This annex provides detailed information about how OECD and selected non-OECD countries design financial incentives to promote savings for retirement. Each country profile includes the following sections: i) the structure of the funded private pension system; ii) the tax treatment of retirement savings (contributions, returns on investment, funds accumulated and pension income); iii) the description of non-tax incentives; iv) the social treatment of contributions and benefits; v) the tax treatment of pensioners; and vi) the incentives for employers.
Financial Incentives and Retirement Savings
Annex A. Country profiles
Abstract
Australia
Structure of the funded private pension system
Tax treatment of contributions
Contributions are taxed, but usually at a lower rate than the individual’s marginal income tax rate. There are two main types of contributions with different tax treatments: “concessional” or before-tax contributions and “non-concessional” or after-tax contributions.1 The government also makes tax-exempt contributions to eligible individuals.
Concessional contributions
Concessional contributions include mandatory employer contributions (“superannuation guarantee” contributions), employee “salary sacrifice” contributions and voluntary deductible contributions.2 The superannuation guarantee contribution is paid regardless of age. However, individuals between 65 and 74 years of age may only make voluntary deductible contributions if they satisfy a “work test”. Individuals aged over 75 cannot make voluntary deductible contributions.
Concessional contributions are taxed at 15% on amounts up to the concessional contributions cap. In 2017-18, this cap is AUD 25 000. It is indexed to wages. From 1 July 2018 it is possible for individuals with balances of less than AUD 500 000 to carry-forward up to 5 years unused concessional cap space.
Contributions over the concessional contributions cap are taxed at the individual’s marginal income tax rate. The individual also has to pay the excess concessional contribution (ECC) charge on the increase in the tax liability to neutralise the benefit of having excess contributions in the concessionally taxed environment. To reduce the tax liability, the individual receives a non-refundable tax offset equal to the 15% tax already paid by the fund on the excess amount. Any contributions over the cap count towards the individual’s non-concessional contributions. The individual may choose to withdraw up to 85% of the excess concessional contributions from the superannuation fund to help pay the income tax. Any excess concessional contributions withdrawn no longer count towards non-concessional contributions cap.
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%. The additional tax is imposed on the whole amount of the contributions, up to the concessional cap, if salary and wages are above the threshold. Otherwise, the additional tax is only imposed on the portion of the contribution that takes the individual over the threshold. If the adjusted taxable income is less than AUD 250 000, but adding concessional contributions brings the total above that threshold, the 30% tax rate applies only to the part of the contribution above the threshold. For example, if your income is AUD 230 000 and your concessional contributions are AUD 25 000, you only pay the 30% tax rate on AUD 5 000.
Non-concessional contributions
Non-concessional contributions primarily include personal voluntary contributions (which can be made as after-tax additional contributions), spouse contributions and other contributions made by one person on behalf of another person where there is no employment relationship. Excess concessional contributions not withdrawn from the fund are also included in the calculation of non-concessional contributions.
Non-concessional contributions are not taxed upon entry into the fund because they are made from money on which the individual has already been taxed at his/her marginal rate. The non-concessional contributions cap is the limit on the amount of non-concessional contributions an individual can make each year before paying extra tax. In 2017-18, this cap is AUD 100 000. Only individuals with a total superannuation balance of less than AUD 1 600 000 are permitted to make non-concessional contributions. The cap is indexed to wages.
Any non-concessional contributions above the cap in a given year automatically bring forward the next two years’ non-concessional contributions cap for people under 65 years old. This means that an eligible individual can contribute up to AUD 300 000 over a three-year period without paying the excess contributions tax. Any contributions above AUD 300 000 in that three-year period can remain in the superannuation fund and be taxed at 49%, or be withdrawn from superannuation to avoid that additional tax, and only pay tax at an individual’s own marginal tax rate on an earnings amount associated with the excess contributions.
Individuals aged between 65 and 74 are eligible to make annual non-concessional contributions of AUD 100 000 if they meet the work test (that is, they work 40 hours within a 30 day period each income year), but are not able to access the bring-forward of contributions.
A tax offset (called Spouse Super Contribution Tax Offset) may apply to after-tax contributions made on behalf of non-working or low-income-earning spouses.3 It is payable to the contributor (not the spouse). The tax offset is calculated as 18% of the lesser of:
AUD 3 000, reduced by one dollar for every dollar that the sum of the spouse’s income, total reportable fringe benefits and reportable employer superannuation contributions exceeds AUD 37 000; and
the total amount of contributions paid.
State contributions
The 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 contributions made by, or for individuals (it is effectively a refund of the tax paid on concessional contributions). This contribution is tax exempt.
Tax treatment of returns on investments
Investment earnings on superannuation assets in the accumulation phase are taxed at a rate of 15%.
People who have reached preservation age but are under 65 and not retired can still access a transitional super income stream (TRIS) but earnings on the amount supporting it will be taxed at 15%.
Funds are eligible for imputation credits for dividend income and a one-third capital gains tax reduction on assets held for at least 12 months.
Tax treatment of funds accumulated
From 1 July 2017, the transfer balance cap imposes a lifetime limit of AUD 1 600 000 on the amount of superannuation assets that may be transferred to a retirement phase account (i.e. an account supporting retirement income streams) with tax-free investment earnings. Assets in excess of the AUD 1 600 000 transfer balance cap must be rolled back to an accumulation phase account (where investment earnings will be taxed at 15%) or withdrawn from superannuation. The transfer balance cap is indexed in line with the consumer price index and increases in AUD 100 000 increments. The transfer balance cap applies only to the amount of assets that may be transferred into a retirement phase account. The value of retirement phase accounts may grow above AUD 1.6 million if future earnings exceed withdrawals.
Transfers in excess of AUD 1 600 000 are subject to excess transfer balance tax. This is a tax on notional earnings attributed to the excess. The tax is 15% in 2017-18. From 2018, the rate is 15% the first time an individual has an excess transfer balance and 30% for second and subsequent breaches.
Tax treatment of pension income
Benefits withdrawn from a superannuation fund have three components: a tax-free component, a taxed element and an untaxed element. Non-concessional (after-tax) contributions are tax-free when withdrawn from the superannuation account. Concessional (before-tax) contributions are taxable when withdrawn. If the superannuation fund has paid taxes on those contributions (as described earlier), this corresponds to the taxed element. If the fund has not paid taxes, this corresponds to the untaxed element.
Individuals do not pay tax on the tax-free component when they withdraw it, regardless of their age or the type of withdrawal. The tax treatment of the taxable component (taxed element and untaxed element) depends on the age at which the individual retires and the type of withdrawal, as described in the tables below. The preservation age is the age at which individuals can access their superannuation assets if they are retired. It depends on the date of birth (55 years old for people born before 1 July 1960, increasing gradually to 60 for people born from 1 July 1964).
Table A A.1. Australia: Tax on withdrawals of taxable component when the individual withdraws money before his/her preservation age
Table A A.2. Australia: Tax on withdrawals of taxable component when the individual withdraws money between his/her preservation age and 60 years old
Table A A.3. Australia: Tax on withdrawals of taxable component when the individual withdraws money at age 60 or more
Non-tax incentives
The state helps low-to-middle income earners to boost their retirement savings through the “super co-contribution”. This contribution is tax-exempt. The super co-contribution is a government matching contribution for eligible individuals. Individuals younger than 71 are eligible for a super co-contribution if they make a voluntary non-deducted contribution (in their own name) in the income year, have a total income lower than the higher income threshold (AUD 51 813 for 2017-18), at least 10% of their total income is from employment or business and their total superannuation balance is less than AUD 1 600 000. The match rate is up to 50%. Individuals with an income below the lower income threshold (AUD 36 813 for 2017-18) can get 50 cents for each dollar contributed, up to the full maximum entitlement (AUD 500 for 2017-18). For every dollar that the individual earns above the lower income threshold, the maximum entitlement is reduced by 3.333 cents.
Social treatment
Social contributions are not levied on mandatory pension contributions.
Withdrawals from the taxed and untaxed elements before 60 years old are subject to Medicare Levy (2% since July 2014). After 60 years old, only withdrawals from the untaxed element are subject to Medicare Levy.
Tax treatment of pensioners
The public pension (Age Pension) is included in taxable income. The Age Pension is paid to people who meet age and residency requirements, subject to a means test.
Most senior Australians receive tax relief through the seniors and pensioners tax offset (SAPTO). SAPTO is available to taxpayers in receipt of a taxable Australian Government pension, as well as to Australians who are of Age Pension age and who meet all of the Age Pension eligibility criteria except the means test. In 2017-18, it is worth a maximum of AUD 2 230 for a single senior and AUD 1 602 for each member of a senior couple. It builds on the statutory tax-free threshold and the low income tax offset to ensure that eligible single senior Australians with a rebate income up to AUD 32 279 in 2017-18 (or AUD 28 974 for each member of a couple) pay no income tax or the Medicare levy. The tax offset cannot exceed the total tax paid.4
For single individuals: the maximum offset is reduced by 12.5 cents for each dollar of rebate income in excess of AUD 32 279, cutting out at a rebate income of AUD 50 119.
For couples: the maximum offset is reduced by 12.5 cents for each dollar of rebate income in excess of AUD 28 974 (AUD 57 948 of combined income), cutting out at a rebate income of AUD 41 790 (AUD 83 580 of combined income).
Incentives for employers to set up or contribute to a funded private pension plan
Employer superannuation guarantee contributions are deductible against corporate income tax.
Employers who fail to make the required contributions are subject to additional tax and penalties. This additional tax is the superannuation guarantee charge. It is paid to employees to compensate for non-payment of compulsory superannuation. The charge is higher than the basic superannuation requirement as it includes interest and administrative components. It is not deductible.
Austria
Structure of the funded private pension system
Tax treatment of contributions
Pension companies and occupational group insurance
Employee contributions are taxed at the individual’s marginal income tax rate. They cannot exceed the sum of annual employer contributions (although an employee can contribute up to EUR 1 000 even when the employer contributes less than EUR 1 000 per year). These contributions are treated as special expenses.
25% of an individual’s special expenses (individual private pension contributions plus other special expenses) are tax-deductible up to the limit of EUR 2 920 per year for a single person and EUR 5 840 if the spouse’s income does not exceed EUR 6 000. If the annual salary exceeds EUR 36 400 these limits are gradually decreased and no tax-deductible special expenses can be claimed if the annual salary exceeds EUR 60 000. From 2016, special expenses are no more deductible for new pension contracts. For contracts concluded before 1 January 2016, the deductions continue to be applicable for a maximum period of 5 years.
Employer contributions are not considered as income for the employee.
An extra 2.5% insurance tax is levied on both employee and employer contributions.
Direct insurance
Employee contributions are taxed at the individual’s marginal income tax rate. They cannot exceed the sum of annual employer contributions (although an employee can contribute up to EUR 1 000 even when the employer contributes less than EUR 1 000 per year). Contributions exceeding EUR 1 000 are treated as special expenses. From 2016, special expenses are no more deductible for new pension contracts. For contracts concluded before 1 January 2016, the deductions continue to be applicable for a maximum period of 5 years.
Employer contributions up to EUR 300 per year are tax-free for the employee. Contributions in excess of EUR 300 are considered as taxable income for the employee and can be considered as special expenses.
An extra 4% insurance tax is levied on both employee and employer contributions.
Direct commitments and support funds
Employees do not contribute. Employer contributions are not considered as income for the employee. The 4% insurance tax applies to support funds but not to direct commitments.
Personal pension plans
Contributions to personal pension plans are done from after-tax income (therefore they are taxed at the individual’s marginal rate of income tax). These contributions are treated as special expenses and attract a 25% tax relief up to a limit. From 2016, special expenses are no more deductible for new pension contracts. For contracts concluded before 1 January 2016, the deductions continue to be applicable for a maximum period of 5 years.
There is no tax relief for state-sponsored retirement provision plans.
An extra 4% insurance tax is levied on individual contributions.
Tax treatment of returns on investments
Investment income is tax-exempt for pension companies, occupational group insurance, direct insurance, support funds and personal pensions.
Investment income is considered as company profit and subject to profit tax for direct commitments.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
The tax treatment of pension income depends primarily on the type of plan:
Pension companies and occupational group insurance: Pensions are taxed as earned income at the individual’s marginal rate of income tax. The portion of pension accrued by employer contributions is fully taxed. Only 25% of the portion of pension accrued by employee contributions is taxed.
Direct insurance and personal pension insurance: Pensions are taxed as earned income at the individual’s marginal rate of income tax from the moment the total value of benefits paid exceeds the capital value of the pension at retirement. It means that pension benefits are tax-free until that point in time.
Direct commitments and support funds: Pensions are taxed as earned income at the individual’s marginal rate of income tax.
State-sponsored retirement provision: Withdrawals are tax-exempt if the entitlements are transferred to an occupational or personal pension plan or used to buy an annuity. If they are paid-out as a lump sum, the individual has to pay back 50% of the government subsidies and a 27.5% tax on capital gains.
Lump sum payments are taxed as ordinary income unless the payment does not exceed the amount of EUR 12 000. In this case, only 50% of the normal tax rate has to be paid. This applies to all lump sum payments which result from terminations of pension plans.
Non-tax incentives
The minimum term of a state-sponsored retirement provision plan is 10 years and only individuals not yet receiving social security pension benefits can open such plans. The plan must provide a capital guarantee. Personal contributions to a state-sponsored retirement provision plan can attract government matching contributions. The matching contribution rate corresponds to a fixed rate of 2.75% plus a variable rate depending on the annual general level of interest rate. For 2018, the variable rate is 1.5% (thus the total matching rate is 4.25%). As of 1 January 2018, the maximum personal contributions considered to calculate the government contribution is EUR 2 825.60 (thus the maximum government matching contribution for 2018 is EUR 120.09). No tax is levied on matching contributions. If the individual takes the benefits as a lump sum payment, s/he has to pay back 50% of the government subsidy and pay an additional 27.5% tax on the capital gains with retro-active effect.
It is also possible to get government matching contributions for employee contributions to direct insurance plans. The match rate is 2.75% plus a variable rate depending on the annual general level of interest rate for contributions up to EUR 1 000.
Social treatment
Social contributions are levied on employee/individual contributions but not on employer contributions.
Pensioners do not pay most social contributions but do pay for sickness insurance (5.1%).
Tax treatment of pensioners
Old-age public pension is considered as an income and subject to the individuals’ marginal income tax rate.
Retired persons are entitled to a tax credit. For couples, the tax credit amounts to EUR 764 for sole earners with income up to EUR 19 930 and if the spouse’s income does not exceed EUR 2 200. Otherwise the tax credit is EUR 400. The tax credit is linearly reduced to 0 between EUR 17 000 (EUR 19 930 for sole earners) and EUR 25 000 of income.
Additional voluntary contributions are possible in the public pension system (Höherversicherung) and lead to benefits taxed differently. Everyone with a public pension scheme can make additional contributions. Contributions can be defined by the individual. The contribution limit for 2018 is EUR 10 260. The contributions are deductible as special expenses up to the individual’s personal limit. The additional amount granted in pension benefits by these additional contributions depends on the amounts contributed, gender, age at the time of the contribution and the age at retirement. 75% of these additional benefits are tax-exempt. 25% are taxed at the individual’s marginal rate of income tax. Under certain conditions, benefits resulting from these contributions can be fully tax exempt, if they result from contributions up to EUR 1 000.
