Financial Incentives and Retirement Savings

Chapter 2. The tax treatment of retirement savings in funded private pension arrangements

Abstract

This chapter describes and compares the tax treatment of retirement savings in funded private pension arrangements across 42 OECD and selected non-OECD countries. It provides details regarding the tax treatment of contributions, returns on investment, funds accumulated and withdrawals. It also describes other forms of financial incentives offered to individuals saving for retirement, mainly matching contributions and fixed nominal subsidies. The information refers to 2018 and covers all types of funded private pension plan in each country.

Countries use two types of financial incentive, tax incentives and non-tax incentives, to encourage individuals to save for retirement. Traditional forms of savings are taxed the same way as other income and earnings, with contributions paid from after-tax earnings, the investment income generated taxed, and withdrawals exempted from taxation. This is generally referred to as the “Taxed-Taxed-Exempt” or “TTE” tax regime. Tax incentives for retirement savings arise from deviating from this benchmark. They are indirect subsidies provided through the tax code. By contrast, non-tax incentives, mainly matching contributions and fixed nominal subsidies, are direct government payments. These payments are made by the government directly into the pension account of eligible individuals.

This chapter describes and compares the tax treatment of retirement savings across 42 OECD and selected non-OECD countries. It also examines the extent to which countries use more direct, non-tax financial incentives to promote savings for retirement. It focuses on retirement savings made through funded private pension arrangements.

Many countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime to retirement savings, where both contributions and returns on investment are exempt from taxation while benefits are treated as taxable income upon withdrawal. Yet a wide range of tax regimes can be found as well, from the “EEE” tax regime, where contributions, returns on investment and pension income are tax exempt, to regimes where two of three flows are taxed. In addition, in a majority of countries, a disparity of tax treatments exists at the national level between different types of plan, contribution (i.e. mandatory or voluntary) and contribution source (i.e. employer or individual). This complexity may prevent individuals to save for retirement. Consequently, some countries have introduced more direct financial incentives, which this chapter reports as well.

This chapter is organised as follows. Section 2.1 gives a general overview of the tax treatment of retirement savings under the personal income tax system. The following sections then go into more detail regarding the tax treatment of contributions to funded pension plans (Section 2.2), returns on investment and funds accumulated (Section 2.3), and private pension income (Section 2.4). Besides the personal income tax system, social contributions (e.g. those financing public health care insurance, public pensions, unemployment insurance, or disability insurance) may be levied on contributions to funded pension plans and private pension benefits. Section 2.5 therefore describes for each country whether contributions to funded pension plans are excluded from the income base used to calculate social contributions and whether social contributions are levied on private pension income. Section 2.6 presents the different forms of non-tax financial incentives introduced by selected countries to promote savings for retirement. Section 2.7 concludes.

2.1. Overview of the taxation of retirement savings

This chapter covers the tax treatment of retirement savings made through all types of funded private pension arrangement, whether mandatory or voluntary, occupational or personal, defined benefit or defined contribution. This section refers to the taxation of retirement savings under the personal income tax system, while Section 2.5 addresses other taxes such as social contributions levied on contributions and pension income.

When providing an overview of the taxation of retirement savings (Figure 2.1), for countries where the tax treatment differs across different types of pension plan, the analysis focusses on the tax treatment of the most common plan. Sections 2.2 to 2.4 then address cases when different tax rules apply to different types of plan. Second, the analysis treats contributions in occupational pension plans as taxed to employees if either employee or employer contributions are taxed when these two sources of contributions have a different tax treatment. Third, the tax treatment of pension income assumes a case where individuals take an annuity at their official age of retirement. Section 2.4 looks at how different types of post-retirement product and ages of benefit withdrawal affect the tax treatment of pension income.

Half of OECD countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime to retirement savings, meaning that both contributions and returns on investment are exempt from taxation, while benefits are treated as taxable income upon withdrawal. Out of 36 OECD countries, 18 follow this tax regime (see Figure 2.1).

Figure 2.1. Overview of the tax treatment of retirement savings in OECD and selected non-OECD countries, 2018

Note: Main pension plan in each country. “E” stands for exempt and “T” for taxed. Countries offering tax credits on contributions are considered as taxing contributions, as the tax credit may not cover the full amount of tax paid on those contributions.

1. Note by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people in the Island. Turkey recognizes the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of United Nations, Turkey shall preserve its position concerning the “Cyprus” issue.

2. Note by all the European Union Member States of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

Six other tax regimes can be found among the other countries. Occupational pension plans in Austria, Belgium, France, Korea, Portugal and Malta are taxed according to a “TET” regime, usually with part of the contributions exempt from taxation.1 The Czech Republic, Hungary, Israel, Lithuania and Luxembourg follow a “TEE” regime, where part or all of individuals’ contributions are taxed.

Returns on investment are taxed in three groups of countries. In Denmark, Italy and Sweden, contributions are tax exempt but returns on investment and pension income are taxed. Returns on investment are however not subject to progressive income tax rates but rather to fixed tax rates. In the case of Italy, returns on investment are not subject to double taxation during the accumulation phase and at withdrawal. Only the part of pension income that has not been already taxed during the accumulation phase is taxed at withdrawal. In Australia, New Zealand and Turkey, only pension income is tax exempt.2 In Cyprus, interest income earned by provident funds is taxed at the fixed rate of 3% (special contribution for defence).

Finally, four countries have more favourable taxation regimes for pension funds. In Mexico, the Slovak Republic, Bulgaria and Colombia, mandatory contributions to personal pension plans enjoy an “EEE” tax regime, meaning that contributions, returns on investment and pension income are tax-exempt.3

Table 2.1 provides more detailed information by country about the tax treatment of contributions, returns on investment and pension income. It disaggregates information between different types of plan, different types of contribution (i.e. mandatory or voluntary) and different sources of contribution (i.e. employer or individual) when these are subject to different tax treatments. Sections 2.2 to 2.4 explain further the information provided in Table 2.1.

Table 2.1. General tax treatment of retirement savings in funded private pensions, 2018

Country	Type of plan / contribution	Source of contribution	Tax treatment
			Contributions	Returns	Withdrawals
Australia	Concessional contributions Non-concessional contributions	All Individual	0%/15%/30% T	0%/15% 0%/15%	E E
Austria	Occupational plans Occupational plans Personal plans State-sponsored retirement provision plans	Individual Employer Individual Individual	T E T T	E E E E	T/PE T T/PE E
Belgium	Pension savings accounts Occupational plans “VAPZ” (self-employed) IPT (self-employed with a company) POZ (self-employed without a company)	Individual Employer Individual Individual Individual	30% credit E E E 30% credit	E 9.25% 9.25% 9.25% 9.25%	8% of assets 10% - 16.5% T 10% - 16.5% 10%
Canada	All	All	E	E	15% credit
Chile	Mandatory contributions Voluntary contributions, regime A Other voluntary contributions	Individual Individual Individual	E T E	E E E	T E T
Czech Republic	Supplementary plans Supplementary plans	Individual Employer	T/PE E	E E	E E
Denmark	Age savings plans Other plans	All All	T E	15.3% 15.3%	E T
Estonia	Mandatory contributions Voluntary contributions	All Individual	E 20% credit	E E	T E
Finland	Voluntary personal plans set up by individual Other plans	Individual All	30% credit E	E E	30% - 34% T
France	Article 82 Other occupational plans PERCO plans Other plans	All Employer Individual Individual	T T/PE T T/PE	T/PE E T/PE E	T/PE T/PE T/PE T/PE
Germany	Private pension insurance Other plans	Individual All	T E	E E	T/PE T
Greece	Occupational plans and group contracts Other plans	All All	E T	E E	T E
Hungary	All All	Individual Employer	T 17.7%	E E	E E
Iceland	All	All	E	E	T
Ireland	All	All	E	E	T/PE
Israel	All All	Individual Employer	35% credit E	E E	E E
Italy	All	All	E	12.5%/20%	T/PE
Japan	All	All	E	E	T/PE
Korea	Occupational plans All	Employer Individual	E 13.2%/16.5% credit	E E	T/PE T/PE
Latvia	Mandatory contributions Voluntary contributions Voluntary contributions	Individual Individual Employer	E E E	E 10% 10%	T E T
Lithuania	“Pillar 2” plans “Pillar 3” plans	All Individual	T E	E E	E E
Luxembourg	Occupational plans All	Employer Individual	20% E	E E	E T/PE
Mexico	Mandatory contributions Long-term voluntary contributions Short-term voluntary contributions	All Individual Individual	E E T	E E T	E E E
Netherlands	All	All	E	E	T
New Zealand	All	All	T	10.5% - 28%	E
Norway	Occupational DC plans Occupational DC plans Individual pension saving Occupational plans for the self-employed	Individual Employer Individual Individual	T/PE E T/PE E	E E E E	T T T/PE T
Poland	OFE plans IKZE plans PPE and IKE plans	Individual Individual All	E E T	E E E	T 10% E
Portugal	Occupational plans All	Employer Individual	E T/PE	E E	T T/PE
Slovak Republic	“Pillar 2” plans “Pillar 2” plans “Pillar 3” plans	Employer Individual All	E T T/PE	E E 19%	E E E
Slovenia	All	All	E	E	T
Spain	All	All	E	E	T
Sweden	Premium Pension Other plans	Individual All	E E	E 15%	T T
Switzerland	All	All	E	E	T
Turkey	Personal plans	All	T	T	E
United Kingdom	All	All	E	E	T/PE
United States	Roth contributions Other contributions	Individual All	T + credit (0% - 50%) E + credit (0% - 50%)	E E	E T
Selected non-OECD countries
Bulgaria	All	All	E	E	E
Colombia	Mandatory contributions	All	E	E	E
Croatia	Mandatory contributions Voluntary contributions Voluntary contributions	Individual Individual Employer	E T E	E E E	T/PE E E
Cyprus	Provident funds	All	E	3%	E
Malta	All Occupational plans	Individual Employer	15% credit E	E E	T T
Romania	All	All	E	E	T/PE

