lower than that resulting from a capital withdrawal.

Practical Example — Withdrawal in annuity:

Same person with 120,000 € accumulated. Decides to receive 10,000 € annually over 12 years.

• Public pension: 18,000 €/year.
• Annuity from the plan: 10,000 €/year.
• Total earnings from work: 28,000 €/year.

In this scenario, applying the minimum personal allowance and the reductions for earnings from work provided by the current legislation (AEAT), the resulting effective tax rate is notably lower than that applied to the 120,000 € received all at once. The difference can amount to thousands of euros in tax savings over the payment period.

Withdrawal in a mixed form

Combines an initial lump-sum payment —taking advantage, if applicable, of the 40% reduction on pre-2007 contributions— with the rest received as periodic annuity. It is the method that offers the greatest flexibility, and when planned well, can optimize the tax burden.

For example, if you have 30,000 € in contributions before 2007, you could withdraw that portion in capital (taxing only 18,000 € after the 40% reduction) and leave the rest to be received as an annual annuity. This way, you benefit from the transient advantage without triggering the marginal tax rate on the entire balance.

The 40% reduction: requirements and deadline in 2026

This tax benefit is one of the most relevant in the transitory regime and it is important to know it precisely:

• It only applies to contributions made before January 1, 2007.
• It is only valid for withdrawals in the form of capital (not for periodic annuities).
• The withdrawal must occur in the tax year of the contingency or in the two following tax years. If you retire in 2026, the maximum deadline to apply the reduction is the 2028 tax return (source: AEAT, twelfth transitory provision of Law 35/2006).
• If you miss this deadline, you lose the reduction permanently on those old contributions.

This point is one of the most common errors: taxpayers who retire and wait several years before withdrawing the plan, losing the right to the 40% reduction for not respecting the transitory deadline.

Contingencies that allow the withdrawal

You cannot withdraw a pension plan at any time. The contingencies that enable the withdrawal are (source: AEAT):

• Retirement (or equivalent situation if you have never contributed).
• Total and permanent disability for the habitual profession, absolute or severe disability.
• Death of the participant (paid to the designated beneficiaries).
• Severe or severe dependency.

In addition, there are exceptional liquidity cases that allow early withdrawal:

• Long-term unemployment (more than 12 months without benefits).
• Serious illness (of the participant, spouse, ascendants or descendants).
• Contributions with more than 10 years of age (from January 1, 2025, according to the current legislation in 2026).
• Execution procedure on the habitual home.

In all cases, the amount withdrawn is taxed as earnings from work in the year of the withdrawal.

Withholding and tax return

When you withdraw the plan, the managing entity applies a withholding of IRPF on the amount received. This withholding is an advance payment to the Tax Agency, not the final tax. In the tax return for the corresponding year, the situation is regularized: if the withholding was insufficient (because the actual marginal tax rate is higher), you will have to pay the difference; if it was excessive, the Tax Agency will refund the excess.

That is why it is essential to plan the year of the withdrawal: if in that year you have other high income (sale of a property, labor compensation, etc.), the applicable marginal tax rate for the plan withdrawal will be higher. Coordinating the timing of the withdrawal with the rest of your tax situation can make a significant difference.

Contribution limits in 2026 and their relation to the withdrawal

Although the focus of this article is the withdrawal, it is worth remembering the current contribution limits in 2026 (for the tax return of the 2025 exercise and onwards), according to AEAT:

• Individual plan: up to 1,500 €/year reduction in taxable base.
• Employment plans: up to 8,500 € additional (total combined: 10,000 €).
• Self-employed with Simplified Employment Pension Plan (PPES): up to 4,250 € additional (total: 5,750 €).
• People with disability: up to 24,250 €.

The applicable reduction is the lower of the absolute limit and 30% of the sum of net earnings from work and economic activities (source: AEAT).

This information is relevant because the contributions that reduced the taxable base in their time will be fully taxed when withdrawn, since the tax deferral is settled at that moment.

When each method is advisable: practical guide

There is no universal answer. The choice depends on several factors:

• Accumulated amount: The higher the balance, the more advisable it is to withdraw in annuity or mixed form to avoid the bracket jump.
• Other earnings of the year: If in the year of the withdrawal you have high income from other sources, the capital may result in a very high tax burden.
• Contributions before 2007: If you have a significant volume of contributions before 2007, the mixed method may be the most efficient, taking advantage of the 40% reduction without giving up the temporal distribution of the rest.
• Liquidity needs: If you need the money immediately, capital is the only practical option, although it is the most costly tax-wise.
• Life expectancy and asset planning: The annuity withdrawal may be more efficient in the long term, but it implies that the balance remains in the plan and, in the event of death, passes to the designated beneficiaries.

Use our pension plan withdrawal calculator to estimate the tax impact according to your specific situation before making a decision.

Common errors when withdrawing a pension plan

Practical experience shows that these are the most common mistakes:

1. Losing the 40% reduction by not withdrawing within the transitory period after retirement.
2. Withdrawing in capital in a year with high other income, unnecessarily spiking the marginal tax rate.
3. Not correctly communicating the contingency to the manager, which may delay the process or cause problems with the withholding.
4. Confusing the withdrawal with savings income: the mistake of believing it will be taxed at 19-28% like investment funds, when in fact the general IRPF rate applies.
5. Not planning the withdrawal year based on the rest of the tax return.

Sources and reference legislation

• AEAT (agenciatributaria.gob.es): Taxation of pension plans, earnings from work, withholdings.
• Law 35/2006, of November 28, on the IRPF (BOE): Articles 17, 51 and twelfth transitory provision (40% reduction for pre-2007 contributions).
• Royal Legislative Decree 1/2002 (BOE): Text of the Regulation of Pension Plans and Funds.
• BOE: Development and current modifications in force in 2026.
• Bank of Spain (bde.es): General information on pension products.