13th and 14th month pensions (Sonderzahlungen) attract a particular tax treatment. They are tax free up to an amount of EUR 620 per year. If the received amount is between EUR 621 and the value of 2 times the average monthly gross pension income (max. EUR 2 100), there is no tax levied. If the value of 2 times the average monthly gross pension exceeds EUR 2 100, the amount between EUR 621 and EUR 2 100 is taxed at a fixed rate of 6%. If the amount received exceeds 2 times the average monthly gross pension, the excess amount is taxed at the individual’s marginal income rate.
Incentives for employers to set up or contribute to a funded private pension plan
Pension companies and occupational group insurance: Employer contributions are tax-deductible company expenses, up to 10% of salary, provided that the total benefit target including social security benefits does not exceed 80% of current salary.
Direct insurance: Employer contributions up to EUR 300 per year are exempt from non-wage labour costs.
Direct commitments and support funds: Allocations to internal reserves are tax-deductible against income and corporation tax, up to 10% of salary, if the total benefit target including social security benefits does not exceed 80% of current salary.
Belgium
Structure of the funded private pension system
Tax treatment of contributions
Occupational pension plans
Employer contributions to an occupational pension plan are not considered as taxable income for the employee.
Employee contributions to an occupational pension plan are rare. They are eligible for a non-refundable tax credit of 30% of the amount contributed.5
Employee and employer contributions enjoy tax relief only to the extent that total retirement benefits, including the statutory pension, do not exceed 80% of the last gross annual salary.6
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 “social” pension scheme (i.e. a plan with solidarity components).7 It is not due either under institutions for occupational retirement provision (IORP).
Personal pension plans for the self-employed
There are three types of personal pension plans for the self-employed. VAPZ plans can be opened by any self-employed person. By contrast, only the self-employed with a company can open an IPT plan, while only those without a company can open a POZ plan.
Contributions to VAPZ plans are deductible from professional income. Contributions to VAPZ plans cannot exceed 8.17% of professional income, up to EUR 3 187.04 in 2018 (respectively 9.40% of professional income for “social” VAPZ plans, up to EUR 3 666.85).
Contributions to IPT plans are deductible from taxable income only to the extent that total retirement benefits, including the statutory pension, do not exceed 80% of the last gross annual salary. The self-employed individual must pay an annual 4.4% tax on the total contributions paid.
Contributions to POZ plans are eligible for a non-refundable tax credit of 30% of the amount contributed. The self-employed individual enjoys tax relief only to the extent that total retirement benefits, including the statutory pension, do not exceed 80% of the last gross annual salary. The self-employed individual must pay an annual 4.4% tax on the total contributions paid.
Third pillar personal pension plans
Individual contributions to third pillar pension plans are eligible for a non-refundable tax credit of 30% of the amount contributed.
In the case of pension savings accounts, the maximum contribution is EUR 960 per year in 2018. Alternatively, the individual may opt for a dual account, allowing for contributions up to EUR 1 230, with a tax credit of 25% (instead of 30%). The pension savings account shall have been subscribed by an individual aged 18 or over, but less than 65, and for at least 10 years.
In the case of long-term savings individual life insurance, contributions cannot exceed 6% of professional income, up to EUR 2 310 in 2018 (respectively 15% of professional income when professional income is no more than EUR 1 920 in 2018). The individual must pay an annual 2% tax on the total contributions paid. The insurance contract shall have been subscribed by an individual younger than 65, and for at least 10 years.
Tax treatment of returns on investments
Pension plans directly withhold a 9.25% profit sharing tax from the pension account. Pension savings accounts (third pillar) are exempted from profit sharing tax.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Occupational pension plans
The tax treatment of occupational pension income depends on the form of the pay-out option and the source of the contributions. In the case of a lump sum capital payment, the part of the capital that has accrued in respect of the employer’s contributions is generally taxed at 16.5% (plus municipal tax). In case the individual withdraws from the statutory age of retirement (65 years old increasing gradually to 67) and remained active until that age, the tax rate is reduced to 10% (plus municipal tax).
The part of the capital that has accrued in respect of the employee’s contributions is taxed at 10% (plus municipal tax) if withdrawn following death or retirement, and at age 62 (63 as of 2019) at the earliest (16.5% for the capital that has accrued in respect of contributions made before 1993).
Annuities are taxed at the individual’s marginal rate of income tax. Annuities are rare in practice. Programmed withdrawals are not allowed in Belgium.
Personal pension plans for the self-employed
Upon withdrawal from VAPZ plans (from age 62 or 63 as of 2019), the accumulated capital is converted into a virtual income for tax purposes. The virtual income is then taxed at the individual’s marginal income tax rate. The virtual income is determined by applying a conversion rate to the accumulated capital (between 4% and 4.5%) and has to be declared during a certain period (13 years, except when the individual withdraws from age 65, in which case, the declaration duration is only 10 years).
Withdrawals from IPT plans are generally taxed at 16.5% (plus municipal tax). In case the individual withdraws from the statutory age of retirement (65 years old increasing gradually to 67) and remained active until that age, the tax rate is reduced to 10% (plus municipal tax).
Withdrawals from POZ plans are taxed at 10% (plus municipal tax) if withdrawn following death or retirement, and at age 62 (63 as of 2019) at the earliest.
Third pillar personal pension plans
Third pillar pension plans are paid as a lump sum. That lump sum is taxed at the rate of 8% for pension savings accounts and 10% for long-term savings individual life insurance (no municipal tax). If the pension plan has been opened when the individuals was younger than 55, the tax is calculated on the capital accumulated until age 60. If the pension plan has been opened when the individuals was 55 or older, the tax is calculated on the capital accumulated when the contract reaches 10 years. Individuals can choose to withdraw the money when the anticipated tax is due, or to delay withdrawal and the payment of the tax when they get entitled to a pension (62 or 63 as of 2019). In the latter case, individuals can continue contributing after age 60 with no further tax due on the additional capital accumulated.
Non-tax incentives
No such incentives.
Social treatment
Employers must pay social contributions at the rate of 8.86% on their contributions to an occupational pension plan, which is lower than the usual rate for social contributions.
For the self-employed, social security contributions are not levied on contributions to IPT plans. They are levied on contributions to POZ plans. VAPZ contributions are considered as social contributions.
There is a special social contribution of 3% on the portion of contributions exceeding EUR 32 472 (for 2018) per year (so-called Wyninckx contribution). This applies to all plans except third pillar plans, but is mostly relevant for IPT plans.
Employee contributions to occupational plans and individual contributions to third pillar plans are treated in the same way as salary and are thus subjected to the same social contributions (13.07%).
Third pillar lump sums are not subject to social contributions.
Pensioners with a pension above a minimum threshold pay a social contribution of 3.55% for health and disability insurance. The minimum threshold is EUR 1 306.12 since 1 September 2010 for a single pensioner without dependents (EUR 1 517.60 for pensioners with dependents). The effect of the contribution cannot lead to a pension payment inferior to this monthly amount.
There is also a “solidarity” contribution levied on pension income exceeding EUR 2 478.95 per month. This contribution ranges from 0% to 2% of the gross pension.
Tax treatment of pensioners
Public pension income is taxed at the individual’s marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to an occupational pension plan are deductible as business expenses to the extent that total retirement benefits, including the statutory pension, do not exceed 80% of the last gross annual salary.
Canada
Structure of the funded private pension system
Tax treatment of contributions
Pension contributions made within the applicable limits are deductible from income.
There is a 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). Over-contributions, including those made within the CAD 2 000 over-contribution allowance, are not deductible from income.
Limits apply to contributions to RRSPs, PRPPs, DPSPs and defined contribution RPPs. Limits apply to pension benefits provided under a defined benefit RPP:
Annual contributions of 18% of earnings are permitted to be made to an RRSP and defined contribution RPP, up to a specified dollar limit (CAD 26 230 and CAD 26 500 respectively for 2018).
Defined benefit RPPs are permitted to provide pension benefits of 2% of earnings per year of service, up to 1/9th of the DC RPP limit per year of service (CAD 2 944 for 2018).
Annual contributions to a DPSP are limited to 18% of earnings up to one-half of the defined contribution RPP limit (CAD 13 250 for 2018).
The RPP and RRSP dollar limits are indexed to average wage growth.
The RPP and RRSP limits are integrated in order to provide comparable retirement savings opportunities whether an individual saves in an RPP, an RRSP, a PRPP, a DPSP or a combination of these plans. This is achieved through the pension adjustment (PA), which reduces an RPP or DPSP member’s annual RRSP limit by the amount of annual RPP and/or DPSP saving.
For defined contribution RPP members and DPSP members, the PA is equal to the sum of employer and employee contributions.
For defined benefit RPP members, the PA is an estimate of the contributions needed to fund the annual benefit accrued under the plan (based on a pension cost factor of 9 multiplied by the annual benefit accrued under the plan).
PRPP contributions must be made within an individual’s available RRSP limit.
Unused RRSP room is carried forward to future years.
In general terms, contributions to (or benefit accruals under) these plans must cease and payments/withdrawals must commence by or after the end of the year in which the plan member attains 71 years of age. In particular, an RRSP must be converted to a Registered Retirement Income Fund (RRIF) for this purpose. While defined benefit RPP members may not accrue pension benefits after the year in which they attain 71 years of age, employers may make any necessary contributions to a defined benefit RPP that are required to ensure the plan is fully funded in respect of all members and retirees, including those over age 71.
An individual who is 72 years of age or older, may, based on the individual’s accumulated unused RRSP room, contribute to a spousal RRSP until the end of the year in which the spouse reaches 71 years of age.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Payments and withdrawals from pension and retirement savings plans are included in income for regular tax purposes and taxed at the applicable rate. Income tax is generally withheld on such payments and withdrawals.
Lump sum payments from an RPP, where they are permitted, generally are not treated differently than periodic pension payments for tax purposes (i.e., they are included in income and taxed at the applicable rate) except for the purposes of the Pension Income Credit and pension income splitting (lump sum amounts are not eligible). Where a lump sum amount is permitted to be transferred to another registered plan or used to purchase an annuity (e.g., where a member terminates their membership in, or retires under, an RPP), the transfer is tax-free (i.e. there are no immediate tax consequences). The transferred amounts would be included in income for tax purposes when withdrawn from the receiving registered plan or when received as annuity payments.
The Pension Income Credit (PIC) is a non-refundable tax credit provided on the first CAD 2 000 of eligible pension income. The credit rate is 15% federally.
A pension income splitting measure permits seniors and pensioners to allocate up to one-half of their eligible pension income to their spouse or common-law partner for tax purposes.
Eligible pension income for the Pension Income Credit and pension income splitting includes periodic pension payments from an RPP, regardless of the recipient’s age, and other types of pension income (i.e., income from an RRSP annuity, RRIF, PRPP and DPSP annuity) as of age 65.
Generally, pension and RRSP assets may not be withdrawn tax-free, either in a lump-sum or on a periodic basis. However, tax-free withdrawals from an RRSP may be made by first-time home buyers for the purchase of a home or by those pursuing qualifying education or training programs, under the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) respectively. Withdrawals are limited to CAD 25 000 under the HBP and CAD 20 000 under the LLP. HBP and LLP withdrawals must be repaid to an RRSP in regular repayments over a specified period, otherwise the repayment amount is included in income for tax purposes.
Non-tax incentives
No such incentives.
Social treatment
Social programme contributions (Canada Pension Plan contributions and Employment Insurance premiums) are not levied on employer contributions to an RPP, PRPP or DPSP, since employer contributions to these plans are excluded from an employee’s earnings. Employee contributions to an RPP or PRPP attract social programme contributions since such contributions are made out of an employee’s earnings. Contributions to an RRSP, which are generally made out of employment or self-employment earnings, attract social programme contributions.
Social programme contributions are not levied on pension income.
Tax treatment of pensioners
Public pension benefits (Canada Pension Plan and Old Age Security (OAS) benefits) are included in income for regular tax purposes and taxed at the applicable rate, with the exception of the Guaranteed Income Supplement (GIS), which is a non-taxable supplement to OAS provided to low-income seniors.
The Age Credit is a non-refundable tax credit provided to individuals age 65 and over on an amount of CAD 7 333 for 2018. The credit amount is reduced by 15% of income over a threshold of CAD 36 976 (for 2018) and is eliminated when income exceeds CAD 85 863 (for 2018). Both the credit amount and the income threshold are indexed to inflation annually.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to an RPP, a PRPP or a DPSP are deductible for the employer for income tax purposes.
Social programme contributions (Canada Pension Plan contributions and Employment Insurance premiums) are not levied on employer contributions to an RPP, PRPP or DPSP, since employer contributions to these plans are excluded from an employee’s earnings.
Chile
Structure of the funded private pension system
Tax treatment of contributions
Members of the pension system contribute 10% of their salary to mandatory personal accounts. These contributions are tax-exempt. There is an upper limit for the salary taken into account for contributing to the system of 78.3 UF.8
Members may also contribute to voluntary accounts. These contributions are tax-exempt up to a certain limit. Regarding contributions to APV or APVC, there are two tax regimes available for members:
Regime B: contributions are tax-exempt, up to a limit of 50 UF per month or 600 UF per year. Under this regime, voluntary contributions are deducted before taxation.
Regime A: contributions are not deducted before taxation.
Agreed deposits are contributions settled between the employer and the worker. These savings may only be withdrawn upon retirement and they are not subject to taxation up to a maximum of 900 UF. Contributions above this limit are taxed at the individual’s marginal rate of income tax.
Tax treatment of returns on investments
Returns on investments are not taxed in general.
Workers making voluntary contributions under regime A, withdrawing the funds and not using them to complement the mandatory pension, pay taxes upon withdrawal on the yield obtained from the amount withdrawn, at the individual’s marginal rate of income tax.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income is subject to income tax.
Upon retirement, pensioners who can finance a pension greater than 100% of the maximum pension with solidarity payment and greater than 70% of the average monthly taxable wage over the last ten years, are entitled to withdraw the surplus as a lump-sum payment (i.e. funds remaining in the individual account after calculating the necessary savings to obtain the aforementioned pension). This available surplus is tax-exempt up to a maximum annual amount equivalent to 200 UTM, and the total exemption may not exceed 1 200 UTM.9 If members choose to withdraw the entire surplus in one year, the maximum exemption is 800 UTM. This exemption applies to all savings (mandatory and voluntary) done at least 48 months prior to retirement. In the case of agreed deposits, if an individual withdraws more than 900 UF but less than the limit of the surplus, the return on investment over the excess of 900 UF is taxed.
Workers may fully or partially withdraw the balance accumulated through voluntary contributions at any time, not only upon retirement. If the worker used regime B, these funds are subject to a special additional tax and are considered income for the year the withdrawals were made. The special additional tax is calculated differently depending on when the withdrawal is made:
Withdrawal before meeting the conditions for retirement: The withdrawal is subject to one-off additional tax at the time of withdrawal at a rate between 3% and 7%. This rate is calculated as 0.03 + [1.1 × (ICR - ISR)/R] where ICR corresponds to the amount of income tax that the individual would have to pay by adding the withdrawal to other taxable income for the fiscal year; ISR corresponds to the amount of income tax that the individual would have to pay if no withdrawals were made; R corresponds to the amount of the withdrawal.
Withdrawal for pensioners or those who meet requirements for retirement: The withdrawal is subject to one-off additional tax at the time of withdrawal at a rate calculated as (ICR - ISR)/R.