Note: T = Taxed; E = Exempt (usually up to a limit); T/PE = Taxed but partially exempt; credit = Tax credit.

2.2. Taxation of contributions to funded private pension plans

This section provides more details on the tax treatment of contributions to private pension plans. It reviews cases when the tax treatment varies for different types of plan, different types of contribution (i.e. mandatory or voluntary) or different sources of contribution (i.e. employer or individual). It also reports the limits that apply on contributions attracting tax relief or on the tax deductibility of contributions, as well as the tax treatment of contributions above those limits. Finally, it examines the requirements that must be met in certain countries to become eligible for tax relief on contributions.

Disparity of tax treatments across different types of contribution

Only a minority of OECD countries apply an identical tax treatment across all types of contribution and pension plan. This is the case in 12 OECD countries (Canada, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Slovenia, Spain, Switzerland, Turkey and the United Kingdom) and 4 non-OECD countries (Bulgaria, Colombia, Cyprus and Romania). In these countries, employee and employer contributions, whether voluntary or mandatory, are subject to the same tax treatment. Contributing to a personal or occupational plan does not modify the general tax treatment either, even though different limits may apply to the amount of contributions attracting tax relief.

In Chile, all types of contributions can be deducted from income but workers making voluntary contributions can actually decide whether or not to deduct these contributions from their taxable income. If they do, benefits are considered income for the year the withdrawals are made and are subject to a special additional tax. If they do not deduct contributions, the individual does not have to pay further taxes when the funds are used to complement the mandatory pension.

As shown in Table 2.1, contributions from employers and individuals within the same type of plan are treated differently in the income tax system of Austria, the Czech Republic, France, Hungary, Israel, Korea, Latvia, Luxembourg, Norway, Portugal, the Slovak Republic, Croatia, and Malta. In most of these countries, employer contributions to private pension plans are not considered as taxable income for the individual.4 By contrast, individuals’ contributions are made from after-tax income and may only enjoy a partial tax exemption (for example, 20% of overall employee contributions to private pension plans in Portugal are tax deductible) or a tax credit (for example, employee contributions in Israel are subject to a 35% non-refundable tax credit). In Luxembourg, employer contributions are taxed at a fixed rate of 20%, while employee contributions are tax-deductible. In Latvia, employer and employee voluntary contributions are tax deductible, but upon withdrawal, employer contributions are taxed while employee contributions are tax exempt.

The tax treatment may also vary according to the type of plan in which the individual is a member. This is the case in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Lithuania, Norway, Poland, the Slovak Republic, Sweden and the United States. In the Slovak Republic, plans receiving part of the social security contributions attract a different tax treatment than other plans. In Sweden, all plans follow an “ETT” tax regime, except the mandatory personal pension plan system (PPM) in which returns on investment are tax exempt. In the other countries, the difference in the tax treatment is not related to any plan category (occupational or personal, mandatory or voluntary). For example, Poland has two types of supplementary personal pension plan (IKE and IKZE) with two different tax regimes applying (“TEE” and “EET” respectively).

In Australia, Estonia, Latvia, Mexico and Croatia, the important criterion to determine the tax treatment of contributions is whether these contributions are mandatory or voluntary. In Australia, non-concessional contributions are usually voluntary contributions and paid from after-tax income, while concessional contributions are usually mandatory contributions (either paid by the employer or by the individual in case of self-employed workers) and generally taxed at a fixed rate of 15%. In Estonia and Croatia, contributions are tax-exempt in plans receiving part of the social security contributions, while they are taxed in supplementary voluntary personal plans.

The tax rate applied to contributions may depend on the income level of the individual. In the Netherlands, the tax treatment is the same for all types of contribution and pension plan but varies according to the income of the individual member. The maximum income for the “EET” system is set at EUR 105 075 in 2018. For the income that exceeds that limit, a “TEE” system can apply. In Australia, for high-income earners with an adjusted taxable income of more than AUD 250 000, the tax rate on concessional contributions that are considered above the AUD 250 000 threshold is 30% instead of 15%.5 In addition, the government refunds the tax paid on concessional contributions for low-income individuals in the form of a matching contribution.6 In New Zealand, employers’ contributions are also liable for tax. The tax rate is calculated based on the employee’s salary or wages in the previous tax year (including gross pension employer contribution) and varies between 10.5% and 33%.

Caps or limits to the amount of contributions attracting tax relief

Table 2.2 presents limits to the amount of contributions attracting tax relief and the tax treatment of excess contributions by country. Different limits may apply to different types of contribution within a country.

In only 11 countries, an overall limit applies to the sum of employer and employee contributions to private pension plans (Australia, Canada, Estonia, Italy, Latvia, Mexico, Slovenia, Spain, the United Kingdom, the United States and Romania). In that case, excess contributions, when permitted, are considered as taxable income for the individual and taxed at his/her marginal rate of income tax. In the other countries, employer contributions are not limited or have separate limits to the ones applying to employee contributions.

In three countries, tax relief is granted only for a part of the contributions made by individuals (the Czech Republic, Norway and Portugal). For example, in Portugal, 20% of overall employee contributions to private pension plans (both occupational and personal) are tax deductible, within age-dependent limits. In the Czech Republic, only contributions above CZK 12 000 per year are tax-deductible.

Partial tax relief can also be granted in the form of a tax credit. Tax credits reduce the amount that the individual owes in tax (in contrast to tax deductions that reduce taxable income). It is calculated as a proportion of the contributions made, up to a limit. Eight countries provide tax credits: Australia, Belgium, Estonia, Finland, Israel, Korea, the United States and Malta. The proportion of contributions used to calculate the tax credit varies from 13.2% in Korea to 35% in Israel. In the case of voluntary personal plans taken by the employees in Finland, the tax credit is provided only if the capital income earned in the year is lower than the amount of deductible contributions. In the United States, the Saver’s Credit provides individuals who fall within certain tax brackets with non-refundable tax credits equal to 50%, 20% or 10% of the amount contributed on up to USD 2 000.

