Redeeming a PPR: How to do it without incurring a penalty

At a glance

  •  The law categorises situations in which you can withdraw funds without penalty into two groups: those requiring a five-year waiting period from the date of contribution, such as retirement, reaching the age of 60 or paying off a mortgage, and those with no minimum waiting period, such as long-term unemployment, serious illness, permanent disability or death.

  •  Income from the scheme is taxed at 8% within the legal conditions. Outside of these conditions, the rate increases to 21.5%, falling to either 17.2% or 8.6% if at least 35% of contributions are made during the first half of the contract.

  •  You may also have to repay any tax deductions that you have benefited from under the personal income tax scheme, plus a 10% surcharge for each full or partial year that has elapsed.

It is possible to redeem a PPR without incurring a penalty in situations defined by law. Not all of these require the same holding period: some require you to wait five years after the scheme was set up, while others can be redeemed at any time.

Investing money in a Pension Savings Scheme (PPR) does not mean that the capital will be inaccessible until retirement. This article answers the following four questions: in which situations can you redeem a PPR without incurring a penalty, how much will you pay if you withdraw funds outside of these conditions, what steps and evidence does the process require, and what alternatives exist before you make any changes to the scheme.

In which situations can you redeem the PPR without incurring a penalty?

First, it is important to note that a PPR can be withdrawn at any time. Unlike pension funds, where redemption is limited to situations provided for by law and under the relevant applicable scheme, there is no general legal impediment to redeeming a PPR.

However, from a tax perspective, there are two distinct situations: the PPR can be cashed in under the conditions laid down by law. In this case, it benefits from the most favourable tax treatment. The PPR can be cashed in outside of these conditions. In this case, cashing in remains possible, but it may entail less favourable tax treatment. This includes higher taxation on withdrawal. If you have previously benefited from tax deductions for contributions to the PPR, you will also have to repay those tax benefits, plus the applicable statutory penalty.

You can redeem a PPR without incurring a penalty in the following seven situations, as set out by law: retirement due to old age; reaching the age of 60; repayment of mortgage instalments; long-term unemployment; permanent incapacity for work; serious illness; and the death of the participant. You are only exempt from penalty in the first three situations five years after the respective contribution was made. The remaining situations do not require a minimum holding period.

The table below outlines each situation, its minimum holding period, and the required evidence.

In the three situations where a time limit applies, you can withdraw the full amount five years after the first contribution if at least 35% of the total contributions have been made in the first half of the contract term. This means that you do not have to wait five years for each subsequent contribution. Regarding mortgages, the law ensures that monthly instalments are paid, but it does not cover the early repayment of the loan.

Income from the scheme is taxed at a rate of 8% on the lump-sum repayment under these conditions. This tax is levied on the income generated by the PPR, rather than on the total amount of capital redeemed.

What is the cost of redeeming a PPR outside of the legal conditions?

If you redeem a PPR outside of the legal conditions, you will have to pay tax at a rate of 21.5% on the scheme’s income. You may also have to repay any personal income tax deductions that you have benefited from, plus a 10% surcharge for each full or partial year that has elapsed. Redemption is still possible; it’s just the cost that changes.

The rate only falls below 21.5% if at least 35% of contributions are made in the first half of the contract term. Once this threshold is met, the rate drops to 17.2% in the fifth year and to 8.6% in the eighth year. Otherwise, the rate of 21.5% applies, regardless of how long the scheme has been in place.

The adjustment to tax deductions is easy to calculate. Repayment only applies to the value of tax deductions from which you have actually benefited. As the deduction is optional, if you did not declare the contributions in Annex H of Form 3 of the IRS in a given year and therefore did not obtain any tax benefit, you do not have to repay anything in respect of that year. If you made further contributions in the following year and declared them for tax purposes, the deduction obtained in that year would be subject to any refund and the corresponding increase. For each deduction, 10% is added for every year, or part of a year, that has elapsed since the year in which you obtained the tax benefit. Any part of a year is counted as a full year.