If the worker used regime A, s/he does not have to pay the additional tax described above. In the case of withdrawal of funds before retiring, the worker loses the government matching contribution and pays tax on the return on investment. If voluntary contributions under regime A are used to complement the mandatory pension, the part of the pension financed with these voluntary savings is deducted before taxation.
Non-tax incentives
Workers between 18 and 35 years old with an income lower than 1.5 times the minimum wage are entitled to a government matching contribution for the first 24 contributions to the pension system. This contribution consists in two payments: a subsidy to employers for hiring this type of workers and a direct contribution to the worker’s pension account of the same amount. The matching contribution is equivalent to 50% of the mandatory contribution of the worker if the wage is lower than or equal to the minimum wage; or 50% of the mandatory contribution over the minimum wage if the wage is greater than the minimum wage and lower than 1.5 times the minimum wage.
Women aged 65 or older are entitled to a government subsidy for each child alive at birth. The subsidy is equivalent to 18 months of contributions over the current minimum wage at the moment of the birth of the child, invested in fund type C since 2009 or since the birth of the child, whichever is later.
Workers making voluntary contributions under regime A (usually low-earnings workers whose wages are either exempted from income tax or have a low income tax rate) are entitled to a government matching contribution, corresponding to 15% of the amount saved annually, subject to a limit. These funds are added to the individual account each year but have a separate accounting. For each calendar year, the government matching contribution is limited to 6 UTM. If the member withdraws the funds instead of using them for retirement, the matching contribution is lost. It is not required to contribute to the mandatory system to get the matching contribution but only members of the pension system may contribute to voluntary accounts.
Social treatment
Social contributions (pension 10%; healthcare 7%; unemployment insurance 3% - of which 0.6% is paid by the employee and 2.4% by the employer - ; insurance for work-related accidents and occupational diseases 0.95%; disability and survivor insurance 1.41%) are levied over the gross salary. There is a maximum salary for social contributions of 78.3 UF. Pension contributions are part of the social security contributions.
Pensioners pay 7% of pension income for health coverage. Since 2011, pensioners eligible for a solidarity pension (who must belong to the 60% poorest population, among other requirements) are exempted to pay contributions for health insurance. Between 2012 and 2016, pensioners that belonged to the 80% poorest population and were not eligible for a solidarity pension, benefited from a reduction in the contribution for healthcare. Since November 2016, this latter group of pensioners is exempted to contribute for healthcare.
Tax treatment of pensioners
The basic solidarity pension and the pension supplement are taxed at the individual’s marginal rate of income tax. In practice however, they are tax exempt, because the beneficiaries are in the lower part of the income scale.
Incentives for employers to set up or contribute to a funded private pension plan
Agreed deposits and contributions in APVC are considered as an expense for the employer and therefore reduce corporate income tax.
Czech Republic
Structure of the funded private pension system
Tax treatment of contributions
Individuals’ contributions into supplementary pension insurance plans are paid from after-tax income. Contributions of and below CZK 1 000 a month are matched by government contributions. Contributions above CZK 12 000 a year are tax-deductible up to CZK 24 000 a year.
Employer contributions into supplementary pension insurance plans are not considered as taxable income for the employee up to CZK 50 000 a year. Above they are taxed as income
Tax treatment of returns on investments
Returns on investment are not subject to income tax during participation in the system but taxed according the rules described below in out payments from the system.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
If the participant would like to withdraw money and the conditions for lump sum or pension are not met, this closes the contract and any government contributions are returned to the government, and if the participant in such a case used tax incentives, the amount previously deducted must be taxed.10 In addition, the returns on investments and employers contributions are taxed at 15%.
Annuities are tax-free, including when withdrawn up to 5 years before the official retirement age. Programmed withdrawals for more than 10 years are tax-free. They are otherwise taxed as income. Lump sums are taxed at 15% but the tax base consists only of the returns on investments and employer’s contributions payed after January 2000.
Non-tax incentives
Individuals’ contributions made into supplementary pension insurance plans are matched each month by the government according to the following scale:
CZK 230 if the individual contributes at least CZK 1 000.
CZK 210 if the individual contributes between CZK 900 and CZK 999.
CZK 190 if the individual contributes between CZK 800 and CZK 899.
CZK 170 if the individual contributes between CZK 700 and CZK 799.
CZK 150 if the individual contributes between CZK 600 and CZK 699.
CZK 130 if the individual contributes between CZK 500 and CZK 599.
CZK 110 if the individual contributes between CZK 400 and CZK 499.
CZK 90 if the individual contributes between CZK 300 and CZK 399.
Nothing if the individual contributes less than CZK 300.
Employer contributions cannot be matched. The government contributions are not subject to income tax and social contributions.
Social treatment
Individuals’ contributions above CZK 12 000 per year and up to CZK 24 000 are not included in income subject to social contributions.
Social contributions are not levied on employer’s contributions up to the limit of CZK 50 000 per year.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Old-age public pay-as-you-go pensions are not taxed up to a value of 36 times the minimum wage.
Taxpayers can claim a tax credit of CZK 24 840 per year. Since 2014, the tax credit can also be claimed by individuals receiving an old-age public pension.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into supplementary pension insurance plans are deductible from corporate tax - more precisely they constitute expenses for tax purposes.
Social contributions are not levied on employer’s contributions up to the limit of CZK 50 000 per year.
Denmark
Structure of the funded private pension system
Quasi-mandatory occupational plans and voluntary personal plans can run three different kinds of scheme: age savings (Aldersopsparing), programmed withdrawal (Ratepension/Ophørende livrente) or life annuity (Livrente).
Tax treatment of contributions
Employer contributions are not considered as taxable income to the employee.
In age savings, individual contributions are subject to labour market tax and income tax. There is a contribution limit of DKK 5 100 in 2018. The last five years before retirement age, the contribution limit is increased to DKK 46 000 per year.
For all the other plans, employee/individual contributions are deductible from income tax but still subject to the labour market tax (this tax is paid by the pension institutions):
ATP: contributions are tax-exempt.
Programmed withdrawal: contributions are tax-exempt up to DKK 54 700.
Life annuity: contributions are tax-exempt.
LD pensions: the scheme has not received contributions since 1980.
SP: the scheme has not received contributions since 2010.
Tax treatment of returns on investments
Returns are subject to taxation, regardless of the form of the pension scheme. Returns are taxed yearly at a fixed rate of 15.3%. Returns include dividends, interests and changes in the market value of the assets.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
For ATP, programmed withdrawal and life annuity schemes, pension income is subject to personal income tax (but not to labour market tax).
Pension income from age savings schemes is tax-exempt and does not affect entitlements for the housing support and public pensions.
If an individual chooses to withdraw assets from programmed withdrawal or life annuity schemes before retirement age, the sum will be taxed at a fixed rate of 60%. Many occupational plans do not however offer this opportunity of early withdrawal.
Non-tax incentives
No such incentives.
Social treatment
No such contributions.
Tax treatment of pensioners
Public basic old-age pension is subject to personal income tax (but not to labour market tax).
Incentives for employers to set up or contribute to a funded private pension plan
Contributions made by employers are, like other parts of salaries, fully tax deductible as expenses.
Estonia
Structure of the funded private pension system
Tax treatment of contributions
In mandatory pension plans, only employee contributions and government matching contributions are possible. Employee contributions (2% of the gross salary withheld by the employer) are fully tax-deductible. Government matching contributions (4% of the gross salary) are not considered as taxable income to the employee. They are paid from the employer’s social contributions (20% for pension insurance and 13% for health insurance).
Individuals receive a non-refundable tax credit on their contributions to voluntary pension plans corresponding to 20% of the contributions made during the year, up to 15% of gross income or EUR 6 000. The EUR 6 000 limit applies to the total employee and employer contributions. Contributions are otherwise taxed at the fixed income tax rate (20% in 2018). The tax credit only applies to contract opened for at least 5 years when the individual reaches 55.
Employer contributions to voluntary pension plans are considered as a part of the employee’s salary and are not subject to personal income tax as long as they do not represent more than 15% of individual contributions, up to EUR 6 000. As the EUR 6 000 limit is common to employee and employer contributions, any employer contribution reduces the available room for individual contribution entitled to the tax credit.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension payments from the mandatory funded pension system and the pay-as-you-go public pension system are treated together in terms of taxation. An annual basic exemption is available to all Estonian residents who receive taxable income below EUR 25 200, and pension income exceeding the limit is taxed as income at the fixed income tax rate (20% in 2018).
The taxation of pension payments from voluntary pension plans depends on when the individual withdraws money and the form of pension payments.
Early withdrawals (before age 55) are taxed at a rate of 20% except if the person has become fully and permanently disabled. For disabled people, lump sums are taxed at a rate of 10%, while life annuities are tax-free.
Withdrawals from the age of 55 are taxed at a rate of 10% for fixed-term annuities and tax free for life annuities, provided that more than 5 years have passed since the conclusion of the contract. Withdrawals are taxed at a rate of 20% if less than 5 years have passed since the conclusion of the contract.
All taxed withdrawals should be taken into account in yearly income when calculating the basic tax exemption.
Non-tax incentives
No such incentives.
Social treatment
Employees pay 1.6% of their earnings in contributions for unemployment insurance. The taxable base is the total amount of the gross wage or salary.
Social contributions are also paid by employers on the same taxable base than employees’. The social tax is 33% of gross salary. There is a minimum lump sum payment for each employee of EUR 155.10 (in 2018). In addition, employers pay the unemployment insurance premium at a rate of 0.8% of gross salary monthly.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Pension payments from the mandatory funded pension system and the pay-as-you-go public pension system are treated together in terms of taxation. Pension income exceeding the annual basic exemption is taxed as income at the fixed income tax rate (20% in 2018).
Incentives for employers to set up or contribute to a funded private pension plan
Contributions to voluntary pension plans made by the employer are classified as expenses related to business. These expenses may be deducted from the employer’s business income.
Finland
Structure of the funded private pension system
Tax treatment of contributions
Mandatory occupational plans: Employee contributions are fully tax-deductible from earned income. Employer contributions are not considered as taxable income to the employee.
Voluntary occupational group plans: Employee contributions are deductible from the employee’s earned income up to the lesser of (i) 5% of salary or (ii) EUR 5 000 per year. If the employee contributes more than the employer does, the excess amount is not deductible. For voluntary occupational plans opened before 06/05/2004, employees’ contributions are fully deductible. Employer contributions are not considered as taxable income to the employee.
If the employee contributes to the occupational group plan, the retirement age cannot be lower than the maximum statutory age (currently varying between 68, 69 and 70 years depending on the age of the insured person) to be eligible for tax relief.11 If the employee does not contribute to the plan, in practice a minimum retirement age of 55 years has been applied.
Voluntary personal plans set up by the employer: Employee contributions are not tax-deductible for the employee. Employer contributions are not considered as taxable income to the employee if they do not exceed a limit of EUR 8 500 per year. Excess contributions count as employee’ salary and are taxed at his/her marginal income tax rate.
Voluntary personal plan taken by the employee: Individual contributions are deductible from capital income up to EUR 5 000 per year. If the capital income earned in the year is lower than the amount of deductible contributions, the difference is used to calculate a tax credit applicable to earned income tax. For example, if an individual contributes EUR 5 000 to a personal plan and has EUR 3 000 of capital income, the first EUR 3 000 of contributions are used to reduce capital income to zero. The tax credit is then calculated as 30% of the remaining EUR 2 000, i.e. EUR 600. Employer contributions are considered as taxable income to the employee. If the employer provides a voluntary personal plan for its employees, each year the employer contributes to it, the tax-deductible amount of contributions to a voluntary personal plan taken by the employee declines to EUR 2 500. If the voluntary personal plan was opened before 06/05/2004, contributions paid before 2006 were deductible from earned income.
For members of voluntary personal plans since 2013, the retirement age cannot be lower than the maximum statutory age (currently varying between 68, 69 and 70 years depending on the age of the insured person) to be eligible for tax relief. In addition, early withdrawal of pension assets is possible only under strict conditions (unemployment, disability, divorce and death of a spouse). Furthermore, the minimum withdrawal period has to be 10 years.
Tax treatment of returns on investments
Returns on investments in pension plans are not taxed during the saving time until pension is actually paid out.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension benefits received from mandatory occupational plans, voluntary occupational plans and voluntary personal plans provided by the employer are taxed as earned income, as part of the taxpayer’s total earned income.
Pension benefits received from voluntary personal plans taken by employees are taxed as capital income. Capital income is taxed at a fixed rate of 30% up to EUR 30 000. The excess amount is taxed at 34%.
Non-tax incentives
No such incentives.
Social treatment
Employer health insurance contribution is payable by the employer on salary income, and if e.g. pension insurance contributions constitute taxable salary, the employer and employee health insurance contributions need to be collected. The average contribution in 2018 is 0.86% of salary paid. A so-called employee per diem contribution also needs to be collected from income taxable as salary income, the rate of this contribution is 1.53% during 2018.
Similarly, if e.g. employer contributions to pension insurance are considered taxable salary income for the employee, mandatory unemployment and pension insurance contributions need to be collected.
The employer withholds the mandatory unemployment contribution from the employee’s salary, and forwards both the employer’s (in 2018, up to 2.6% of salary paid) and employee’s (in 2018, 1.9% of salary received) contribution to the Unemployment Insurance Fund (TVR).
The average mandatory pension insurance contribution rate applicable for employer is 17.75% during 2018 on salaries paid. The mandatory pension insurance rate applicable for employees depends on the age of the employee and varies between 6.35% and 7.85%.
Pension income does not form a basis for pension or unemployment insurance contributions.
There is a separate health care contribution for pension income taxable as earned income. The health care contribution rate is 1.53% for pension income in 2018.
Tax treatment of pensioners
Public pension income is subject to taxes as earned income. However, pensions are entitled to a special pension deduction. The deduction ensures that persons who only receive a small, usually public, pension get their pension tax free.
Some public pensions and add-ons are always tax free, e.g. some war related pensions and state artist pensions.
Incentives for employers to set up or contribute to a funded private pension plan
From the point of view of corporate income tax, the employer contributions to e.g. pension insurances can be deducted in the taxation of the employer, similarly to salary expenses. However, as such, there is no extra benefit in using these plans from the point of view of corporate income taxation.
As explained above, some employer (or employee) social contributions are not payable on e.g. voluntary pension insurances, if conditions are met.
France
Structure of the funded private pension system
Tax treatment of contributions
Personal income tax system
Employer contributions to all occupational pension plans (except article 82) are not considered as taxable income for the employee.
Employee contributions to occupational (except PERCO and article 82) and personal pension plans are tax deductible from income (or from taxable profit in case for Madelin contracts) up to specific limits. Contributions above the limits are taxed at the individual’s marginal rate of income tax. The following limits apply:
Article 39: No limit for the tax-exemption of employer contributions.
Article 83 and PERE: Mandatory employer and employee contributions are tax-exempt up to a limit of 8% of the annual gross wage of the employee, with the annual gross wage capped at 8 times the annual social security ceiling. The contribution limit is reduced by tax-exempt employer or employee contributions into PERCO.
Article 83, PERE, PERP and PREFON: The tax deduction limit for voluntary contributions is common for these four types of plan. The ceiling for a year is 10% of gross earnings of the previous year. This ceiling cannot be lower than 10% of the annual social security ceiling (EUR 3 973 in 2018) or greater than 8 times 10% of the annual social security ceiling (EUR 31 785 in 2018). This ceiling is reduced by the following contributions made in another retirement savings plan the same year:
Employer contributions and mandatory employee contributions into article 83 and PERE;
Employer contributions into PERCO;
Tax deductible contributions into Madelin contracts.