Table 2.2. Limits to the amount of contributions attracting tax relief and tax treatment of excess contributions

Country	Type of plan / contribution / source of contribution	Part of contribution attracting tax relief	Contribution limit	Taxation of excess contributions
Australia	Concessional contributions Non-concessional contributions	All No tax relief	AUD 25 000 per year or AUD 125 000 over a five-year period if total superannuation balance is less than AUD 500 000. Only permitted if total superannuation balance is less than AUD 1 600 000. The limit is AUD 100 000 per year or AUD 300 000 over a three-year period for those aged under 65.	Marginal income tax rate + excess concessional contribution charge 49% tax rate if individuals do not withdraw the excess contributions. If they do, notional earnings on excess contributions are taxed at marginal tax rate.
Austria	Direct insurance, employer	All	EUR 300	Marginal income tax rate
Belgium	Pension savings accounts, ordinary Pension savings accounts, dual Long-term savings individual life insurance Occupational pension plans VAPZ IPT POZ	Tax credit: 30% Tax credit: 25% Tax credit: 30% All for employers; 30% tax credit for employees All All Tax credit: 30%	EUR 960 EUR 1 230 EUR 2 310 Total retirement benefits, including the statutory pension, should not exceed 80% of the last gross annual salary 8.17% of professional income, up to EUR 3 187.04. For “social” VAPZ: 9.40% of professional income, up to EUR 3 666.85 Total retirement benefits, including the statutory pension, should not exceed 80% of the last gross annual salary Total retirement benefits, including the statutory pension, should not exceed 80% of the last gross annual salary	Marginal income tax rate Marginal income tax rate Marginal income tax rate Marginal income tax rate Excess contributions are not permitted Marginal income tax rate Marginal income tax rate
Canada	Registered Retirement Savings Plans (RRSP) Pooled Registered Pension Plans (PRPP) Registered pension plans (RPP) - DC Deferred Profit-Sharing Plans (DPSP)	All All All All	Employee + employer contributions: 18% of earnings up to CAD 26 230 minus actual or estimated RPP contributions Contributions must be made within an individual’s available RRSP limit Employee + employer contributions: 18% of earnings up to CAD 26 500 Employee + employer contributions: 18% of earnings up to one-half of the RPP limit (CAD 13 250).	Marginal income tax rate + penalty tax of 1% per month for excess over-contributions made to an RRSP or a PRPP (i.e. contributions in excess of CAD 2 000 over the applicable RRSP/PRPP limit). See RRSP Excess contributions are not permitted Excess contributions are not permitted
Chile	Mandatory contributions Agreed deposits Voluntary contributions, regime B	All All All	78.3 UF (Unidad de Fomento in Spanish, a price-indexed unit of account) 900 UF 50 UF per month or 600 UF per year	Excess contributions are not permitted Marginal income tax rate Marginal income tax rate
Czech Republic	Individual Employer	> CZK 12 000 / year All	CZK 24 000 per year CZK 50 000 per year	Marginal income tax rate Marginal income tax rate
Denmark	Programmed withdrawals Age savings	All No tax relief	DKK 54 700 DKK 5 100; The last five years before retirement age, the contribution limit is increased to DKK 46 000 per year	Marginal income tax rate Excess contributions are not permitted
Estonia	Voluntary contributions	Tax credit: 20%	Maximum tax credit: 15% of gross income up to EUR 6 000. The EUR 6 000 limit is common to employee and employer contributions, so that any employer contribution reduces the available room for individual contribution entitled to the tax credit	Flat income tax rate (20%)
Finland	Voluntary occupational plans Voluntary personal plans set up by the employer Voluntary personal plan taken by the individual	All All for employer contributions. No tax relief for employee contributions Deductible from capital income	5% of salary up to EUR 5 000 per year Employer contributions: EUR 8 500 per year EUR 5 000 per year or EUR 2 500 if the employer also provides and contributes to a voluntary personal plan for its employees. Tax credit of 30% on the excess if capital income is too low	If the employee contributes more than the employer does, the excess amount is not deductible Marginal income tax rate Marginal income tax rate
France	Article 83 and company retirement savings plans (PERE) Article 83, PERE, popular retirement savings plans (PERP) and PREFON Collective retirement savings plans (PERCO) Madelin contracts	All All All for employer contributions. No tax relief for employee contributions All	8% of gross earnings, with gross earnings capped at 8 times the annual social security ceiling Common limit for voluntary contributions: 10% of gross earnings of the previous year, with gross earnings capped at 8 times the annual social security ceiling Employer contributions: 16% of the annual social security ceiling and 3 times the employee contributions; Employee contributions: 25% of gross earnings of the previous year Depends on taxable profit, minimum 10% of the annual social security ceiling, maximum 10% of 8 times the annual social security ceiling plus 15% of 7 times the annual social security ceiling	Marginal income tax rate Marginal income tax rate Marginal income tax rate Marginal income tax rate
Germany	Pension funds and direct insurance Riester plans Basisrente plans	All All All	8% of the social security contribution ceiling EUR 2 100 per year (including the subsidy) From 2025: The maximum contribution to the miners’ statutory pension scheme	Marginal income tax rate Marginal income tax rate Marginal income tax rate
Greece	Occupational plans and group contracts	All	No limit
Hungary	Individual	No tax relief
Iceland	Individual	All	4% of taxable income	Marginal income tax rate
Ireland	Individual	All	Between 15% of earnings for individuals younger than 30 and 40% of earnings for individuals 60 and older, with earnings capped at EUR 115 000	Excess contributions are not permitted
Israel	Individual Employer	Tax credit: 35% All	Contributions are subject to a cap at 20.5% of twice the national average salary Maximum tax credit: 7% of the salary 7.5% of the salary, with a cap on gross salary of 2.5 times the national average salary for employees and 16.5% of the national average salary for self-employed people	Marginal income tax rate Marginal income tax rate
Italy	All	All	Employee + employer contributions: EUR 5 164.57 per year. Employees who got their first job since 1 January 2007 are entitled to recoup the unused annual tax relief of their first five years of participation in a pension scheme, up to the limit of 50% of the maximum annual relief. The recoupment may take place in the 20 years following the first five years of participation.	Marginal income tax rate
Japan	Individual-type DC plans DC corporate plans DB corporate plans	All All All	Employees: between JPY 12 000 and JPY 23 000 per month depending on whether the employer sponsors a plan and what type of plan; Self-employed workers: JPY 68 000 per month Employer: JPY 330 000 or JPY 660 000 per year and per employee depending on whether the employer also sponsors a DB plan JPY 40 000 per year	Excess contributions are not permitted Excess contributions are not permitted Excess contributions are not permitted
Korea	Individual	Tax credit: 13.2% or 16.5%	The maximum level of contributions taken into account for the calculation of the tax credit varies between KRW 4 000 000 and KRW 7 000 000 per year depending on the type of plan in which the individual contributes	Marginal income tax rate
Latvia	Voluntary contributions	All	Employee + employer contributions: 10% of annual taxable income, up to EUR 4 000 per year	Marginal income tax rate
Lithuania	Voluntary contributions	All	25% of taxable income up to EUR 2 000 per year	Flat income tax rate (15%)
Luxembourg	Employer Individual	All All	20% of salary EUR 1 200 in occupational pension plans and EUR 3 200 in personal pension plans	Excess contributions are not permitted Marginal income tax rate
Mexico	Complementary contributions Long-term voluntary contributions Contributions to special "savings for retirement" accounts Occupational plans Voluntary personal plans	All All All All All	10% of taxable income up to 5 times the annual minimum wage. 10% of taxable income up to 5 times the annual minimum wage. MXN 152 000 Employee + employer contributions: 12.5% of salary 10% of taxable income up to 5 times the annual minimum wage	Marginal income tax rate Marginal income tax rate Marginal income tax rate Marginal income tax rate Marginal income tax rate
Netherlands	Occupational DC plans Personal plans	All All	“EET” system: between 3.2% to 4.6% of the salary minus a threshold for the public pension for employees aged 15 to 19 and 22.3% to 27.3% for employees aged 65 to 67; “TEE” system: between 2.2% for employees aged 15 to 19 and 13.1% for employees aged 65 to 67 13.3% of the annual income up to EUR 105 075 minus a threshold for the public pension	Marginal income tax rate Marginal income tax rate
New Zealand	All	No tax relief
Norway	Occupational DC plans, individual Occupational plans for the self-employed Individual pension saving	Deductible from ordinary income Deductible from ordinary and personal income Deductible from ordinary income	2% of salary in municipal and public sector DB plans; 4% of salary in private sector plans 6% of imputed personal income from self- employment between 1 and 12 G NOK 40 000	Excess contributions are not permitted Marginal income tax rate Marginal income tax rate
Poland	IKZE PPE IKE	All All All	1.2 times the national projected average monthly salary 4.5 times the national projected average monthly salary 3 times the national projected average monthly salary	Excess contributions are not permitted Excess contributions are not permitted Excess contributions are not permitted
Portugal	Individual	20%	Tax-deductibility limit: EUR 400 per year under 35 years old, EUR 350 between 35 and 50 years old, and EUR 300 above 50 years old	Marginal income tax rate
Slovak Republic	Pillar 3 plans	All	Employee contributions: EUR 180	Marginal income tax rate
Slovenia	All	All	Employee + employer contributions: 5.844% of gross salary up to EUR 2 819.09 per year	Marginal income tax rate
Spain	All	All	Employee + employer contribution limit: EUR 8 000. Tax-deductibility limit: 30% of earnings up to EUR 8 000	Excess contributions are not permitted
Sweden	Voluntary personal	All	35% of eligible income up to 10 basic amounts per year	Marginal income tax rate
Switzerland	Personal plans	All	If the individual has an occupational pension scheme: CHF 6 768; If not: 20% of annual earnings up to CHF 33 840	Excess contributions are not permitted
Turkey	Personal plans	No tax relief
United Kingdom	All	All	Employee + employer contributions: 100% of the individual's income up to GBP 40 000	Marginal income tax rate
United States	401(k) and 403(b) plans 457(b) plans Simplified Employee Pension Plans (SEP) SIMPLE IRA Individual Retirement Accounts (IRA)	All All All All All	Employee + employer contributions: 100% of earnings up to USD 55 000 Employee + employer contributions: 100% of earnings up to USD 18 500 Employee + employer contributions: 25% of earnings up to USD 55 000 Employee contributions: USD 12 500; Employer contributions: 100% match up to 3% of compensation or 2% of compensation 100% of taxable earnings up to USD 5 500	Marginal income tax rate Marginal income tax rate Marginal income tax rate Marginal income tax rate 6% per year, as long as the excess amounts remain in the plan
Selected non-OECD countries
Bulgaria	Voluntary individual contributions Voluntary employer contributions	All All	10% of annual taxable income BGN 60 per month	Flat income tax rate (10%) Flat income tax rate (10%)
Colombia	Voluntary contributions	All	30% of the employee’s employment income or COP 125 992 800 annually	Marginal income tax rate
Croatia	Voluntary employer contributions	All	HRK 6 000 a year	Marginal income tax rate
Cyprus	Provident funds	All	1/6th of annual income	Marginal income tax rate
Malta	Personal plans	Tax credit: 15%	Maximum tax credit: EUR 150 per year	Marginal income tax rate
Romania	Voluntary contributions	All	Employee + employer contributions: 15% of gross earnings; Employee contributions are tax deductible up to EUR 400 per year	Flat income tax rate (10%)

