The hidden costs – Retirement in Spain
By Matthew Green
This article is published on: 5th August 2025
When Richard and Anne relocated from the UK to Spain’s sunny Valencia region to enjoy their retirement, they brought €100,000 in savings. They weren’t looking for high returns — just a safe place to grow their nest egg and potentially draw a small income if needed.
Richard chose to keep the money in a Spanish bank account. It felt safe, accessible, and earned a seemingly decent 5% per year. But what he didn’t realise was how Spain’s tax system was quietly eroding his returns — and how his family could face significant complications if he passed away.
Scenario 1: Leaving the Money in the Bank
Each year, Richard earned 5% interest. However, Spain taxed those annual gains at 26%, meaning he was only compounding on what was left after tax.
(Note: While 5% is well above typical long-term interest rates, this figure is used to highlight the negative impact of tax on compounding.)
Effective annual growth: Just 3.7% (after tax)
Value after 20 years: €202,269
What it cost him: Thousands in lost growth potential
What looked like a safe, straightforward approach turned out to be far less efficient than it could have been.
Scenario 2: Using a Spanish Tax-Compliant Bond
A friend introduced Richard to a financial adviser, who explained the numerous benefits of Spanish tax-compliant bonds — fully legal investment vehicles often underused by expats. These structures allow investments to grow tax-free until funds are withdrawn.
Richard invested the same €100,000 into a compliant bond, again earning 5% annually. But unlike the bank account, no tax was deducted each year, allowing the full amount to compound uninterrupted.
After 20 years:
Bond value: €265,330
Tax due on gain (€165,330): €42,986
Net amount after tax: €222,344 — €20,075 more than the bank account
Compound Growth Comparison (No Withdrawals)
The graph shows how the tax-compliant bond (orange dashed line) outperforms the bank account (solid line) over time, thanks to tax deferral. Even after paying tax at the end, the bond delivers a much higher return.
What If Richard Needed an Income?
Suppose Richard withdrew €5,000 annually to help cover living expenses. Here’s what happened:
From the bank account:
Withdrawals were fully taxed each year, and interest was also taxed annually. The account balance declined steadily, and the effects of compounding were weakened.
From the tax-compliant bond:
Withdrawals triggered tax only on the gains within each €5,000. The rest, drawn from his original capital, was untaxed or lightly taxed. Meanwhile, the remaining funds continued to grow tax-free.
Growth Comparison with Withdrawals
Even with yearly withdrawals, the bond preserved capital efficiently and delivered stronger long-term growth compared to a taxed bank account.
What Happens When Richard Passes Away?
One of the most overlooked parts of financial planning in Spain is inheritance tax and transfer of wealth to beneficiaries.
Because we take a holistic approach, we’d ensure Richard’s bond was correctly structured so that:
- His UK-based family could inherit without dealing with Spanish probate
- The investment passed directly to his beneficiaries
- No inheritance tax was due in Spain
What if he’d kept the money in the bank?
His heirs would have faced a slow, costly probate process in Spain, potential succession taxes, and possibly long delays — all during an already emotional time.
Why This Matters for You
If you’re an expat living in the Valencia region, with savings in Spanish or foreign bank accounts, you may be unknowingly exposed to:
- High annual taxation
- Poor compounding performance
- Inheritance delays and unnecessary tax exposure
The solution?
By moving your savings into a Spanish tax-compliant bond, you could:
✓ Maximize long-term growth through tax deferral
✓ Withdraw income more efficiently
✓ Avoid Spanish probate
✓ Protect your family from unnecessary taxes
Let’s Talk
I help expats across the Valencia region make their money work smarter within Spanish tax rules — always with a view to your entire financial picture, including what happens after you’re gone.