The final cap for one year is the ceiling of that year plus unused ceilings of the three previous years.
Madelin contracts: The tax deduction limit for contributions depends on the taxable profit. If the taxable profit is lower than the annual social security ceiling (EUR 39 732 in 2018) then the tax deduction is capped at 10% of the annual social security ceiling. If the taxable profit is between 1 and 8 times the annual social security ceiling, the cap is equal to 10% of the taxable profit plus 15% of the taxable profit above the annual social security ceiling. If the taxable profit is greater than 8 times the annual social security ceiling, the cap is equal to 10% of 8 times the annual social security ceiling plus 15% of 7 times the annual social security ceiling.
Employer contributions on behalf of employees into article 82 occupational plans are considered as taxable income for the employee and are not tax deductible.
Voluntary employee contributions into PERCO are not tax-deductible. However, profit-sharing contributions into PERCO are not considered as taxable income for the employee. Employer contribution into PERCO cannot exceed 16% of the annual social security ceiling and 3 times employee contributions (voluntary contributions and profit sharing contributions). Employee contributions into PERCO (voluntary contributions and profit sharing contributions) cannot exceed a quarter of the employee’s gross earnings of the past year. The cap for employee contributions into PERCO includes any contributions made into company savings plan (PEE) or intercompany savings plan (PEI).
Social taxes
So-called “social” taxes are levied on employer and employee contributions to occupational pension plans (except article 39) and on individual contributions to personal pension plans: the General Social Contribution (CSG) at the rate of 9.2% and the Social Debt Reimbursement Contribution (CRDS) at the rate of 0.5%.12 These social taxes are withheld from the salary. Part of the CSG is deductible from income tax (6.8%). Social taxes are not levied on contributions to article 39.
Tax treatment of returns on investments
For article 39, article 83, PERE and PERP, return on investment is exempt from income tax and social taxes.
Return on investment into PERCO and article 82 is not considered as taxable income during the accumulation phase. However, in case of a lump sum withdrawal, it is subject to social taxes at the rate of 17.2% (PERCO) or income and social taxes (article 82). Part of the CSG is deductible from income tax (6.8%).
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Annuities
Annuities paid by article 39, article 83, PERE, PREFON, Madelin and PERP are subject to the same social and income taxes as public pensions. These pensions are taxed at the individual’s marginal rate of income tax after a 10% deduction. This deduction cannot be lower than EUR 383 per pensioner or greater than EUR 3 752 per household. If the individual’s pension is lower than EUR 383, then the tax deduction is equal to the pension. These pensions are also subject to CSG (8.3%), CRDS (0.5%), health contribution (1%) and the solidarity contribution for autonomy - CASA - (0.3%). Part of the CSG is deductible from income tax (5.9%).
An additional tax applies to annuities paid by article 39. The tax scale depends on the date when the annuities have begun:
If the annuities have begun before 1 January 2011, the part of the monthly pension below EUR 500 is not taxed, the part between EUR 500 and EUR 1 000 is taxed at 7% and the part above EUR 1 000 is taxed at 14%.
If the annuities have begun after 1 January 2011, the part of the monthly pension below EUR 400 is not taxed, the part between EUR 400 and EUR 600 is taxed at 7% and the part above EUR 600 is taxed at 14%.
The part of the additional tax covering the first EUR 1 000 of pension payment is tax-deductible.
Annuities paid by PERCO and article 82 are partially taxed at the individual’s marginal income tax rate and subject to social taxes (17.2%), depending on the claiming age. If the individual claims the annuity before age 50, 70% of the pension is subject to income and social taxes. If s/he claims the annuity between age 50 and age 59, 50% of the pension is subject to income and social taxes. If s/he claims the annuity between age 60 and age 69, 40% of the pension is taxed. If s/he claims the annuity from age 70, 30% of the pension is taxed.
Lump sums and programmed withdrawals
Lump sums or programmed withdrawals are not allowed for article 39, article 83, PERE and PREFON. They are not allowed either for Madelin contracts, except if the pensioner buys his/her permanent residence.
In case of a lump sum withdrawal after 8 years from article 82, the payment is divided between a capital component and a return on capital component. Only the return on capital component above EUR 4 600 (for singles) is subject to taxes, as follows:
if total premiums are lower than EUR 150 000, a single tax of 7.5% (or income tax at the individual’s marginal tax rate), and social taxes;
if total premiums are higher than EUR 150 000, a single tax of 30% (12.8% for income tax and 17.2% for social taxes) or income tax at the individual’s marginal tax rate and social taxes.
Lump sums paid by PERCO are divided into a capital component and a return on capital component. Only the return on capital component is subject to 17.2% social tax. The lump sum is not considered as taxable income.
Pensioners can withdraw up to 20% of their PERP as a lump sum. In this case, pensioners can choose between three fiscal options:
The lump sum is taxed at the individual’s marginal rate of income tax after a deduction of 10%. The lump sum is also subject to CSG (8.3%) and CRDS (0.5%). CSG is partially tax deductible (5.9%).
The income tax due for the lump sum is equal to 4 times the additional tax that would be generated by a quarter of the lump sum being taxed at the marginal rate of income tax. The lump sum is also subject to CSG (8.3%) and CRDS (0.5%). CSG is partially tax deductible (5.9%).
The lump sum is entirely taxed at the rate of 7.5% and subject to CSG (8.3%) and CRDS (0.5%). In this option, there is not deductible CSG. This option is only available if it is not possible to withdraw another lump sum from the same contract in the future.
Non-tax incentives
No such incentives.
Social treatment
Contributions into article 39 plans are not subject to social contributions. More precisely, three types of employer contribution are possible and depend on employer’s choice. If the article 39 management is not delegated to an insurance company, social contributions are taxed at 48% of the insurance premium. However, in case of delegated management, the rate is 24%. Employer may choose pensions as tax base with a rate of 32%.
Employee and employer contributions into article 83 and PERE are subject to employee social contributions. Employer contributions within limits are subject to a fixed social fee of 20% instead of usual employer social contributions. The contribution limit is the highest of 5% of the annual gross wage (with the annual gross wage capped at 5 times the annual social security ceiling) or 5% of the annual social security ceiling. The limit is reduced by employer contributions into PERCO. Any contributions above the limit are subject to usual employer social contributions.
Employer contributions into article 82 are subject to social contributions.
Employee contributions (except profit-sharing contributions) into PERCO are subject to social contributions. Employer contributions are subject to a fixed social fee of 20% instead of usual employer social contributions, lowered to 16% on two conditions.
Contributions to PERP and “Madelin” contracts are subject to social contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pensions are taxed at the individual’s marginal rate of income tax after a 10% tax deduction. This deduction is computed on public pensions and some private pensions (article 39, article 83, PERE, PREFON, Madelin contracts and PERP). It cannot be lower than EUR 383 per pensioner or greater than EUR 3 752 per household. If the individual’s pension is lower than EUR 383, then the tax deduction is equal to the pension.
Pensioners with low “fiscal reference income” are partially or fully exempt from social taxes. The value of the income thresholds in Table A A.4 depends on the family composition and on whether the individual leaves in metropolitan France or in Overseas Departments of France.
Table A A.4. France: Exemption from social taxes
Incentives for employers to set up or contribute to a funded private pension plan
Employers contributions to occupational private pension plans (article 39, article 83, PERE and PERCO) are deductible from corporate tax. Regarding social contributions, the social treatment described above is also an incentive for employers to set up or contribute to a funded private pension plan.
Germany
Structure of the funded private pension system
Since 1 January 2018, social partners can agree to introduce occupational defined contribution schemes per collective agreement. These plans can be offered by life insurers and pension funds.
Tax treatment of contributions
Pension funds and direct insurance: Employer and employee contributions are tax exempt, up to 8% of the social security contribution ceiling (EUR 78 000 per year in 2018). If total contributions exceed the limit, they are taxed at the individual’s marginal rate of income tax. For members who joined the plan before 2005, in certain cases, total contributions up to EUR 1 752 could be subject to a 20% fixed tax rate (plus solidarity and church tax), provided this rate is more beneficial than the employee’s personal income tax rate and that the 8% tax deduction rule would not be used.
Direct commitments: Employer and employee contributions are tax free and no ceiling applies.
Riester pensions: Riester pensions are available only to individuals who are actively compulsorily insured in a pension system, where the benefits were reduced by the legislation in or after 2002 (i.e. employees, civil servants, unemployed in receipt of unemployment benefits, recipients of disability pensions). Riester pension plans and the corresponding incentives are also generally available to spouses and partners of civil partnership if both partners live in the European Union, are not separated from each other, make the minimum payment and conclude a Riester contract. Plan members can receive a government subsidy and pay contributions net of those subsidies. Their gross contributions (including the subsidy) can be deducted from income tax up to EUR 2 100. From a technical point of view, the government subsidy can be seen as an advance on the subsequent tax relief.13 To be incentivized, contributions must be paid to an officially certified Riester pension contract. Important certification criteria are the following. The pension has to be paid in the form of a life annuity and if the contract was signed after 2011, the payment must not occur before age 62.14 Alternatively, income drawdown until age 85 with a subsequent lifetime annuity from age 85 onwards is permitted.
Basisrente pensions: Contributions to Basisrente pensions are partly taxed at the individual’s marginal income tax rate. From a tax perspective, Basisrente pension plans are treated like pillar one pensions (mandatory state pension plan and collective retirement schemes for selected professions). These pensions are in a transition period regarding taxation. Contributions to pillar one pensions (including Basisrente contributions) are partly taxed, the exempt part growing by 2 percentage points every year, starting from 60% in 2005. This means that in 2018, 86% of a maximum EUR 23 712 for single individuals (EUR 47 424 for married couples) of contributions can be deducted from taxable income. Contributions will be fully tax exempt from the year 2025, up to a maximum equal to the maximum contribution to the miners’ statutory pension scheme (Knappschaft). The limit counts for the total contributions to mandatory state pension, collective retirement schemes for selected professions and Basisrente pensions. For contributions to Basisrente pensions to be tax-incentivized, they must be paid to an officially certified Basisrente contract. Important certification criteria are the following. The benefit payment of a Basisrente scheme must be under the form of a life annuity and if the contract was signed after 2011, the payment must not occur before age 62. The savings cannot be inherited by someone else, must be non-transferable, cannot be used as collateral, cannot be sold and cannot be subject to capitalization.
Private pension insurance: No tax relief on contributions.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
In general, pension income is taxed at the individual’s marginal rate of income tax.
Direct commitments: Direct commitments are in transition period regarding the taxation of pension income. The tax-free allowance on benefits will be gradually phased-out from 40% of pension income up to EUR 3 000 in 2005 to 0% by the year 2040. If the payment of the benefits starts in 2018, 19.2% of pension income is tax-free, up to EUR 1 440.
Pension funds, direct insurance and Riester pensions: If the benefits of tax-deducted contributions are paid as annuities or a maximum of 30% as a lump sum, they are taxed at the individual’s marginal rate of income tax. If the annuity is lower than EUR 28.35 per month then the whole benefits can be paid as a lump sum and are also taxed at the individual’s marginal rate of income tax. Programmed withdrawals with subsequent annuitisation from age 85 from Riester plans are also taxed at the individual’s marginal tax rate. If the benefits of non-tax-deducted contributions (e.g. contributions exceeding tax limits or paid without being entitled to Riester subsidy) are paid as annuities, then only an age-dependent percentage of the pension is liable for taxation (see description below for private pension insurance).
Basisrente pensions: Due to the transitional regime, the taxation of pension income depends on the date of retirement. If the payment of the benefits started in 2005 or earlier, 50% of the benefits are subject to taxation at the marginal income tax rate of the pensioner. The taxable portion increases annually by 2 percentage points until 2020. Between 2020 and 2040, the taxable portion increases annually by 1 percentage point until reaching 100%. Therefore, pensions withdrawn on or after 2040 will be fully taxed. The tax-exempt part of the pension is determined in the year after the retirement (based on the rate applicable in the year of retirement) and is kept constant in nominal terms for the remaining lifetime of the retiree. If the payment starts in 2018 the taxation rate of the pension is 76%. The annual amounts are taxed at the individual’s marginal rate of income tax.
Private pension insurance: Because for these products, in general, contributions are not tax-favoured, some special tax rules regarding the benefits apply. Withdrawals before age 62 are not allowed for contracts signed from 2012.
For life-time annuities, only the so-called “income part” (i.e. returns on investment) will be taxed at the individual’s marginal rate of income tax. This income part is determined by the age at which the retiree receives the pension for the first time. For example, if the recipient receives his/her pension for the first time at age 65, the taxable income part is 18% of the annual pension. For age 60 (respectively age 67) it is 22% (respectively 17%). This amount will be taxed at the individual’s marginal rate of income tax.
The taxable income in case of a lump sum payment is calculated as follows. The income part is the insurance benefit in the event of survival minus the paid-in contributions. If the lump sum is paid after holding the contract at least 12 years and the recipient is 60 years or older (if the contract was signed from 2012, the payment must not occur before age 62) half of the income part will be taxed.
Non-tax incentives
Riester plans
Members of Riester pension plans can receive government subsidies. Members pay own contributions net of the subsidy. The subsidy is paid into their account by a state authority. Members have to claim the subsidy annually within two years after contributing to the plan. They may also authorize the provider to claim the government subsidy for them. For single individuals or each partner of a married or civil partnership couple where both qualify for the subsidy, the maximum subsidy is EUR 175 per year and per person. In order to receive the maximum subsidy, the sum of the tax-deducted member’s contributions and the subsidies must be at least equal to 4% of his/her previous year’s annual income before taxes (up to a maximum of EUR 2 100). If below 4%, the state subsidies will be reduced pro-rata. Spouses and partners of civil partnership of individuals entitled to the subsidy are entitled to the government subsidy too if they contribute at least EUR 60 per year to their own contract.
An additional child subsidy can also be paid into the Riester account if one of the parents receives child allowances. The maximum subsidy amounts to EUR 185 per year and per child born before January 1st 2008; or EUR 300 per year and per child born on or after January 1st 2008. As a default the mother receives the subsidy, unless otherwise agreed.
Young individuals, who receive the government subsidy before their 25th birthday, receive an additional maximum one-time bonus of EUR 200.
Since 1 January 2018, income from a Riester pension is no longer included in the income assessment to determine eligibility for receiving social welfare payments (“basic social security”).
Social partner model
For deferred income contracts signed as of 2019, employers have to forward 15% from the deferred income to the pension fund or direct insurance contract, if they save social insurance contributions due to the deferral of income. This contribution is tax free for the employee, within the general maximum amounts.
To support employees earning less than EUR 2 200 per month, the “Law to improve occupational retirement income provision” introduces new incentives for the setting up and expansion of occupational pension schemes. If employers contribute at least EUR 240 per year to an occupational pension scheme on behalf of a low-income earner, in addition to the regular wage payment, they get a tax allowance of 30% of the contribution, up to a maximum contribution of EUR 480 (i.e. the tax allowance varies between EUR 72 and EUR 144 per year). The additional employer contribution is tax free for low-income earners. In addition, occupational pension benefits of up to EUR 200 are not included in the income assessment to determine eligibility for receiving social welfare payments.
Social treatment
Pension funds and direct insurance: Neither the employee nor the employer has to pay social insurance contributions (state pension, unemployment, health and long-term care insurance) on the contributions within the 4% of the social security contribution ceiling limit. On the additional 4% of contributions which are still tax free, social insurance contributions are levied.