Limits to the amount of contributions attracting tax relief can be defined as a proportion of the individual’s income. This limit is usually subject to a maximum amount in national currency in order to put a ceiling on the tax relief granted to high-income earners. Such a definition of limits is used in Belgium, Canada, Estonia, Finland, France, Germany, Iceland, Ireland, Israel, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, Norway, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, the United States, Bulgaria, Colombia, Cyprus and Romania. For example, employee contributions to voluntary occupational plans in Finland are deductible from the employee’s earned income up to the lesser of (i) 5% of salary or (ii) EUR 5 000 per year.

By contrast, the limit to the amount of contributions attracting tax relief can be defined as a fixed amount in national currency, usually a multiple of a reference value in the country. Such a definition of limits can be found in Australia, Austria, Belgium, Chile, the Czech Republic, Denmark, Finland, France, Germany, Italy, Japan, Korea, Luxembourg, Mexico, Norway, Poland, Portugal, the Slovak Republic, Switzerland, Bulgaria, Croatia, Malta and Romania.

Finally, in a majority of countries, excess contributions are taxed at the individual’s marginal tax rate. They are subject to a specific tax rate in Australia, Canada (for Registered Retirement Savings Plans) and the United States (for Individual Retirement Accounts, IRAs). Excess contributions are not permitted for certain types of plan in Belgium, Canada, Chile, Denmark, Ireland, Japan, Luxembourg, Norway, Poland, Spain and Switzerland.

Eligibility criteria for tax relief on contributions

In most countries, people not paying income taxes do not get any relief on their contributions into private pension plans. The United Kingdom is an exception, as individuals not paying taxes can benefit from basic rate tax relief (20%) under the relief at source mechanism.

People with an income above a certain threshold cannot claim a deduction on their pension contributions at all in the United States for IRAs (USD 73 000 per year for a single individual also participating in an occupational pension plan).

Tax relief on contributions may be granted until a certain age. The age limit to be eligible for tax relief on contributions is 65 years old in Belgium (for personal plans) and 75 years old in the United Kingdom. Individuals aged over 75 cannot make voluntary deductible contributions in Australia.

Finally, plan members may be eligible for tax relief on contributions if they comply with certain rules, such as:

• contributing for a minimum period: ten years in Belgium (for personal plans), five years in Estonia (for voluntary personal plans), ten years in Luxembourg;

• not retiring before a certain age: 62 in Belgium (for occupational plans), the maximum statutory age in Finland (currently varying between 68 and 70 years depending on the age of the insured person), 62 in Germany (in principle for Riester pension plans and Basisrente plans), 60 in Luxembourg, 55 in Sweden (for voluntary personal plans);

• taking benefits in a certain form: minimum withdrawal period of ten years in Finland (for personal plans), monthly lifelong payments in Germany (for Basisrente plans), at least two-thirds of the benefits paid as an annuity in Portugal (for occupational plans), minimum withdrawal period of five years as an annuity in Sweden (for voluntary personal plans).

2.3. Taxation of returns on investment and of the funds accumulated

Taxation of returns on investment

Most countries exempt from taxation returns on investment in private pension plans (see Table 2.1). Returns on investment are taxed, for some or all types of pension plan, contribution (voluntary or mandatory) and contribution source (employee and employer), in 12 countries (Australia, Belgium, Denmark, France, Italy, Latvia, Mexico, New Zealand, the Slovak Republic, Sweden, Turkey and Cyprus).

In Australia, investment earnings on pension assets are taxed at a rate of 15% during the accumulation phase. During the pay-out phase, investment earnings are tax free, except when the amount of assets that has been transferred to a retirement phase account exceeds AUD 1 600 000. In addition, funds are eligible for imputation credits for dividend income and for a one-third capital gains tax reduction on assets held for at least 12 months.

The taxation of returns on investment depends on the type of asset classes in Italy. Investment income from pension funds is taxed at a 20% standard rate, but income from government bonds held by the pension fund is taxed at a more favourable rate of 12.5%.

A fixed tax rate applies to returns on investment in Belgium (9.25%), Denmark (15.3%), Latvia (10%), Sweden (15%) and Cyprus (3%). In the case of Sweden, the 15% tax rate applies on an imputed return on investment rather than on the actual return on investment generated by the assets of the pension plan. The imputed return corresponds to the previous year’s average government borrowing rate, but it cannot be negative.

In France, Mexico, the Slovak Republic and Turkey, returns are taxed when the individual retires and not during the accumulation phase. The part of pension income originated from returns is taxed separately. In France, returns on investment in PERCO plans are subject to social taxes at the rate of 17.2% upon withdrawal if the individual chooses a lump sum (the lump sum is divided into a “capital component” and a “return on capital component”, and only the “return on capital component” is subject to the 17.2% tax). In Mexico, the real interest earned from investing short-term voluntary contributions are considered as taxable income upon withdrawal. In the Slovak Republic, returns on investment in supplementary pension plans (pillar 3) are taxed at the rate of 19% upon withdrawal (only the part of pension income originated from returns is taxed). In Turkey, only the part of pension income originated from returns is taxed upon withdrawal and the tax rate depends on the age at withdrawal (younger or older than 56 years old) and on the length of membership in the plan (more or less than ten years).

Finally, in New Zealand, the taxation of investment income depends on the type of scheme and on the taxable income of the plan member. If the scheme is an occupational pension plan, investment earnings are taxed at 28%. If the scheme is a Portfolio Investment Entity (e.g. all KiwiSaver default schemes), the tax rate for investment earnings varies from 10.5% for taxable income equal to or below NZD 14 000 to 28% for taxable income higher than NZD 48 000.

Taxation of funds accumulated

Some countries tax the total amount of funds accumulated (which includes returns on investment and past contributions) during the accumulation period. Belgium and Japan are the only two countries imposing a tax on assets accumulated in private pension plans. In Belgium, there is an 8% tax on the lump sum received from pension savings accounts (third pillar). This tax basically replaces the tax on withdrawals. If the pension savings account was opened when the individual was younger than 55, the tax is due at age 60 on the capital accumulated until then. If the pension savings account was opened when the individual was 55 or older, the tax is due when the contract has been in place for 10 years on the capital accumulated until then. In Japan, assets in Employees’ Pension Funds (EPFs), DB and DC plans are taxed at an annual rate of 1.173%. However, this tax has been paused since 1999.