For example, if you received a deduction of €350 in 2022 and redeemed the PPR in 2026 outside of the legal conditions, four years would have elapsed. The surcharge will therefore be 40%, i.e. €140. You will need to repay the €350 deduction plus the €140 surcharge, totalling €490.

A step-by-step guide to making a PPR withdrawal without incurring a penalty

The order of the four steps is important: your eligibility determines your tax treatment, which in turn determines the net amount you receive.

  1.  Check the eligibility criteria and timeframe. Check which of the seven situations applies to you. Then check whether the minimum holding period has been met for the contributions you wish to withdraw and which deductions you have claimed in Annex H of your previous income tax returns.

  2.  Gather the supporting documentation. If a withdrawal request is based on a legally recognised situation, the managing body may require proof that the relevant conditions have been met.

  3.  Decide whether to make a full or partial withdrawal. You are not obliged to withdraw all the capital from your PPR when making a withdrawal. If you only withdraw the amount you need, you will preserve the rest of your investment.

  4.  Submit your application to confirm the deadlines and costs. Before signing the contract, make sure you clarify the timeframe for the capital to be made available, as well as any redemption fees.

Three alternatives to consider before redeeming, all of which preserve tax benefits

There are three ways to meet a need for liquidity without forfeiting the tax deductions you have already claimed.

  •  Partial redemption rather than full redemption. If you redeem only the amount required, you will only be taxed on any repayment of tax relief (if you have claimed it) on the redeemed portion. The remaining capital will remain invested.

  •  Transfer rather than withdrawal. If the reason is not a lack of liquidity, but rather that the plan is unsuitable for your objectives, transferring your PPR to another PPR does not constitute a withdrawal. Therefore, it will not trigger taxation or the repayment of tax deductions. Check the transfer fees in the contract. For capital- or income-guaranteed PPRs, the transfer fee may be up to 0.5%.

  •  Emergency fund before a PPR. The purpose of an emergency fund is to cover three to six months’ worth of expenses in the event of unforeseen circumstances.

Recalculating your projected retirement income after a withdrawal shows its impact, while investment management helps you to reassess your asset allocation.

Rely on Carregosa NextGen when redeeming a PPR

The decision to withdraw from a PPR is a tax decision before it is an investment decision. The framework depends on the law and your specific circumstances rather than the product you hold.

Redeeming a PPR: FAQs

Can I redeem my PPR at any time?

Yes, you can redeem your PPR at any time. The taxation of the income and the obligation to repay any tax deductions claimed on your personal income tax return vary depending on the timing and reason.

How long do I have to wait to redeem my PPR without incurring a penalty?

It depends on the situation. In the case of retirement due to old age, or reaching the age of 60, or paying off a mortgage, the law requires a five-year waiting period after the relevant contributions have been made, unless at least 35% of the contributions were made in the first half of the contract. There is no minimum waiting period in the case of long-term unemployment, serious illness, permanent disability or death.

What happens if I redeem my PPR outside of the legal conditions?

Not only will you lose the reduced tax rate on the scheme’s income, but you may also have to repay any tax deductions already claimed, plus a 10% surcharge for each year or part thereof.

Is income from a PPR redemption taxable?

Yes, the tax is levied on the income generated by the PPR, rather than on the total amount of capital withdrawn. The rate is 8% within the legal conditions. Outside these conditions, the rate is 21.5%, falling to 17.2% or 8.6% if at least 35% of contributions are made in the first half of the contract and the investment is held for more than five or eight years, respectively.

Can I use my PPR to pay off my mortgage?

Yes, you can use the money to pay the monthly instalments on a mortgage for your permanent home, but not to make early repayments on the loan. You will need a statement from the lending institution confirming the amount of the instalments.

Disclaimer: This article has been prepared by Banco Carregosa for information and educational purposes only. Under no circumstances does it constitute an investment proposal, recommendation to purchase, or personalised financial advice. Investing in financial instruments carries risks, as well as the possibility of losing the invested capital. Past performance is no guarantee of future returns. You should consult your account manager or financial advisor before making any financial decisions to ensure that it is suited to your risk profile and financial objectives.