Direct commitments: Employer contributions are exempt from social insurance contributions without any limit. Same for employee contributions (deferred compensation) within the 4% of the social security contribution ceiling limit.
Pensioners have to pay the full contribution rate to health (14.6% in 2015) and long-term care insurance (2.55% in 2018) from their occupational pension payments. However, these expenses are deductible from taxable income up to certain limits. For individuals who have to finance their health insurance on their own and do not get tax-free benefits for this propose, the limit is EUR 2 800 per person and per year. For all the others, the limit is EUR 1 900 per person and per year. If the contributions to the basic health and basic long-term care insurance are higher than the limit, these higher contributions are deductible. Contributions to health and long-term care insurance are considered as basic if they are paid to establish a care level which corresponds to the level reached when social welfare is granted.
State pensioners who contributed most of their lifetime to the public health insurance become entitled to pensioners’ health insurance. In this case the state pension scheme pays half of the general contributions to health insurance (7.3% in 2018). Pensioners contribute half of the general contributions plus additional contributions stipulated by their particular health insurance. They pay the full rate of contributions to long-term care insurance (2.55% in 2018).
Riester pension, Basisrente pensions and private pension insurance: Contributions have to be paid from income from which social contributions were levied (including occupational Riester plans). Benefit payments are not subject to social insurance contributions if the retiree is eligible to pensioners’ health insurance. Non-eligible pensioners have to pay the full health and long-term care insurance contributions.
Tax treatment of pensioners
Germany is currently in a transition period regarding the way income from the public pay-as-you-go system is taxed – by 2040 pensioners’ income will be fully taxed. Before this date, pensioners benefit from an allowance which is not taxed. For the individual pensioner the allowance is calculated based on the pension received in the first year after the retirement (50% in 2005; annual increase of 2 percentage points until 2020 and 1 percentage point between 2020 and 2040 until reaching 100%) and is nominally fixed for the remaining lifetime. Simultaneously, contributions to the state pensions will benefit over time from growing tax relief.
There is an additional deduction of EUR 138 for pensions drawn at any age.
Incentives for employers to set up or contribute to a funded private pension plan
From the employer’s perspective, payments to a direct insurance, a pension fund or a support fund can be deducted as operational expenses. In the case of direct commitments, an accrual should be recognized as liability. Pension accruals lead to a reduction of profit for tax purposes and in this way also to a lower tax burden. In most cases, this creates a tax deferral effect which acts in a long-term manner.
Under the new social partner model, if employers contribute at least EUR 240 per year to an occupational pension scheme on behalf of a low-income earner (earning less than EUR 2 200 monthly), in addition to the regular wage payment, they get a tax allowance of 30% of the contribution, up to a maximum contribution of EUR 480 (i.e. the tax allowance varies between EUR 72 and EUR 144 per year). The allowance is administered through the wage tax and reduces the employer’s wage tax liability.
Greece
Structure of the funded private pension system
Tax treatment of contributions
Contributions paid to occupational insurance funds established by law, including employer’s and employee’s contributions, are not taxed.
Contributions paid by the employee or by the employer on behalf of the employee under group pension insurance contracts are not taxed.
Contributions to other personal pension plans are not deductible from income and therefore taxed.
Tax treatment of returns on investments
Returns on investment in private pension plans are tax exempt.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from occupational insurance funds is taxed at the individual’s marginal rate of income tax.
If the contributions to personal pension plans are taxed during accumulation phase then the private pension income is not taxed. If the contributions to personal pension plans are not taxed during accumulation phase then the private pension income is taxed.
Non-tax incentives
No such incentives.
Social treatment
Social insurance contributions are not levied on pension contributions.
Social insurance contributions are not levied on pension income.
Tax treatment of pensioners
Public pension benefits are taxable at the individual’s marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer’s contributions are deductible from corporate income tax.
Hungary
Structure of the funded private pension system
Tax treatment of contributions
Employees’ contributions are paid from net wages. They are therefore taxed at the fixed income tax rate of 15%.
Employers may contribute as well. Employer’s contributions are not considered taxable income for the employee but are subject to personal income tax at the rate of 17.7% (1.18×15%), paid by the employer.
Contributions to private pension plans enjoy tax relief in the form of a tax refund transferred and credited to the employee’s pension account. The tax refund is equivalent to 20% of contributions made, up to a limit. The contributions could come from 3 sources: employee contribution, employer contribution and employer donation. The maximum amount of tax refund is HUF 100 000 per year in case of individual retirement accounts (for those who retire before 2020, the limit is HUF 130 000), HUF 150 000 per year in case of voluntary private pension funds and HUF 130 000 per year in case of pension insurance. If the individual has more than one of the above-mentioned savings plans, the amount of tax relief cannot exceed HUF 280 000 per year altogether. Individuals get tax relief on contributions as long as they contribute to voluntary private pension funds and/or individual retirement accounts. The tax refund paid to the member cannot be more than the personal income tax liability.
Tax treatment of returns on investments
Returns on investments in private pension funds are tax free provided the returns are not withdrawn from the account before the pension payments started.
In case of voluntary private pension funds, after 10 years of membership, returns can be withdrawn tax free once every 3 years. Otherwise returns withdrawn are taxed at a rate of 15% and health care contribution (19.5%) is also levied on returns on investment.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
After a certain waiting period, pension income from voluntary private pension funds is tax free:
If the account was opened before 01/01/2013 and the membership period was less than 3 years, lump sum pension payment is taxed, while a programmed withdrawal of at least 3 years of duration is tax free upon the condition that the decrease of the yearly payments is less than 15%. Pension payments are tax free after 3 years of membership.
If the account was opened after 01/01/2013, pension payments are tax free after 10 years of membership. Withdrawals before the retirement age are usually taxable at 15% personal income tax and 19.5% health care tax. However, in case of withdrawals from voluntary private pension funds after the 10-year compulsory period has elapsed, the taxable part of the income is reduced gradually (10% reduction per year), i.e. after 20 years of membership withdrawals become tax free.
In case of other types of private pension fund (e.g. individual retirement accounts), withdrawals before the retirement age are taxable for the individual at 15% personal income tax and 19.5% health care tax (the base of the tax and the contribution is 78%). In addition, when an individual wants to access to the individual retirement account before the retirement age, the 20% tax refund has to be paid back.
Non-tax incentives
The tax refund credited to the employee’s pension account can also be seen as a government matching contribution of 20% of the contributions made to private pension funds, up to the limit previously described. The tax refund paid to the member cannot be more than the personal income tax liability.
Social treatment
Social contributions are levied on employee contributions.
Health care contribution is not payable by the employee, but the employer is responsible for the payment of it. Employer’s contribution to institutions for occupational retirement provision and/or to voluntary private pension funds is subject to 23.01% (1.18×19.5%) healthcare contribution.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pension income is tax exempt.
Incentives for employers to set up or contribute to a funded private pension plan
Employers can deduct contributions to private pension plans as expenses.
The incentive for the employer to pay pension contributions is indirect. If the employer wants to give for instance HUF 100 employer contribution, it will cost HUF 140.01 (the employer pays 17.7% personal income tax and 23.01% health care contribution). If the employer wants to give HUF 100 net salary increase for the employee, the employer should give HUF 150.38 gross salary increase (the gross salary of the employee is subject to 15% personal income tax, 10% state pension contribution, 7% health care contribution and 1.5 % labour market contribution), which in total costs HUF 181.95 after taking into account the taxes and health care contributions paid by the employer.
Employers can also make contributions as donations. Employers can deduct donations as expenses.
In order to be eligible for tax relief, employers have to make a contract with the fund to make contributions. The employer’s contribution has to be identical (same amount or same percentage) for each employee who is a fund member. Employees who have been in employment for at least six months cannot be excluded.
Iceland
Structure of the funded private pension system
Tax treatment of contributions
Both employer and employee contributions to occupational pension funds are tax-deductible. Employees can deduct up to 4% of their salaries as contributions. There is no limit for employer contributions.
If individuals decide to start personal pension savings, the minimum contribution is 2% of wages. This contribution is then matched by the employer with another 2% of wages. Individual contributions to personal pension funds are deductible from taxable income up to 4% of the salary. Excess contributions are taxed at the marginal income tax rate. The employer matching contribution is tax exempt.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income is taxed as ordinary wage income and subject to the individual’s marginal income tax rate.
A law passed in June 2014 allows active members in voluntary personal pension plans to withdraw assets tax free to pay down residential housing debt, up to ISK 750 000 per year for couples taxed together and ISK 500 000 per year for single persons. Individuals who do not own their residential housing can withdraw up to ISK 500 000 per year and per person to invest in residential housing. This kind of tax-free withdrawal was initially supposed to end in 2019, but an additional article was passed in law in July 2016 to extend this possibility for 10 years from 2016.
Non-tax incentives
According to collective agreements, employers contribute minimum 2% of the salary to voluntary personal pension plans if the employee decides to start personal pension savings. The most common contribution rate (employee and employer) is 6% of the employee’s salary as most employees contribute their maximum tax-free percentage (4%).
Social treatment
Social contributions are not levied on pension contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pension income is taxed as ordinary wage income.
Incentives for employers to set up or contribute to a funded private pension plan
There is no incentive for employers to set up or contribute to private pension savings plans. Contributions are mandatory and based on collective agreements. Pension plans are autonomous and not directly linked to the employer.
Ireland
Structure of the funded private pension system
Tax treatment of contributions
Contributions made by employees to any kind of pension plan are deductible for income tax purposes. The contributions to approved pension schemes or plans by employees subject to the pay-as-you-earn (PAYE) tax system are deducted from gross pay before the application of income tax under PAYE (this is known as the “net pay arrangement”). Self-employed individuals or individuals in non-pensionable employment must claim tax relief on contributions to pension saving arrangements. Low-income people who are exempt for filing income tax get no tax relief.
Employer contributions to occupational pension plans on behalf of their employees are not treated as taxable income in the hands of the employee.
Employer contributions on behalf of the employee to a PRSA or a RAC are treated as taxable benefit-in-kind for the employee. However, for the purposes of obtaining tax relief on pension contributions, the employee rather than the employer is deemed to have made such a contribution to the pension fund. The effect of this provision is that the tax relief on the contribution negates the taxable benefit-in-kind on the benefit provided. This treatment only applies where the employer contribution does not exceed certain limits based on the age of the employee. If combined employer and employee contributions exceed the limits, an unrelieved benefit-in-kind charge applies to the excess, at the employee’s marginal tax rate.
The amount of employee contributions that can be tax relieved is limited to an age-related percentage amount of the employee’s earnings (see Table A A.5). There is also an overall upper limit on the amount of earnings that are taken into account for the purposes of giving tax relief. Since 2011, this limit is set at EUR 115 000. These rules apply to aggregate employee contributions including additional voluntary contributions but do not apply to employer contributions into occupational pension plans.
Table A A.5. Ireland: Age-related percentage limits and corresponding contribution limits
Tax treatment of returns on investments
Returns on investments are not taxed (i.e. exempt from capital gains and dividend income tax).
Tax treatment of funds accumulated
There is a lifetime limit on the total capital value of pension benefits that an individual can draw in his/her lifetime from tax relieved pension products. This limit is called the standard fund threshold (SFT) and is EUR 2 million since 1 January 2014. In certain circumstances, a higher threshold called the personal fund threshold (PFT) may apply.
On each occasion that an individual becomes entitled to receive a benefit under a pension arrangement, that individual uses up part of his/her SFT or PFT. Where the capital value of the aggregate of such benefits exceeds the SFT or PFT, a “chargeable excess” arises equal to the amount by which the threshold is exceeded which is subject to an upfront income tax charge at the higher rate of income tax (currently 40%).
Individuals with pension rights whose capital value as at 1 January 2014 exceeds EUR 2 million are able to protect higher capital value by claiming a PFT from the Revenue Commissioners. The maximum PFT is EUR 2.3 million (i.e. the previous SFT limit), except where an individual holds a PFT issued on the previous occasions when the SFT was first introduced or reduced.
For DC pension arrangements, the capital value of pension rights when they are drawn down after 1 January 2014 is the value of the assets in the arrangement that represent the member’s accumulated rights on that date.
In the case of DB pension arrangements, the capital value of pension rights drawn down after 1 January 2014 is determined by multiplying the gross annual pension that would be payable to the individual (before commutation of part of the pension for a lump sum) by the appropriate valuation factor. DB pension benefits accrued to 1 January 2014 are valued using a standard valuation factor of 20 that applied up to that date. DB pension benefits accrued after 1 January 2014 are valued at the date of drawdown of those benefits by reference to a set of age-related valuation factors. The factors range from 37 for DB pension entitlements drawn down at age 50 and under, 30 where they are drawn down at age 60, to 26 at age 65 and 22 at age 70 or over.
Tax treatment of pension income
Pension income benefits are taxable as income at the individual’s marginal rate of income tax. Individuals can take tax-free lump sums as described below.
Individuals with DC pension savings can transfer some or all of their retirement savings upon retirement to an approved retirement fund (ARF), subject to conditions. Any money withdrawn from an ARF is taxed at the individual’s marginal rate. There is an imputed or notional distribution of the value of the assets of an ARF on 31 December each year unless the imputed distribution is matched by actual distributions and the notional amount is taxed at the ARF’s owner marginal income tax rate. The imputed percentage of ARF assets is 4% for ARF owners younger than 70 and where the value of ARF assets is EUR 2 million or less. The percentage is 5% for ARFs of such value where the owner is aged 70 or over. The level of the imputed distribution is 6% for ARFs with asset values in excess of EUR 2 million. The notional distribution measure was introduced to encourage drawdowns from ARFs so that they are used, as intended, to fund a stream of income in retirement.
Since 1 January 2011, the maximum sum that can be taken from a pension scheme at retirement tax free is capped at EUR 200 000. This tax-free amount is a lifetime limit and encompasses all retirement lump sums paid to an individual on or after 7 December 2005. Lump sum payments above that limit are taxed at the following rates:
Table A A.6. Ireland: Tax rates on lump sum payments
Non-tax incentives
No such incentives.
Social treatment
Employees’ pension contributions do not receive relief from Pay-Related Social Insurance (PRSI) and Universal Social Charge (USC).
Employer contributions attract full PRSI relief. Employer contributions are not liable to the USC (except when the employer makes a contribution on behalf of the employee to a PRSA or to a RAC).
Pension benefits are subject to the USC.
Tax treatment of pensioners
All income in Ireland is generally subject to taxation. Social welfare payments may or may not be deemed taxable but even if an individual’s social welfare payment is taxable (as state pensions are), s/he may not actually have to pay tax on it. Individuals getting a social welfare payment get a PAYE tax credit in addition to their normal tax credits. This means, if a social welfare payment is the only source of income, the individual may not pay tax because his/her tax liability does not exceed his/her tax credits. If an individual has a social welfare payment and another source of income, both sources are added together and the individual is taxed on the total amount.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to occupational pension plans on behalf of their employees are deductible in computing the income for tax purposes of the employer’s business.
Employer contributions attract full PRSI relief. Employer contributions are not liable to the USC (except when the employer makes a contribution on behalf of the employee to a PRSA or to a RAC).
Israel
Structure of the funded private pension system
Tax treatment of contributions
Employer contributions are not included in the taxable income of the individual up to 7.5% of the individual’s 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. Excess contributions are taxed at the individual’s marginal rate of income tax.