Other countries tax the total amount of funds accumulated once it exceeds a lifetime limit. Australia, Ireland and the United Kingdom do this when the individual retires. In Australia, the limit, called the transfer balance cap, is currently AUD 1 600 000 and is indexed annually in line with the consumer price index. It restricts the amount of superannuation assets that an individual can transfer to a retirement phase account, i.e. an account supporting retirement income streams with tax-free investment earnings. Assets in excess of the transfer balance cap must be rolled back to an accumulation phase account, where investment earnings will be taxed at 15%, or withdrawn from the plan. Transfers in excess of the limit are subject to a 15% excess transfer balance tax. In Ireland, the limit has been set at EUR 2 million since 1 January 2014. Upon withdrawal, the amount of assets in excess of this limit is subject to an upfront income tax charge at the higher rate of income tax (currently 40%). The limit in the United Kingdom is currently set at GBP 1.03 million and is indexed annually by the consumer price index. Individuals building up pension savings worth more than the limit pay a tax charge on the excess upon withdrawal. The rate depends on how this excess is paid to the individual. If the amount over the limit is paid as a lump sum, the rate is 55%. If it is paid as an annuity, the rate is 25%.

2.4. Taxation of pension income

Distinct tax treatments of pension income according to the post-retirement product

As shown in Table 2.3, the tax treatment of pension income is identical across different types of post-retirement product in 17 OECD countries (Denmark, Finland, Germany, Greece, Iceland, Italy, Latvia, Lithuania, the Netherlands, New Zealand, Norway, Poland, the Slovak Republic, Slovenia, Sweden, Turkey, and the United States) and 5 non-OECD countries (Bulgaria, Colombia, Croatia, Cyprus and Romania).7

Lump sums may be tax free up to a certain amount or may be only partially taxed. This tax treatment for lump sums can be found in Australia (if withdrawn after the preservation age), Chile (provided the individual can finance a certain minimum benefit with the assets accumulated), Denmark (for age savings plans), France, Hungary (provided the account has been opened for a long enough period), Ireland, Israel, Korea, Latvia, Lithuania (provided the account has been opened for at least five years and withdrawal is not earlier than five years before the statutory retirement age), Luxembourg, Mexico, New Zealand, Poland (for PPE and IKE plans), Portugal, the Slovak Republic, Spain (for people who have contributed before 2007), Switzerland, the United Kingdom, the United States (Roth contributions), Bulgaria (if the annuity payment from universal pension funds is less than 20% of the public social retirement pension), Colombia, Cyprus and Malta. Compared to annuities and programmed withdrawals, lump sum payments can be quite large, potentially increasing the individual’s marginal income tax rate the year of withdrawal. Allowing for a partial tax exemption of lump sums (while annuities and programmed withdrawals are fully taxed as income), may help reaching a more neutral tax treatment across the different post-retirement products.

Only two OECD countries incentivise people to annuitize their pension income through a more favourable tax treatment for annuities as compared to programmed withdrawals. In the Czech Republic, annuities are always tax-exempt, while programmed withdrawals are tax-exempt only when they are paid for at least a duration of ten years (otherwise, they are taxed as income). In Estonia, pension payments from voluntary pension plans from age 55 are tax free for life annuities and taxed at a rate of 10% for programmed withdrawals. It is also worth mentioning that many countries do not allow pension payments as programmed withdrawals.

Finally, early withdrawals are taxed less favourably in some countries. The age limit defining early withdrawals differ in each country and there may be more than one limit to define different tax treatments. For example, in Australia, annuities are taxed at the individual’s marginal tax rate before the preservation age, there is a 15% tax offset between the preservation age and 59 years old, and annuities up to AUD 100 000 per year are tax free from age 60. Other countries distinguishing the tax treatments for early withdrawals include Belgium, Denmark, Estonia, France (PERCO and article 82 plans), Italy, Lithuania (voluntary contributions), Turkey, the United Kingdom and the United States.

Table 2.3. Tax treatment of pension income according to the post-retirement product