Employee contributions are subject to a cap at 20.5% of twice the national average salary. Employee contributions are subject to a 35% non-refundable tax credit up to 7% of the salary that is taken into account for pension savings (sometimes not all the components of the salary are taken into account for pensions).
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Annuities below a limit called “entitled annuity” are tax exempt. The tax rate for the part of the annuity above the entitled annuity is 35%. The entitled annuity amount depends on the extent to which the right to an exemption on severance pay was used. In 2018, the full exemption was NIS 8 380 monthly.
Since 2008, the capital accumulated in any of the pension products (pension funds, provident funds and life insurance policies) has to be converted into an annuity, up to a minimum of NIS 4 418 (based on minimum indexed wage as of 2008). If the capital accumulated translates into a larger annuity, the individual can asks for the minimum annuity and take the difference as a lump sum. Lump sums below NIS 739 116 are tax free and anything in excess is taxed at 35%.
Non-tax incentives
No such incentives.
Social treatment
Social contributions are not levied on pension contributions.
Old age pensions are subject to social insurance contributions. These contributions are deducted at source.
Tax treatment of pensioners
Public pension income is subject to income tax.
Incentives for employers to set up or contribute to a funded private pension plan
No such incentives.
Italy
Structure of the funded private pension system
Tax treatment of contributions
Contributions are exempt from personal income tax up to EUR 5 164.57 per year. This limit applies to the sum of employee and employer contributions. Contributions above the limit are taxed at the individual’s marginal rate of personal income tax.
TFR (Trattamento di fine rapporto) flows paid into a pension scheme are excluded from the contributions subject to such limit and thus are exempt from personal income tax, regardless of their amount.
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.
Since 2017, performance bonuses granted to employees up to EUR 3 000 per year are exempted from personal income tax if they are used for a number of welfare-related expenses, including contributions into occupational pension plans. However, since most of these welfare-related expenses do not qualify for any dedicated tax relief, and most pension plan members contribute well below the pension-specific limit of EUR 5 164.57 per year, it is expected that the tax relief of performance bonuses will rarely be used for pension contributions.
Tax treatment of returns on investments
The total investment return of pension funds (interest, dividends, capital gains) is taxed at a 20% standard rate, except for the total return of government bonds, taxed at the more favourable rate of 12.5% (for example, if the investment return comes 50% from shares and 50% from government bonds, the tax rate applied will be 16.3%). This rule applies since 2014. The tax is levied annually, on the total investment income earned.
Since 2017, returns of new investments of pension funds in stocks of Italian and/or European companies are tax free, if they are kept for at least five years.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension benefits are taxed at a fixed rate of 15%, with a reduction of 0.3% for every year of participation after 15 years. The maximum reduction is 6% (leading to a 9% tax rate after 35 years of participation). Taxation is applied on the pension benefit net of the part that was already taxed in the accumulation phase (either as contributions exceeding the tax-deductible limit, or as investment income). Therefore, although the Italian system is often described as “ETT”, actually every euro paid into pension funds is taxed “one time only” (i.e. no “double” taxation occurs).
Early withdrawals (for buying a house or other reasons) are generally taxed at a rate of 23%, regardless of the type of contributions.
Non-tax incentives
In occupational plans, collective agreements between employee and employer associations provide for employer matching contributions, under the condition that the employee contributes as well.
Social treatment
Employee contributions are subject to the standard social contribution rate of 9.19% on earnings up to EUR 46 630. An additional 1% is levied for income above EUR 46 630 and up to EUR 101 427. For earnings exceeding EUR 101 427, the employee pays a fixed amount given by (0.0919 × 46 630) + 0.1019 × (101 427 – 46 630). These ceilings are updated annually.
Employer contributions are subject to a lower rate of 10% (instead of the standard contribution rate, around 24%), on earnings up to EUR 101 427; for earnings exceeding EUR 101 427, the standard contribution rate applies. Social contributions are not levied on TFR contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pensions are taxed as personal income at the individual’s marginal income tax rate.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions are always considered as costs for the employer and hence they are deducted from business income in calculating the corporate tax.
Employer contributions to supplementary pension funds are subject to a social security contribution of 10% (lower than the standard contribution rate of about 24%), on earnings up to EUR 101 427; for earnings exceeding EUR 101 427, the standard contribution rate applies.
Japan
Structure of the funded private pension system
Tax treatment of contributions
Employee contributions
Contributions to DB corporate pension funds are deductible up to a yearly limit of JPY 40 000.
Contributions to defined contribution pension funds and EPFs are fully deductible without any limit. Employee contributions to DC corporate plans were prohibited until 2012. Since then, employee contributions cannot exceed employer contributions (employers are responsible for ensuring that contributions do not exceed the limit). The limit on combined employer and employee contributions has not changed (see below under employer contributions).
Employees are also eligible to participate in individual type DC plans. Contributions are tax deductible and the monthly contribution limit depends on the employer’s plan sponsorship:
Employers do not sponsor a DB or a DC plan: JPY 23 000
Employers do sponsor only a DC plan: JPY 20 000
Employers do sponsor at least a DB plan: JPY 12 000
Excess contributions are not allowed. For self-employed workers, the monthly contribution limit is JPY 68 000, although this is a combined contribution limit for DC and National Pension Funds.
Employer contributions
Employer contributions to all plans are not considered as taxable income (fringe benefit) for the members/employees.
Certain restrictions apply in the case of DC corporate plans. If the employer sponsors only one occupational plan, the maximum tax-deductible yearly contribution is JPY 660 000 for each employee. If the employer also sponsors a DB plan, the maximum tax-deductible yearly contribution to the DC plan is JPY 330 000 for each employee instead of JPY 660 000. Excess contributions are not allowed.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds.
Assets in EPFs, DB and DC plans are taxed at an annual rate of 1.173%. This tax has been temporarily stopped since 1999.
Tax treatment of pension income
Retirement income from occupational and personal pension plans is taxed separately without aggregation with other classes of income.
There is a pension-related deduction for annuities which commonly applies to public and private pensions, i.e. the tax treatment of public and private pensions is the same. Once the deduction has been calculated, the remaining income is taxed as general earned income (tax rates between 5% and 45%).
For annual pension income (public and private) “A” below JPY 4 100 000, the statutory deduction is calculated as (A-500 000)×25%+500 000;
For A between JPY 4 100 000 and JPY 7 700 000, the statutory deduction is calculated as (A-4 100 000)×15%+1 400 000;
For A above JPY 7 700 000, the statutory deduction is calculated as (A-7 700 000)×5%+1 940 000;
The statutory deduction cannot be lower than JPY 700 000 below age 65 and JPY 1 200 000 at age 65 and older.
Programmed withdrawals are not specifically stipulated in the Japanese pension legislation, but are not prohibited. They are usually classified as a kind of private pension income.
Lump sums are taxed at the individual’s marginal income tax rate.
Non-tax incentives
No such incentives.
Social treatment
Social contributions are not levied on pension contributions.
Contributions to health insurance and long-term care insurance are levied on pension income.
Tax treatment of pensioners
Old-age public pensions are taxed together with private pension annuities (see above).
Incentives for employers to set up or contribute to a funded private pension plan
No such incentives.
Korea
Structure of the funded private pension system
Tax treatment of contributions
Individual contributions to personal pension plans and to occupational defined contribution pension plans are taxed at the individual’s marginal tax rate but benefit from a tax credit. The tax credit is equal to 13.2% of the individual’s contributions, except for individuals with an income lower than KRW 40 000 000 (or KRW 55 000 000 when the only income source is salary income) for whom the tax credit rate is 16.5%.15 There is a limit to the amount of contributions taken into account to calculate the tax credit which varies between KRW 4 000 000 and KRW 7 000 000 depending on the type of plan in which the individual contributes (see Table A A.7). Individual contributions to occupational DC pension plans and personal pension plans cannot exceed KRW 18 000 000 a year and are not possible in occupational defined benefit pension plans.
Table A A.7. Korea: Determination of the maximum contribution taken into account for the calculation of the tax credit for different illustrative cases
Employer contributions to occupational pension plans are not considered as taxable income for the employee. The minimum rate for employer contributions in defined contribution plans is 1/12 of total annual salary.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income16
Programmed withdrawals are not allowed. Individuals can withdraw both annuities and lump sums from their occupational DC plan from the age of 55. Individuals can claim annuities from their occupational DB plan if they are at least 55 years old and if they have completed at least 10 years of contributions. If the individual cannot withdraw annuities from his/her occupational DB plan, he/she can withdraw a lump sum.
The taxation of pension income depends on the source of the income and whether the individual chooses a lump sum or an annuity.
Pension income originating from employer contributions
To calculate the tax due on pension income originating from employer contributions, one first needs to calculate the tax base. The tax base is calculated according to the following formula:
.
The deduction for continuous years of service is provided in Table A A.8.
Table A A.8. Korea: Tax deduction for continuous years of service
The total tax paid in the case of a lump sum is then determined by the following formula:
The deduction for income level, based on the tax base, is provided in Table A A.9.
Table A A.9. Korea: Tax deduction for income level
The difference between the tax base and the deduction for income level is taxed according to the progressive personal income tax rates (between 6% and 38%).
The tax rules incentivise annuities over lump sums, as only 70% of the previously calculated amount is due in taxes if the individual takes an annuity.
Pension income originating from employee/individual contributions and investment returns
If the individual takes a lump sum, the tax treatment depends on whether the contributions enjoyed the tax credit or not. If contributions did not exceed the maximum set for the calculation of the tax credit (Table A A.7), the lump sum is taxed at the rate of 16.5% (including local income tax). By contrast, contributions made in excess of the tax credit limit are withdrawn tax free.
If the individual takes an annuity, the tax treatment depends on the level of total retirement income (including public pensions). If total retirement income is below KRW 12 million, the individual can choose the separate taxation of the annuity. For a fixed-term annuity, the tax rate varies with the age of the annuitant (5.5% below age 70, 4.4% between 70 and 80, and 3.3% above 80). For a lifetime annuity, there is a fixed tax rate of 4.4% (including local income tax).
If total retirement income is above KRW 12 million, aggregate taxation of all sources of retirement income applies, according to the progressive personal income tax rates.
Non-tax incentives
No such incentives.
Social treatment
Contributions to private pension plans are not included in the social insurance contribution basis.
Social insurance premiums are not levied on private pension income, except for self-employed workers for whom social insurance premiums are levied on the basis of their comprehensive income.
Tax treatment of pensioners
Pension income from public pension schemes is taxed at the marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into occupational pension plans are tax deductible from corporate tax. Moreover, Charges for the Wage Claim Guarantee Fund are reduced by up to 50% if employers set up corporate pension plans rather than severance payment schemes.17
Latvia
Structure of the funded private pension system
Tax treatment of contributions
Contributions to the Mandatory State Funded Pension Scheme (6% as of 2016) are fully tax exempt.
Voluntary contributions to open and closed pension funds are tax deductible up to 10% of the individual’s annual taxable income. In addition, the joint limit for contributions to voluntary pension funds and insurance premiums may not exceed 10% of the individual’s annual taxable income, up to EUR 4 000. Employer contributions are counted as income to the employee and are therefore deductible within the limit mentioned above. Excess contributions are subject to the individual’s marginal income tax rate.
Tax treatment of returns on investments
Returns on investments are not taxed for the Mandatory State Funded Pension Scheme.
Income from investment in open and closed pension funds is considered as income from capital other than capital gains and taxed at a flat rate of 10%.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from the Mandatory State Funded Pension Scheme is treated as ordinary income and taxed at the individual’s marginal income tax rate.
Pension income formed from contributions made by an individual into private pension funds is not taxable. Pension income formed from contributions made by an employer (on behalf of an employee) into private pension funds is taxed at the individual’s marginal income tax rate.
Non-tax incentives
No such incentives.
Social treatment
State Social Insurance Mandatory Contributions are tax-deductible expenses for personal income tax purposes.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Old-age pension above the annual non-taxable minimum is taxed at the individual’s marginal income tax rate.
Incentives for employers to set up or contribute to a funded private pension plan
If an employer sets up or contributes to a funded private pension plan, these contributions are not subject to income tax and social insurance contributions, as long as the total does not exceed 10% of the gross remuneration calculated for the employee in the taxation year.
Lithuania
Structure of the funded private pension system
Second and third pillar pension plans are voluntary. However, once the decision to join the second pillar has been made, it is irreversible.
Tax treatment of contributions
Pension contributions to second pillar pension funds are a portion of the state social pension insurance contributions paid by employees and employers (2% in 2018; increasing to 3.5% from 2020). Social pension insurance contributions are not deducted from taxable income, thus are taxable at the fixed income tax rate of 15%.18 If the individual contributes voluntarily an additional 2% of income (not tax deductible), the government contributes an additional 2% of the average salary in Lithuania of the year before the last (tax exempt). For new participants who entered the second pillar after 1 January 2013, the additional individual and government contributions are mandatory.
Employee contributions to third pillar pension funds are considered as expenses and can be deducted within the annual deduction room for expenses. The total amount of deducted expenses (pension contributions, life insurance premiums, educational expenses) shall not exceed 25% of the taxable income, up to EUR 2 000 per year (this ceiling relates jointly to voluntary personal pension contributions and life insurance premiums). Excess contributions are subject to a fixed income tax rate of 15%. Employer contributions are not considered as taxable income to the employee if the amount of contributions does not exceed 25% of the employee’s income related to employment.
Tax treatment of returns on investments
Returns on investments are tax exempt.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from second pillar pension funds is tax-exempt.
The tax treatment of pension income from third pillar pension funds depends on the withdrawal age, the length of the contract and whether the individual has deducted third pillar contributions. For contracts opened since 1 January 2003, the following rules apply:
If the contract duration is at least five years and the individual withdraws no more than five years before the statutory age of retirement, pension benefits are tax free.
Otherwise, pension benefits are taxed at the fixed income tax rate of 15%, excluding the part of contributions that have not been deducted from taxable income.
Non-tax incentives
Government subsidies are available in the second pillar since 2014. Since 2016, the government contributes an additional 2% of the average gross salary in Lithuania of the year before the last if the individual agrees to contribute an additional 2% of his/her gross salary. This arrangement is mandatory for new participants who entered the second pillar after 1 January 2013.
Since 2014, the government contributes 2% of the average gross salary in Lithuania in the second pillar pension plan for parents who are in parental leave for every child under three years old.
Social treatment
Social contributions are levied on private pension contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Payments from the public pension scheme (SoDra) are tax exempt.
Incentives for employers to set up or contribute to a funded private pension plan
For the purpose of calculating corporate income tax, all contributions to pension funds made by the employer are considered as tax deductible.
Luxembourg
Structure of the funded private pension system
Tax treatment of contributions
Employer contributions into occupational pension plans are not considered as taxable income for the employee up to 20% of the employee’s ordinary earnings. However, employer contributions are taxed at the rate of 20%. This tax is due by the employer.
Employee contributions into occupational pension plans are tax deductible up to EUR 1 200 a year. Excess contributions are taxed at the marginal rate of income tax.
Contributions into individual pension savings contracts are tax deductible up to a limit of EUR 3 200 if some conditions are fulfilled. Excess contributions are taxed at the marginal rate of income tax. Individuals can claim a tax deduction for contributions into individual pension savings contracts if he/she fulfils the following conditions:
Contributions are made into an insurance company or a credit institution accredited by Luxembourg or the insurance company/credit institution has its head office in another European Union Member State.
The contract is held at least 10 years.
Lump sum payments or the start of annuity payments are only possible when the insured person is between 60 and 74 years.
The contract excludes early withdrawal.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income (annuities and/or lump sums, programmed withdrawals are not allowed) from occupational pension plans is divided into the part from the insured period after 1 January 2000 and the part from the insured period before 1 January 2000. The part from the insured period after 1 January 2000 is tax exempt, while the part from the insured period before 1 January 2000 is taxed at the marginal rate of income tax.
Pension income from individual pension savings contracts receives a favourable tax treatment if the conditions described above are fulfilled:
Lump sums are taxed as “extraordinary income”. Extraordinary income is taxed at the rate of half the global effective tax rate. The global effective tax rate is the ratio between the tax due assuming that all taxable income is ordinary income and the taxable income (ordinary plus extraordinary incomes). Ordinary incomes are taxed at this rate and extraordinary incomes at 50% of this rate.
50% of annuities are tax exempt and 50% are taxed at the marginal rate of income tax.
Non-tax incentives
No such incentives.
Social treatment
Social contributions are levied on private pension contributions.
When people have to file an income tax declaration, excess contributions to occupational pension plans or individual pension savings contracts are also subject to employment fund tax at the rate of 7% or 9% depending on their taxable income. For example, an individual having a global effective tax rate at 20.44% and a taxable income below EUR 150 000 will be taxed at a rate of 20.44%×(1+7%) = 21.87%.
Social contributions are levied on pension income.
When people have to file an income tax declaration, pension income is also subject to employment fund tax at the rate of 7% or 9% depending on the taxable income.
Tax treatment of pensioners
Public pensions are taxed at the marginal rate of income tax after tax deductions (wage earners and pensioners receive a maximum refundable tax credit of EUR 600 per year).
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into complementary pension plans are tax deductible from corporate tax up to 20% of the employee’s ordinary earnings.
Mexico
Structure of the funded private pension system
Tax treatment of contributions
Mandatory employer contributions to individual retirement accounts, as well as government contributions and social quotas are not considered as taxable income for the employee. Mandatory employee contributions to individual retirement accounts are tax exempt as they are made from before-tax income.
The tax treatment of voluntary personal contributions depends essentially on whether these savings have a long-term perspective or not. Short-term voluntary contributions, which can be withdrawn at any time after a period from two to six month depending on the pension fund, are not tax deductible. They are made from after-tax income and therefore taxed at the individual’s marginal rate of income tax. All the other types of voluntary personal contributions have a long-term perspective and are tax deductible up to different limits, as described in Table A A.10.
Voluntary employer contributions to individual retirement accounts or to occupational pension plans are never considered as taxable income for the worker. However, the maximum deductible amount of contributions to occupational plans (12.5% of the employee’s salary) includes both employee and employer contributions.
There is a general limit in the income tax system for personal deductions. This limit is equal to the minimum between five times the annual minimum wage and 10% of the taxpayer’s total gross income. The general deduction limit applies to the sum of complementary contributions to individual retirement accounts, long-term voluntary contributions to individual retirement accounts, contributions to special savings for retirement accounts, and contributions to personal pension plans.19
Table A A.10. Mexico: Tax treatment of pension contributions by workers, by type of contribution
Note: AMW = annual minimum wage.
Tax treatment of returns on investments
Investment income is always tax exempt as long as it stays invested. Upon withdrawal, investment income remains tax exempt when generated by mandatory contributions to individual retirement accounts, long-term voluntary contributions to individual retirement accounts, contribution to special savings for retirement accounts, and contributions to occupational and personal pension plans.
The real interests earned from investing short-term voluntary contributions and complementary contributions to individual retirement accounts is considered as taxable income upon withdrawal and taxed at the individual’s marginal rate. A provisional withholding tax of 0.6% of the amounts contributed applies.20
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
The tax treatment of pension income depends primarily on two factors: the form of payment and whether the individual is entitled to a pension when money is withdrawn (see Table A A.11). When workers reach retirement age and get benefits in the form of an annuity or programmed withdrawals, these benefits are tax exempt up to a limit equivalent to 15 times the annual minimum wage. Benefits above this limit are taxed at the marginal rate. This limit applies to the sum of all pension payments or benefits paid by the federal government (pay-as-you-go defined benefit pensions), by pension funds (individual retirement accounts), by occupational pension plans and by personal pension plans.
Workers entitled to a pension may also take their benefits in the form of a lump sum. For example, when they have accumulated enough assets to buy a life annuity equivalent to 1.3 times the minimum guaranteed pension, they have the right to buy such an annuity and withdraw the rest of the assets as a lump sum. In that case, the amounts withdrawn enjoy a tax exemption of 90 times the daily minimum wage. The excess amount is considered as taxable income and is taxed at the average annual rate applicable to ordinary income. Moreover, lump sum payments originated from short-term voluntary contributions are tax free, once the tax levied on real interests has been deducted.
Table A A.11. Mexico: Tax treatment of pension withdrawals, by type of contribution and form of payment
Notes: AMW = annual minimum wage; DMW = daily minimum wage.
When the worker gets a lump sum payment because he/she does not fulfil the requirements for obtaining a pension from his/her individual retirement account (negativa de pensión), this payment is tax exempt up to 90 times the daily minimum wage for each year of contribution. The excess amount is considered as sporadic taxable income and is subject to a temporary 20% withholding tax. The 20% withholding tax becomes final when the taxable income is less than MXN 123 580.20.
Amounts withdrawn before retirement from personal pension plans and retirement accounts constituted by complementary contributions and long-term voluntary contributions are considered as taxable income. A withholding tax of 20% is applied on the capital and the updated interest income generated by that capital.
Finally, amounts withdrawn from the special savings for retirement accounts are considered as taxable income. However, the tax rate applied cannot be higher than the one in force at the time of the deposit.
Non-tax incentives
Solidarity savings are a federal government matching mechanism to encourage public-sector workers affiliated to the pension system to make voluntary contributions. For each peso that the worker contributes voluntarily for retirement purposes, the federal government in its capacity as employer contributes 3.25 pesos. Workers can contribute either 1% or 2% of their salary. Solidarity savings have the same tax treatment as mandatory contributions (contributions are made from before-tax income, return on investment is tax exempt and withdrawals are treated as mandatory pensions).
Social treatment
Social contributions are levied on the gross salary, and therefore on pension contributions.
Pension income is not subject to social security contributions.
Tax treatment of pensioners
Public pensions are tax exempt up to an amount equivalent to 15 times the annual minimum wage. Benefits above this limit are taxed at marginal tax rate. This limit applies to the sum of all pension payments or benefits paid by the federal government (pay-as-you-go defined benefit pensions), by pension funds (individual retirement accounts), by occupational pension plans and by personal pension plans.
Incentives for employers to set up or contribute to a funded private pension plan
Mandatory employer contributions to the retirement sub-account and to the housing sub-account are tax-deductible for the employer.
Complementary retirement contributions done by the employer and employer contributions to occupational private pension plans are partially deductible for the employer. The amount deductible cannot exceed 47% of the contributions made. However, 53% of the contributions can be deducted when the benefits provided by the employer to its employees in a given tax year are not lower than the benefits provided the previous year.
Employer contributions to occupational private pension plans are not considered into the employee’s basic salary if the pension plan is registered in the database created by the pension authority. This process gives the opportunity to reduce the employer’s cost of giving this occupational plan.
Netherlands
Structure of the funded private pension system
Tax treatment of contributions
The maximum income for the EET system is set at EUR 105 075 in 2018. For the income that exceeds EUR 105 075 a TEE system can apply. This means that an individual with an income above EUR 105 075 contributes a certain percentage of his/her income to a mandatory occupational pension plan, but the income taken into account to calculate the contribution is capped at EUR 105 075. If s/he wants to make extra contributions, s/he has to open a voluntary pension plan and the contributions in that plan are not tax-deductible (investment income and capital gains are tax exempt, as well as the benefits of this voluntary pension plan). This two-tiered system was introduced on 1 January 2015. The maximum income is indexed to minimum wage.
EET system
Contributions to an occupational plan are not considered as taxable income to the employee. Second pillar contributions are normally set in collective pension agreements, and are typically shared between employers and employees. Employers usually pay a higher share (roughly two-thirds).
With reference to contributions to an occupational plan, the tax relief is limited in the EET system. For DB plans, the pension that can be granted in a year is limited (the benefit is defined). For DC plans, the contribution is limited.
Occupational DB plans: The pension that can be granted in any working year (the received entitlement concerning a working year) cannot exceed 1.875% of the career-average salary minus a threshold for the first pillar (general state pension) if the retirement age is 68 years old. After 40 working years, this can lead to a pension of 75% of the average salary. In terms of final salary, the pension that can be granted in any working year cannot exceed 1.657%.
Occupational DC plans: Tax rules define the maximum total contributions. Those maximum contributions differ and depend on the age of the participant and the participant’s personal situation (e.g. is a pension for a partner included, and if so, in what form). These contributions vary from 3.2% to 4.6% (for employees aged 15 to 19 years old) up to 22.3% to 27.3% (for employees aged 65 to 67 years old) of the salary minus the threshold for the first pillar.
Contributions to private personal old-age provisions are tax-deductible up to a limit. Contributions are limited to 13.3% of the annual income (with a ceiling of EUR 105 075) minus a threshold for the first pillar (general state pension) and taking into account the accrued pensions rights in the occupational pension plan (to prevent accumulation and tax relief for early retirement).
TEE system
Contributions made under the TEE system are taxed at the individual’s marginal income tax rate.
Contributions to occupational DC pension plans are limited as well. The maximum contributions depend on the age and range from 2.2% (age category 15-19 years old) up to 13.1% (age category 65-67 years old).
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Income from occupational and personal pension plans under the EET system is taxed at the individual’s marginal income tax rate.
Income from occupational and personal pension plans under the TEE system is not taxed.
Lump sum payments are generally not permitted, unless the annuity payment is very small (EUR 474.11 in 2018 for occupational plans), and these payments are taxed as income. The occupational pension capital cannot be paid out as a lump sum to the employee. For personal pension plans, the total lump sum payment cannot exceed EUR 4 351 (in 2018; indexed to inflation).
Non-tax incentives
No such incentives.
Social treatment
EET system: Social contributions are not levied on pension contributions.
TEE system: The contributions for occupational pensions or private personal old-age provisions are not exempt or deductible from the taxable income. The individual has to pay tax and social contributions on the taxable income (there is no difference with other taxable income; in case of wages, the tax and social contributions are normally withheld by the employer).
Pensioners pay 9.75% of their taxable income for the general insurance of certain health costs and survivors’ pensions (WLZ, ANW, up to an income of EUR 33 994). Depending on their income, they pay for their own health insurance. The social contributions are less than the contributions for those below the age from which the general state pension payments are received (66 years in 2018).
Tax treatment of pensioners
Pension income is taxed if the EET system applies. Tax is calculated by applying the marginal income tax rate (box 1 income).
A general personal tax credit is available to all taxpayers. The amount of the general tax credit depends on the age of the individual and the level of the individual’s income.
For individuals below state pension age: If the individual’s income is below EUR 20 142, the tax credit is EUR 2 265. Between EUR 20 142 and EUR 68 507, the tax credit is calculated according to this formula: [2 265 - 4.683% × (income - 20 142)]. If the income is above EUR 68 507 the tax credit is EUR 0.
For individuals at or above state pension age: If the individual’s income is below EUR 20 142, the tax credit is EUR 1 157. Between EUR 20 142 and EUR 68 507, the tax credit is calculated according to this formula: [1 157 - 2.389% × (income - 20 142)]. Above EUR 68 507, the tax credit is EUR 0.
Incentives for employers to set up or contribute to a funded private pension plan
No such incentives.
New Zealand
Structure of the funded private pension system
Tax treatment of contributions
Employees’ contributions are taxed at the marginal rate of income tax.
Employers’ contributions are also liable for tax (called employer superannuation contribution tax, ESCT). The ESCT rate is calculated based on the employee’s salary or wages in the previous tax year (including gross superannuation employer contributions). When the employee was not employed for all the previous tax year, the tax rate is calculated based on an estimate of the total amount of salary or wages that the employee will earn in the year ahead.
If salary ≤ NZD 16 800 then ESCT rate=10.5%
If salary from NZD 16 801 to NZD 57 600 then ESCT rate=17.5%
If salary from NZD 57 601 to NZD 84 000 then ESCT rate=30%
If salary ≥ NZD 84 001 then ESCT rate=33%
There are two alternative ways to calculate ESCT rates:
the employee’s marginal rate of income tax, by treating employer contributions as part of the employee’s salary or wages, with the agreement of both employer and employee; or
for employer contributions made on behalf of a past employee, a fixed tax rate of 33% applies.
Tax treatment of returns on investments
Investment earnings are taxed. The pension provider directly deducts this tax from the pension account.
If the scheme is a widely-held superannuation fund, investment earnings are taxed at 28%.
The tax rate for investment earnings from a Portfolio Investment Entity (PIE) is referred to as the prescribed investor rate (PIR). All of the KiwiSaver default schemes are PIEs. Dividends from a listed PIE are not liable for resident withholding tax. The PIR is calculated based on taxable income in each of the previous two income years.
If, in either of the previous two income years, taxable income was ≤ NZD 14 000 and (taxable income + PIE income) ≤ NZD 48 000 then PIR=10.5%;
If, in either of the previous two income years, taxable income was ≤ NZD 14 000 and (taxable income + PIE income) from NZD 48 000 to NZD 70 000 then PIR=17.5%;
If taxable income ≤ NZD 14 000 and (taxable income + PIE income) ≥ NZD 70 001 for both of the previous two income years, then PIR=28%;
If, in either of the previous two income years, taxable income was from NZD 14 001 to NZD 48 000 and (taxable income + PIE income) ≤ NZD 70 000 then PIR=17.5%;
If taxable income from NZD 14 001 to NZD 48 000 and (taxable income + PIE income) ≥ NZD 70 001 for both of the previous two income years, then PIR=28%;
If taxable income > NZD 48 000 then PIR=28%.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Payments from superannuation funds and from KiwiSaver plans, whether in the form of an annuity, lump sum or pension, are not taxable in the hands of recipients.
Non-tax incentives
The government makes an annual contribution towards KiwiSaver accounts as long as members contribute and are aged 18 and over (and satisfy some additional criteria). The government pays 50 cents for every dollar of member contribution annually up to a maximum payment of NZD 521.43. The member tax credit does not count as taxable income for the member. Members no longer qualify for member tax credit once they become eligible to withdraw their savings.
Employees’ contributions to a KiwiSaver account (minimum 3% of the salary) are matched by a minimum employer contribution of 3% of the employee’s salary.
Social treatment
Social contributions are not levied on pension contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
New Zealand Superannuation (public pension) is taxed at marginal rates.
Incentives for employers to set up or contribute to a funded private pension plan
No such incentives.
Norway
Structure of the funded private pension system
Tax treatment of contributions
Employer contributions to mandatory occupational pension plans are not considered as taxable income to the employees.
Employees usually do not contribute to mandatory occupational pension plans, but they are sometimes required to do so. In case employees are required to contribute, the contribution rate must not exceed 2% of salary in municipal and public sector DB plans and 4% of salary in private sector plans. Contributions are deductible from ordinary income. They are not deductible from personal income.