Country	Type of plan / contribution / source of contribution	Annuities	Programmed withdrawals	Lump sums
Australia	Concessional contributions Non-concessional contributions	- Before preservation age (PA): Taxed at marginal rate - PA to 59: Taxed at marginal tax rate less 15% tax offset - From 60: Exempt up to AUD 100 000 per year, then 50% is taxed at marginal tax rate Exempt	- Before PA: Taxed at marginal rate - PA to 59: Taxed at marginal tax rate less 15% tax offset - From 60: Exempt up to AUD 100 000 per year, then 50% is taxed at marginal tax rate Exempt	- Before PA: Taxed at min {20%; marginal tax rate} - PA to 59: Exempt up to AUD 200 000, then taxed at min {15%; marginal tax rate) - From 60: Exempt Exempt
Austria	Occupational – Employer Occupational – Individual State-sponsored retirement provision Other personal plans	Taxed at marginal rate Only 25% taxed at marginal rate Exempt Taxed at marginal rate from the moment the total value of benefits paid exceeds the capital value of the pension at retirement	Not allowed Not allowed Not allowed Not allowed	Taxed at marginal rate Only 25% taxed at marginal rate 27.5% tax on capital gains and 50% of the state subsidies have to be paid back Taxed at marginal rate from the moment the total value of benefits paid exceeds the capital value of the pension at retirement
Belgium	Pension savings accounts Long-term savings individual life insurance Occupational pension plans VAPZ IPT POZ	Not allowed Not allowed Taxed at marginal rate (rare option) Not allowed Not allowed Not allowed	Not allowed Not allowed Not allowed Not allowed Not allowed Not allowed	Taxed at 8% of the assets accumulated up to age 60 Taxed at 10% of the assets accumulated up to age 60 - Part of the capital from the employer’s contributions: 16.5% or 10% if the individual withdraws from the statutory age of retirement + municipal tax - Part of the capital from the employee’s contributions: 10% + municipal tax The accumulated capital is converted into a virtual income that is then taxed at the marginal rate. The virtual income is determined by applying a conversion rate to the accumulated capital (4% or 4.5%) and has to be declared during a certain period (13 years or 10 years) Taxed at 16.5% or 10% if the individual withdraws from the statutory age of retirement + municipal tax Taxed at 10% + municipal tax
Canada	All	Taxed at marginal rate. A non-refundable 15% tax credit is provided on the first CAD 2 000 of eligible pension income	Taxed at marginal rate. A non-refundable 15% tax credit is provided on the first CAD 2 000 of eligible pension income	Taxed at marginal rate
Chile	Mandatory contributions Voluntary contributions, regime B Voluntary contributions, regime A	Taxed at marginal rate Taxed at marginal rate plus special additional tax at the time of withdrawal Exempt	Taxed at marginal rate Taxed at marginal rate plus special additional tax at the time of withdrawal Exempt	Exempt up to 200 UTM (monthly taxation unit) annually provided that the individual can finance a certain minimum benefit Taxed at marginal rate plus special additional tax at the time of withdrawal Exempt
Czech Republic	All	Exempt	- Exempt if for more than 10 years - Taxed at marginal rate otherwise	Flat tax rate (15%) on returns and employer contributions
Denmark	Age savings plans Other plans	Exempt - Early withdrawal: Taxed at 60% - At retirement: Taxed at marginal rate	Exempt - Early withdrawal: Taxed at 60% - At retirement: Taxed at marginal rate	Exempt Not allowed
Estonia	Mandatory contributions Voluntary contributions	Taxed at flat rate (20%) - Before 55: Taxed at 20% - From 55: Exempt	Taxed at flat rate (20%) - Before 55: Taxed at 20% - From 55: Taxed at 10%	Taxed at flat rate (20%) - Before 55: Taxed at 20% - From 55: Taxed at 10%
Finland	Voluntary personal plans taken by individuals Other plans	Taxed as capital income (30%) up to EUR 30 000; Excess taxed at 34% Taxed at marginal rate	Taxed as capital income (30%) up to EUR 30 000; Excess taxed at 34% Taxed at marginal rate	Taxed as capital income (30%) up to EUR 30 000; Excess taxed at 34% Taxed at marginal rate
France	Article 83, PERE, PREFON and Madelin contracts Article 39 PERCO Article 82 PERP	Taxed at marginal rate after a 10% deduction + 10.1% social taxes Taxed at marginal rate after a 10% deduction + 10.1% social taxes + additional tax (rate depends on monthly pension) - Before 50: 70% taxed at marginal rate + 17.2% social taxes - 50 to 59: 50% taxed at marginal rate + 17.2% social taxes - 60 to 69: 40% taxed at marginal rate + 17.2% social taxes - From 70: 30% taxed at marginal rate + 17.2% social taxes - Before 50: 70% taxed at marginal rate + 17.2% social taxes - 50 to 59: 50% taxed at marginal rate + 17.2% social taxes - 60 to 69: 40% taxed at marginal rate + 17.2% social taxes - From 70: 30% taxed at marginal rate + 17.2% social taxes Taxed at marginal rate after a 10% deduction + 10.1% social taxes	Not allowed Not allowed Not allowed Not allowed Not allowed	Not allowed Not allowed Only return on capital component taxed at 17.2% social taxes Only return on capital component above EUR 4 600 taxed at 7.5% (12.8% if total premiums exceed EUR 150 000) + 17.2% social taxes Taxed at marginal rate after a 10% deduction + 8.5% social taxes (other fiscal options available if more advantageous for the individual)
Germany	Private pension insurance Other plans	Only return on capital component taxed at marginal rate Taxed at marginal rate	Only return on capital component taxed at marginal rate Taxed at marginal rate	Only return on capital component taxed at marginal rate (only 50% taxed if the contract has been held for at least 12 years and the recipient is at least 62 years old) Taxed at marginal rate
Greece	Occupational plans and group contracts Other plans	Taxed at marginal rate Exempt	Taxed at marginal rate Exempt	Taxed at marginal rate Exempt
Hungary	Voluntary private pension funds Other plans	Account opened from 01/01/2013: Exempt after 10 years of membership Exempt after 10 years of membership	Account opened from 01/01/2013: Exempt after 10 years of membership Exempt after 10 years of membership	Account opened from 01/01/2013: Gradual reduction of the portion of withdrawals taxed at flat rate (15%) between 10 and 20 years of membership (Exempt after 20 years of membership) Exempt after 10 years of membership, except for withdrawals before the retirement age that are taxable at flat rate (15%) + 19.5% health care tax (the base of the tax and the contribution is 78%)
Iceland	All	Taxed at marginal rate	Not allowed	Not allowed
Ireland	All	Taxed at marginal rate	Taxed at marginal rate	- Below EUR 200 000: Exempt - EUR 200 001 to EUR 500 000: Taxed at 20% - Above EUR 500 000: Taxed at marginal rate
Israel	All	- Below the entitled annuity (NIS 8 380 monthly): Exempt - Above: Taxed at marginal rate	Not allowed	Exempt up to NIS 739 116 provided that the individual can finance a minimum annuity of NIS 4 418 monthly
Italy	All	Taxed at 15% with a reduction of 0.3% for every year of participation after 15 years (max reduction 6%). Taxation is applied on the pension benefit net of the part that was already taxed in the accumulation phase	Not allowed	- Early withdrawal: Generally taxed at 23% - At retirement: Taxed at 15% with a reduction of 0.3% for every year of participation after 15 years (max reduction 6%). Taxation is applied on the pension benefit net of the part that was already taxed in the accumulation phase
Japan	All	Taxed at marginal rate after a deduction which depends on total pension income (including public pensions)	Taxed at marginal rate after a deduction which depends on total pension income (including public pensions)	Taxed at marginal rate
Korea	Employer contributions Individual contributions and returns	70% of the tax due in the case of a lump sum withdrawal - Total retirement income ≤ KRW 12 million: Taxed at a rate that varies from 3.3% to 5.5% depending on the age of the annuitant - Total retirement income > KRW 12 million: Taxed at marginal rate	Not allowed Not allowed	Taxed at marginal rate after deductions related to the number of years of service and the income level Taxed at 16.5% (including local income tax), except when contributions did not enjoy the tax credit (exempt)
Latvia	Mandatory contributions Voluntary – Employer Voluntary - Individual	Taxed at marginal rate Taxed at marginal rate Exempt	Taxed at marginal rate Taxed at marginal rate Exempt	Taxed at marginal rate Taxed at marginal rate Exempt
Lithuania	Mandatory contributions Voluntary contributions	Exempt - If the contract duration has been at least 5 years and the individual withdraws no more than 5 years before the statutory age of retirement: Exempt - Otherwise: Taxed at flat rate (15%) excluding the part of contributions that have not been deducted from taxable income	Not allowed - If the contract duration has been at least 5 years and the individual withdraws no more than 5 years before the statutory age of retirement: Exempt - Otherwise: Taxed at flat rate (15%) excluding the part of contributions that have not been deducted from taxable income	Not allowed - If the contract duration has been at least 5 years and the individual withdraws no more than 5 years before the statutory age of retirement: Exempt - Otherwise: Taxed at flat rate (15%) excluding the part of contributions that have not been deducted from taxable income
Luxembourg	Occupational plans Personal plans	Only the part from the insured period before 01/01/2000 is taxed at marginal rate Only 50% taxed at marginal rate	Not allowed Not allowed	Only the part from the insured period before 01/01/2000 is taxed at marginal rate Taxed at half the marginal rate
Mexico	Short-term voluntary contributions Other plans	Not allowed - Below 15 times the annual minimum wage: Exempt - Above: Taxed at marginal rate	Not allowed - Below 15 times the annual minimum wage: Exempt - Above: Taxed at marginal rate	Exempt - Below 90 times the daily minimum wage annually: Exempt - Above: Taxed at average rate
Netherlands	Up to EUR 105 075 Above EUR 105 075	Taxed at marginal rate Exempt	Not allowed Not allowed	Not allowed with the exception of small pensions (taxed at marginal rate) Exempt
New Zealand	All	Exempt	Exempt	Exempt
Norway	Occupational DC plans Individual pension saving	Taxed at marginal rate as both ordinary and personal income Taxed at marginal rate as ordinary income	Taxed at marginal rate as both ordinary and personal income Taxed at marginal rate as ordinary income	Not allowed Not allowed
Poland	OFE plans IKZE plans PPE and IKE plans	Taxed at marginal rate Taxed at 10% Exempt	Not allowed Taxed at 10% Exempt	Not allowed Taxed at 10% Exempt
Portugal	Employer Individual	Taxed at marginal rate - Capital component: Exempt - Return on capital component: Taxed at marginal rate	Not allowed Not allowed	- 1/3 of the capital component is exempt from taxation up to a maximum of EUR 11 704.70. The remainder is taxed at marginal rate - The return on capital component is taxed at 4% or 8% - Capital component: Exempt - Return on capital component: Taxed at 4% or 8%
Slovak Republic	Pillar 2 plans Pillar 3 plans	Exempt Only return on capital component taxed at 19%	Exempt Only return on capital component taxed at 19%	Exempt Only return on capital component taxed at 19%
Slovenia	All	Taxed at marginal rate	Taxed at marginal rate	Taxed at marginal rate
Spain	All	Taxed at marginal rate	Not allowed	40% of pension income arising from contributions made before 2007 can be taken as a lump sum and Exempt, otherwise taxed at marginal rate
Sweden	All	Taxed at marginal rate	Not allowed	Not allowed
Switzerland	All	Taxed at marginal rate	Taxed at marginal rate	Taxed as capital income (1/5 of the income tax which could be generated if lump sums were separately taxed as income)
Turkey	Personal plans	Only return on capital component taxed: - At 5% if withdrawal from 56 years old and the contract duration has been at least 10 years - At 10% if withdrawal before 56 years old and the contract duration has been at least 10 years - At 15% if the contract duration has been less than 10 years	Only return on capital component taxed: - At 5% if withdrawal from 56 years old and the contract duration has been at least 10 years - At 10% if withdrawal before 56 years old and the contract duration has been at least 10 years - At 15% if the contract duration has been less than 10 years	Only return on capital component taxed: - At 5% if withdrawal from 56 years old and the contract duration has been at least 10 years - At 10% if withdrawal before 56 years old and the contract duration has been at least 10 years - At 15% if the contract duration has been less than 10 years
United Kingdom	All	- Taxed at marginal rate - Pension savings accessed before the normal minimum pension age (currently age 55) are charged a 55% rate	- Taxed at marginal rate - Pension savings accessed before the normal minimum pension age (currently age 55) are charged a 55% rate	- Up to 25% of the total value of assets accumulated: Exempt - Above: Taxed at marginal rate - Pension savings accessed before the normal minimum pension age (currently age 55) are charged a 55% rate
United States	Roth contributions Other plans	Exempt - Before 59.5: Taxed at marginal rate + 10% extra tax - From 59.5: Taxed at marginal rate	Exempt - Before 59.5: Taxed at marginal rate + 10% extra tax - From 59.5: Taxed at marginal rate	Exempt - Before 59.5: Taxed at marginal rate + 10% extra tax - From 59.5: Taxed at marginal rate
Selected non-OECD countries
Bulgaria	All	Exempt	Exempt	Exempt
Colombia	All	Exempt up to 1 000 UVT	Exempt up to 1 000 UVT	Exempt up to 1 000 UVT
Croatia	Mandatory contributions Voluntary contributions	Taxed: 50% of the tax that would be generated if pension income was taxed as employment income Exempt	Not allowed Exempt	Not allowed Exempt
Cyprus	Provident funds	Not allowed	Not allowed	Exempt
Malta	All	Taxed at marginal rate	Taxed at marginal rate	- Up to 30% of the total value of assets accumulated: Exempt - Above: Taxed at marginal rate
Romania	All	Not allowed	Taxed at flat rate (10%) above RON 2 000 of total pension income (including public pensions)	Taxed at flat rate (10%) above RON 2 000 of total pension income (including public pensions)

Interaction with the tax treatment of public pensions

Pension income paid by public pay-as-you-go pension schemes is considered as taxable income for the individual in a majority of countries. The only exceptions are Hungary, Lithuania, the Slovak Republic, Turkey and Bulgaria, where public pensions are fully tax exempt. These are countries where private pension income is also tax-exempt, at least under certain circumstances or for certain types of plan (see Table 2.3).

Pension income in general benefits from a different tax treatment than income from work in many countries. Tax credits - deductions on the tax due - are provided to pensioners in Australia, Austria, Canada, the Czech Republic, Ireland, the Netherlands, Norway and Slovenia.8 Tax allowances are income limits under which individuals do not pay taxes. Individuals get special allowances for their pension income in the Czech Republic, Mexico, Spain, Sweden, Colombia and Romania. Finally, special tax deductions apply to pension income in Finland, France, Germany, Japan, Portugal, and the United States.

2.5. Are social contributions levied on private pension contributions and private pension income?

Besides the personal income tax system, contributions to private pension plans and benefits paid from these plans can be subject to social contributions. These social contributions are usually levied on gross salaries and wages to finance among other things, health insurance, unemployment insurance, public pensions and disability pensions.

Table 2.4 describes for each country whether social contributions are levied on private pension contributions and on private pension income.

In general, contributions paid by individuals from their after-tax income to voluntary personal pension plans are also subject to social contributions. This is because these pension contributions are paid from an income on which social contributions have been levied.

In ten countries (Austria, Belgium, Canada, the Czech Republic, Ireland, Italy, Portugal, Slovenia, Turkey and the United Kingdom), employee contributions to private pension plans are subject to social contributions while employer contributions are not, or benefit from a reduced rate. In all these countries, employer contributions are not considered as taxable income in the hands of employees. They are not included either in the income base to calculate social contributions. A counter-example is Norway, where employer contributions to mandatory occupational pension plans are not considered as taxable income to the employees, but employers still have to pay social contributions on these occupational pension contributions.

Table 2.4. Social contributions and retirement savings

Are social contributions levied on…

Country	Pension contributions	Pension income
Australia	No	Before age 60: Medicare Levy From age 60: No
Austria	Employee contributions: Yes Employer contributions: No	Pensioners do not pay most social security contributions but do pay for sickness insurance
Belgium	Employee contributions: Yes Employer contributions: Reduced rate IPT: No POZ: Yes VAPZ contributions are considered as social contributions	No for pension savings accounts and life insurance contracts Pensioners with a pension above a minimum threshold pay a social security contribution for health and disability insurance. “Solidarity” contributions are levied on all pensions exceeding a certain threshold
Canada	Employee contributions: Yes Employer contributions: No	No
Chile	Yes	Pensioners pay 7% of pension income for health coverage, except those eligible for a solidarity pension or poor pensioners
Czech Republic	Employee contributions: No for contributions above CZK 12 000 and up to CZK 24 000 per year Employer contributions: No	No
Denmark	No	No
Estonia	Yes	No
Finland	Yes if pension insurance contributions constitute taxable salary (health insurance, mandatory pension insurance and unemployment insurance)	No contributions on pension income for pension or unemployment insurance. There is a separate health care contribution for pension income taxable as earned income
France	Yes	No
Germany	Occupational plans: No up to 4% of the social security contribution ceiling Personal plans: Yes	Pensioners have to pay health and long-term care insurance from their occupational pension payments. Payments made in retirement from Riester, Basisrente and personal pension insurance are not subject to social insurance contributions if the retiree is eligible to pensioners’ health insurance
Greece	No	No
Hungary	Yes	No
Iceland	No	No
Ireland	Employee contributions: Yes Employer contributions: No	Pension benefits are subject to the Universal Social Charge
Israel	No	Yes
Italy	Employee contributions: Yes Employer contributions: Reduced rate	No
Japan	No	Contributions to health insurance and long-term care insurance are levied on pension income
Korea	No	No, except for self-employed workers for whom social insurance premiums are levied on the basis of their comprehensive income
Latvia	No	No
Lithuania	Yes	No
Luxembourg	Yes	Yes
Mexico	Yes	No
Netherlands	EET-system: No TEE-system: Yes	Pensioners pay for the general insurance for certain health costs and survivors’ pensions
New Zealand	No	No
Norway	Employers pay social security contributions on their occupational pension contributions	Pension income is subject to social security contributions at a reduced rate
Poland	Employer contributions into PPE are not included into income subject to social contributions	Pension income is not subject to contributions for pensions, unemployment insurance etc. However, there is a tax-deductible health insurance contribution.
Portugal	Employee contributions: Yes Employer contributions: No	No
Slovak Republic	Yes Employer contributions to pillar 3 plans are only subject to health insurance contributions	No
Slovenia	Employee contributions: Yes Employer contributions: No within certain limits	No
Spain	Employee contributions: No Employer contributions: Yes	No
Sweden	A reduced social security contribution is applied on contributions for occupational pensions paid by the employer	No
Switzerland	Yes	No
Turkey	Employee contributions: Yes Employer contributions: No up to 30% of the minimum wage	No
United Kingdom	Employee contributions: Yes Employer contributions: No	No
United States	Yes	No
Selected non-OECD countries
Bulgaria	No	No
Colombia	Yes	Private pension income is subject to health care contributions at a reduced rate
Croatia	Yes	No
Cyprus	Yes	No
Malta	Yes	No
Romania	Voluntary contributions: No Mandatory contributions: Yes	No

Private pension income is usually not subject to social contributions. Yet part of the social contributions usually levied on wages and salaries can also be levied on pension income. For example, in Australia, Austria, Belgium, Chile, Finland, Germany, Japan, the Netherlands, Poland and Colombia only health-insurance related social contributions are levied on pension income.9 Pension income is not subject to any social contributions in 27 of the countries covered by this analysis (Canada, the Czech Republic, Denmark, Estonia, France, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Mexico, New Zealand, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, the United States, Bulgaria, Croatia, Cyprus, Malta and Romania).

2.6. Non-tax financial incentives

Financial incentives to encourage people to participate in, or to make contributions to, private pension plans can take a different form than preferential tax treatment. The tax treatment of private pension plans, as described in Sections 2.1 to 2.4 (tax exemptions, tax deductions and tax credits), may constitute in itself an incentive to contribute to such plans if it is more fiscally favourable to contribute to a private pension plan rather than to a traditional savings vehicle.10

Other forms of financial incentives include matching contributions from the government or from the employer and government fixed nominal subsidies. These incentives are provided to eligible individuals who actually participate or make voluntary contributions to the private pension system. Both matching contributions and subsidies are paid into the pension account, thus increasing the assets accumulated to finance retirement. They are never taxable to the individual.

Table 2.5. Non-tax financial incentives to promote retirement savings in OECD and selected non-OECD countries

Financial incentives	OECD countries	Selected non-OECD countries
Employer matching contributions	Iceland, Italy, New Zealand, United States
Government matching contributions (match rate)	Australia (50%), Austria (4.25%), Chile (50% or 15%)1, Czech Republic (scale), Hungary (20%), Mexico (325%)2, New Zealand (50%), Turkey (25%), United States (50% to 100%)3	Colombia (20%), Croatia (15%)
Government fixed nominal subsidies	Chile, Germany, Lithuania, Mexico, Turkey

1. Chile has two different matching programmes, one for young low earners (50% match rate) and one for voluntary contributors (15% match rate).

2. The matching programme for Mexico only applies to public sector workers.

3. The matching programme for the United States refers to the Thrift Savings Plan for federal employees. The first 3% of employee contribution is matched dollar-for-dollar, while the next 2% is matched at 50 cents on the dollar.

Matching contributions are the most common type of non-tax financial incentive used by countries to promote saving and participating in private pensions. Government matching contributions are found in Australia, Austria, Chile, the Czech Republic, Hungary, Mexico, New Zealand, Turkey and the United States (Table 2.5). Employer matching contributions can be found in Iceland, Italy, New Zealand, and the United States. The matching contribution is conditional on the individual contributing and corresponds to a certain proportion of the individual’s own contribution, up to a maximum amount. The generosity of the match rate varies greatly across countries, from 4.25% in Austria to 325% in Mexico (solidarity savings programme for civil servants). A match rate of 50% can be found in Australia, Chile and New Zealand.

Only five countries use government subsidies to promote private pensions. Government subsidies are fixed nominal amounts and are therefore more valuable to low-income earners, as the fixed amount represents a higher share of their income. In Chile, government subsidies are provided to encourage participation in the private pension system. Although the system is mandatory for employees, large informality prevents universal coverage of the system. Subsidies target specifically women with a deposit for each live birth. In Germany, government subsidies are paid into Riester pension plans (voluntary private pension plans). The maximum subsidy is available to individuals who are actively compulsorily insured in a pension system and is paid each year in the account if the individual contributes at least 4% of his/her previous year’s annual income. Additional subsidies are available to young individuals and to parents receiving child allowances. In Lithuania, the government contributes 2% of the average gross salary of the year before the last in second pillar pension accounts. In Mexico, the government pays a so-called social quota in mandatory pension accounts. In Turkey, the government pays a one-time contribution of TRY 1 000 for employees who do not opt out within the first two months following their automatic enrolment into a personal pension plan.

Turkey also incentivises individuals to choose an annuity at retirement in their automatic enrolment system. The government pays a subsidy equal to 5% of participants’ savings at retirement for those who choose a minimum 10-year annuity.

2.7. Conclusion

This chapter has shown that half of the OECD countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime to funded private pension plans, where both contributions and returns on investment are exempt from taxation and benefits are treated as taxable income upon withdrawal. However, a full range of possible tax regimes applies in other countries, including the “EEE” tax regime.

Straightforward and simple tax rules applying to the private pension system as a whole may increase people’s confidence and help increasing participation in and contributions to private pension systems. A majority of countries impose different tax treatments to different types of plan or contribution at the national level. This may create confusion for people who may not have the ability to understand the differences and choose the best option for themselves.

The tax treatment of contributions to private pension plans may change according to the source of the contribution (the employee or the employer), their mandatory or voluntary nature, and the type of plan in which they are paid (personal or occupational plans). In addition, limits to the amount of contributions attracting tax relief may also differ for different types of contribution within a country. In most countries, people not paying income tax do not get any relief on their contributions into private pension plans.

A different tax treatment between mandatory and voluntary contributions may be justified. Incentives to save for retirement through the income tax system may be necessary in voluntary pension arrangements as a way to encourage people to save in complementary funded private pension plans. In mandatory pension arrangements, the reasons for providing incentives may be less clear. Incentives may be useful in order to make people accept the policy of compelling them to save for retirement. Moreover, in countries with high informality in the labour market, incentives may also be needed to increase contribution densities.

Most countries exempt from taxation returns on investment in private pension plans. When returns are taxed, they are usually taxed every year during the accumulation phase. However, some countries tax returns upon withdrawal only. Tax rates may vary according to the duration of the investments, the type of asset classes, or the income of the plan member. Most countries do not tax the funds accumulated and impose no lifetime limit on the total amount that plan members can accumulate in a private pension plan.

The tax treatment of pension income is identical across different types of post-retirement product (life annuity, programmed withdrawal or lump sum) in about half of the OECD countries. Only three OECD countries incentivise people to annuitize their pension income through a more favourable tax treatment for annuities as compared to programmed withdrawals, or through a government subsidy. Conversely, lump sums are tax free up to a certain amount or only partially taxed in about half of the OECD countries in order to reach a more neutral tax treatment across the different post-retirement products. A minority of countries discourage early withdrawals through the tax system.

Besides the personal income tax system, contributions to private pension plans and private pension benefits can be subject to social contributions. In general, contributions paid by individuals from their after-tax income to voluntary personal pension plans are also subject to social contributions. Private pension income is usually not subject to social contributions or only a part of the social contributions usually levied on wages and salaries is levied on pension income.

The complexity of the tax treatment of retirement savings may prevent individuals to save for retirement. Consequently, some countries have introduced more direct financial incentives to encourage participation in, and contributions to, the private pension system, especially for low-income earners. Non-tax incentives considered herein include matching contributions from the government or from the employer and government fixed nominal subsidies. These payments are provided to eligible individuals who actually participate in or make voluntary contributions to the private pension system. Such incentives can be found in 13 OECD countries.

Notes

← 1.  In the case of France, tax is treated as encompassing the personal income tax system, the General Social Contribution (CSG) and the Social Debt Reimbursement Contribution (CRDS). There is a debate on how to classify the CSG. The French Law considers it a tax because it does not entitle workers to any right or benefit (as opposed to social security contributions). The Court of Justice of the European Union considers it a social contribution because the money is only used to finance the social security system and is levied on wages (although not only). Following the French interpretation, both CSG and CRDS are treated as taxes in this analysis, rather than as social contributions.

← 2.  In the case of Australia, most pension benefits paid to people over 60, whether lump sums or income streams, are tax free. However, benefits that come from an account that has not been subject to tax on contributions are subject to tax when they are paid to the individual. In addition, investment income is usually tax exempt after the individual enters the drawdown phase.

← 3.  In the case of Mexico, pension income above 15 times the annual minimum wage is taxed.

← 4.  In the case of Austria, an extra insurance tax (2.5% or 4% depending on the type of plan) is levied on individual and employer contributions to certain plans. In the case of Belgium, the employer must pay an annual 4.4% tax on the total contributions paid (employer plus employee) under group life insurance contracts. This tax is not due in the case of a pension scheme with a solidarity component (so-called “social” pension scheme).

← 5.  See the country profile of Australia in the Annex for detailed explanations on how the 30% rate is triggered.

← 6.  The Australian government provides a Low-Income Super tax Offset (LISTO) of up to AUD 500 annually for eligible individuals on adjusted taxable income of up to AUD 37 000. The amount payable is calculated by applying a 15% match rate to concessional pension contributions made by, or for individuals. It is effectively a refund of the tax paid on concessional contributions.

← 7.  In Iceland, Sweden and Croatia, only annuities are allowed. In Belgium, only lump sums are allowed, except for occupational pension plans that can offer life annuities, although this option is rarely taken. In Cyprus, pension benefits paid by provident funds only take the form of lump sums. In Romania, there is no pay-out product legislation yet, so most withdrawals are lump sums. However, the secondary legislation has been amended in order to allow members to receive their accumulated account as monthly instalments up to 5 years, starting April 2018.

← 8.  In addition, in Canada, seniors and pensioners are permitted to allocate up to one-half of their eligible pension income to their spouse or common-law partner for tax purposes.

← 9.  In Chile, since 2011, pensioners eligible for a solidarity pension (who must belong to the 60% poorest population, among other requirements) are exempt to pay contributions for health insurance. Since 2016, pensioners that belong to the 80% poorest population and are not eligible for a solidarity pension, are also exempted to contribute for healthcare.

← 10.  The purpose of this chapter is not to assess the tax advantage received by individuals in different countries when contributing to a private pension plan rather than to a traditional savings vehicle. This is the main objective of Chapter 3.