Contributions by self-employed workers into voluntary defined contribution occupational plans are deductible from both ordinary income and personal income, up to 6% of imputed personal income from self-employment between 1 and 12 G.21
Individual contributions to individual pension saving (IPS) schemes are deductible from ordinary income, up to NOK 40 000. They are not deductible from personal income.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from occupational pension plans is taxed as both personal and ordinary income. Pension income from the IPS scheme is taxed only as ordinary income. Lump sum payments are not allowed.
Non-tax incentives
No such incentives.
Social treatment
Employers pay social contributions on their occupational pension contributions at a maximum rate of 14.1%.
Pension income is subject to 5.1% of social contribution, which is lower than contribution rates on other types of income (employees pay 8.2%).
Tax treatment of pensioners
Public pension income is taxed as both personal and ordinary income.
Old-age pensioners are entitled to a special tax credit. In 2018, the maximum tax reduction was NOK 29 950. The tax credit is tapered by 15.3% of pension income above NOK 193 250 and 6% of pension income above NOK 290 700. There is no tax credit for pension income above NOK 541 000.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to mandatory occupational pension plans are tax-deductible as business expenses according to the Norwegian Taxation Act. Employer contributions to collectively negotiated labour market pensions have also become tax-deductible as business expenses through administrative practice at the taxation authorities.
Poland
Structure of the funded private pension system
Tax treatment of contributions
Contributions into OFE are tax deductible.
Contributions into IKZE are tax deductible up to a limit. Annual contributions into IKZE are capped at 1.2 times the national projected average monthly salary (PLN 5 331.60 in 2018). If the individual exceeds this limit, the financial institution has to return the excess contributions or to forward them to another account.
Employer contributions into PPE (so-called basic contributions) are included in the taxable income of the employee and consequently taxed at the marginal rate of income tax. Employee contributions (so-called additional contributions) are paid from earnings that have been already taxed. Employee contributions into PPE cannot exceed 450% of the national projected average monthly salary (PLN 19 993.50 in 2018).
Contributions into IKE are taxed at the marginal rate of income tax in the sense that contributions are made from after-tax earnings and do not benefit from tax reliefs. Annual contributions into IKE cannot exceed 300% of the national projected average monthly salary (PLN 13 329 in 2018). If the individual exceeds this limit, the financial institution has to return the excess contributions or to forward them to another account.
Tax treatment of returns on investments
Returns on investments are not taxed. Early withdrawal from IKE and IKZE is possible, but in this case returns on investments are taxed at 19%.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Ten years before the official age of retirement, assets in OFE are subject to graduate transfer to ZUS sub-account (in 10% per year pace), due to so called security slide mechanism. At the age of retirement, all assets are completely transferred to the first pillar, from which the individual receives total pension which is taxed at the marginal rate of income tax.
IKZE benefits can be paid after age 65 as lump sums or regular payments and are taxed at a fixed rate of 10%. Early withdrawal is possible, but all accrued tax benefits must be surrendered.
Any withdrawal after 60 from PPE or IKE is tax free. There are no specific rules regarding payment options. Early withdrawal from PPE is not possible. Early withdrawal from IKE is possible but in this case, returns on investments are taxed at 19%.
Non-tax incentives
No such incentives.
Social treatment
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. The contribution is deducted from an amount of due personal income tax (7.75%) and from incomes after taxation (1.25%).
Tax treatment of pensioners
Public pensions are subject to income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into PPE are tax deductible from corporate tax, up to 7% of the employee’s salary.
Portugal
Structure of the funded private pension system
Tax treatment of contributions
Contributions to occupational pension plans are, in terms of amount, mostly employer contributions. Employer contributions are not considered as taxable income for the employee and are tax deductible from the employer taxable profits as long as the legal required criteria are met, namely:
All permanent workers of the company are enrolled in the pension plan and the benefits are established in accordance with an objective criteria that applies to all workers;
The annual contributions made by the employer do not exceed 15% of the annual total costs with wages and salaries (the limit is 25% if employees are not covered by social security such as pension plans under a collective agreement in the banking sector). If the contributions exceed the limit, the exceeding part is not considered as a cost for the company for tax purposes, unless the amounts are included in the employee’s taxable income;
At the time of retirement, at least two thirds of the benefits are paid in the form of annuities;
The pension plan covers exclusively benefits in case of retirement, early retirement, supplementary retirement, health (post-work), disability or survivorship and follows, in what concerns age and holders/beneficiaries, the general social security framework;
The management and disposal of these employer contributions do not belong to the company itself;
Contributions are not considered income from employment.
Employer contributions to retirement savings schemes (PPR) are also not considered as taxable income for the employee. The legal requirements above do not apply as this type of contribution is always considered as income from employment and deductible from the employer’s taxable profits.
20% of overall employee contributions to private pension plans (both occupational and personal) are tax deductible, up to a yearly deduction limit which varies according to the individuals’ age: EUR 400 per taxpayer under 35 years old, EUR 350 per taxpayer between 35 and 50 years old, and EUR 300 per taxpayer above 50 years old. In the case of contributions to the public regime of capitalisation (RPC), only two age limits apply: EUR 400 per taxpayer under 35 years old and EUR 350 per taxpayer older than 35. In addition, an overall limit applies for deductions related to certain expenses, namely health, health insurance, residence for the elderly and tax benefits (including tax benefits related to the above-mentioned contributions to private pension plans) when the annual income exceeds EUR 7 091. Between EUR 7 092 and EUR 80 640 the limit for tax deductions varies between EUR 2 500 and EUR 1 000. For an annual income above EUR 80 640, the maximum deduction available is EUR 1 000.
Tax treatment of returns on investments
Generally, the income generated by private pension assets is tax exempt.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
If the contributions were exempt (employer contributions to occupational pension plans), the following tax treatment applies:
Annuities: Taxed at the individual’s marginal rate of income tax. A maximum deduction of EUR 4 104 applies to total pension income. However, if the compulsory contributions to social protection schemes and to legal health subsystems exceed that limit (EUR 4 104), the deduction will be equal to the total amount of contributions.
Lump sums: One-third of the “contribution part” (capital component) is tax exempt up to a maximum of EUR 11 704.70. The remainder is taxed at the individual’s marginal rate of income tax. The “gains and other returns on investment part” is taxed at a rate of 4% or 8% depending on whether the contributions that originated such income were made before or after 1 January 2006 respectively.
If the contributions were taxed (employee contributions to occupational and personal pension plans, as well as employer contributions when legal criteria are not met for receiving a favourable tax treatment), the following tax treatment applies:
Annuities: The “contributions part” is exempt and only the “gains and other returns on investment part” is subject to taxation at the marginal rate of income tax. If it is not possible to distinguish between contributions and returns, then only 15% of the annuity is subject to taxation at the marginal rate of income tax.
Lump sum: The “contributions part” is exempt. The “gains and other returns on investment part” is taxed at a rate of 4% or 8% depending on whether the contributions that originated such income were made before or after the 1 January 2006 respectively.
The interest income subject to taxation can be reduced if more than 35% of the contributions are paid in the first half of the contract, and the benefits are received more than 5 years after the beginning of the contract (5 to 8 years: 80% of the interest is taxed; more than 8 years: 40% of the interest is taxed).
Withdrawals from retirement savings plans (PPR) under the following conditions are not subject to penalties: (i) old-age retirement; (ii) long-term unemployment of the participant or any member of their household; (iii) permanent disability of the participant or any member of their household; (iv) severe illness of the participant or any member of their household; (v) at the age of 60; (vi) for payment of instalments of mortgage-backed credit on the participant’s own permanent residence.
Withdrawals outside the above conditions are subject to penalties. The year of withdrawal, the individual has to add to his/her taxable income the full amount of tax deductions received on contributions over the years, plus an annual penalty rate of 10% applied to the tax deductions for each year since the contribution has been made. This is then taxed at the individual’s marginal rate. For example, if the individual has made a contribution of EUR 300 eight years ago, the penalty for that contribution will be calculated as the tax deduction received on that contribution (20%×300) multiplied by 8×10%.
Non-tax incentives
No such incentives.
Social treatment
Social contributions are not levied on employer pension contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pensions are considered as income and taxed at the individual’s marginal income tax rate.
There is a general deduction for pensions of EUR 4 104 or, when higher, of the total amount of the mandatory social security contributions.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to occupational pension plans are tax-deductible expenses as long as some requirements are fulfilled (see above). Besides this relief on corporate income tax, social contributions are not levied on employer pension contributions.
Slovak Republic
Structure of the funded private pension system
Tax treatment of contributions
Employers have to pay mandatory contributions on behalf of employees enrolled in an individual retirement account (4.5% of the salary in 2018, increasing by 0.25 percentage point each year until reaching the target of 6% in 2024). Mandatory contributions are fully tax deductible.
Employees can make additional voluntary contributions in their individual retirement account. There is no cap on the amount an employee can contribute voluntarily and these contributions are not tax deductible.
Employer contributions into supplementary pension plans are treated as employee’s income and taxed at the employee’s marginal rate.
Employee contributions into supplementary pension plans are tax deductible up to EUR 180, only if the participant opts for new pay-out conditions. Excess contributions are taxed at the marginal rate of income tax. New pay-out conditions are in place since 1 January 2014 for all new entrants. Participants who joined the scheme prior to 1 January 2014 can decide to conclude with their supplementary pension company a contract amendment with new pay-out conditions. However, if they opt not to choose to sign this contract amendment, they will not become eligible for the EUR 180 tax relief.
Tax treatment of returns on investments
Returns on investment into individual retirement accounts are tax exempt.
Returns on investment are taxed upon withdrawal for supplementary pension plans (both those gained during the accumulation phase and the pay-out phase). A fixed tax rate of 19% applies.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from individual retirement accounts is tax exempt.
Upon withdrawals from supplementary pension plans, only the part of the assets originated from returns on investment is taxed at 19%. The other part (originated from contributions) is tax free.
Non-tax incentives
No such incentives.
Social treatment
Mandatory pension contributions are part of the social insurance contributions: 25.2% of the salary paid by the employer and 9.4% of the salary paid by the employee. Health insurance contributions (10% of the salary paid by the employer and 4% of the salary paid by the employee) and social insurance contributions are calculated based on the gross salary.
Voluntary contributions to individual retirement accounts and individual contributions to supplementary pension plans are subject to social contributions, as they are paid from net income.
Employer contributions to supplementary pension plans are considered as income and are subject to health insurance contributions (but not to social insurance contributions).
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pensions are not taxed.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into supplementary pension plans are tax deductible for the employer (corporate tax) up to 6% of the member’s salary. Employer contributions into supplementary pension plans are not subject to social insurance contributions but health insurance contributions are levied on these contributions.
Slovenia
Structure of the funded private pension system
Tax treatment of contributions
Employer contributions are not included in employee’s taxable income up to 5.844% of the employee’s gross wage.22 This cap cannot exceed EUR 2 819.09 per year.
Individual contributions to occupational and personal pension plans attracting tax deduction are capped by the unused cap of employer contributions attracting tax relief. If contributions are paid by both the employer and the employee, and the total amount of contributions exceeds the maximum contribution entitled to tax relief, the employee may only receive tax relief on the difference between the contribution paid by the employer and the maximum contribution. Excess contributions are taxed at the marginal rate of income tax.
Employer and employee contributions benefit from tax relief if the pension plan is approved by the ministry of labour and entered into a special register kept by the competent tax authority. The sum of employer and employee contributions into pension plans cannot be lower than EUR 240 a year.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Annuities and lump sums are taxed at the marginal rate of income tax.
Non-tax incentives
No such incentives.
Social treatment
Employer contributions above 5.844% of the employee’s gross wage or above EUR 2 819.09 are subject to social contributions. Contributions within the limit are not subject to social contributions.
Employee contributions are made from income that has already been subject to social contributions.
Income from private pension schemes is not subject to social contributions.
Tax treatment of pensioners
Pensions from the public scheme are taxed at the marginal rate of income tax and benefit from a tax credit. The tax credit is equal to 13.5% of resident pensioners’ pensions received from compulsory pension and disability insurance.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions are tax deductible from corporate tax up to 5.844% of the employee’s gross wage. This cap cannot exceed EUR 2 819.09 per year.
Employer and employee contributions benefit from tax relief if the pension plan is approved by ministry of labour and entered into a special register kept by the competent tax authority. The sum of employer and employee contributions into pension plans cannot be lower than EUR 240 a year.
Employer contributions above 5.844% of the employee’s gross wage or above EUR 2 819.09 are subject to social contributions. Contributions within the limit are not subject to social contributions.
Spain
Structure of the funded private pension system
Tax treatment of contributions
Employer contributions count as income to the employee.
Total employer and employee contributions made to personal and occupational pension plans are limited to EUR 8 000 per year. Additional contributions are not permitted. In addition, a tax-deductibility limit applies to total contributions. The limit for 2018 is the lesser of (i) 30% of the aggregate net income from work and economic activities, and (ii) EUR 8 000.
The individual can additionally deduct up to EUR 2 500 per year for contributions paid to his/her spouse’s pension plan when the spouse’s net earned and business activities income is less than EUR 8 000. The additional deduction can be carried forward for five years.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income is taxed as labour income at the individual’s marginal rate of income tax. The same tax treatment applies to lump sums and annuities (except lump sums arising from contributions made before 2007) and to early withdrawals.
Until 2007, 40% of pension income received as a lump sum was tax free. A transitional regime applies, with lump sums arising from contributions made before 2007 taxed in this way under specific conditions and others fully taxed. Conditions to benefit from tax-free lump sums are the following:
People who retired before 2011 can only benefit from tax-free lump sums if they withdraw money before 2018;
People who retired between 2011 and 2014 can only benefit from tax-free lump sums if they withdraw money at most 8 years after retirement;
People retiring as of 2015 can only benefit from tax-free lump sums if they withdraw money at most 2 years after retirement.
Non-tax incentives
No such incentives.
Social treatment
Only employer contributions to private pension plans are included for the calculation of social security contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pension income is taxed as labour income at the individual’s marginal rate of income tax.
The income exempt from income tax is EUR 5 550 per taxpayer under the age of 65. Taxpayers aged over 65 may add EUR 1 150 to the former amount. Those aged over 75 years may claim additionally EUR 1 400.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to occupational pension plans are tax exempt for the employer.
Sweden
Structure of the funded private pension system
Tax treatment of contributions
Employee’s contributions to PPM are offset with a tax credit.
Contributions to occupational plans are only financed by employers. These contributions are not considered as taxable income to the employee.
From 1 January 2016, only the self-employed and employees without employer contributions to their pensions can deduct contributions to pension insurance contracts or IPS schemes. For these persons, the cap for individual contributions is 35% of eligible income or at most 10 basic amounts (SEK 455 000 in 2018) per year. Eligible income for the self-employed is essentially defined as surplus from active business activities. To be eligible for tax relief, benefits cannot be withdrawn before the age of 55, and payments must last at least for 5 years in the form of an annuity.
Tax treatment of returns on investments
Returns on investment are not taxed in PPM schemes.
For occupational and personal pension schemes, returns are taxed at a fixed rate of 15% on an imputed return on investment. The imputed return corresponds to the previous year’s average government borrowing rate, but it cannot be negative.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income is taxed as earned income at the individual’s marginal income tax rate.
Non-tax incentives
No such incentives.
Social treatment
A reduced social contribution of 24.26% (instead of 31.42%) is applied on contributions for occupational pensions paid by the employer.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Public pension income is taxed as earned income.
A basic allowance is given for assessed earned income and varies between SEK 19 246 and SEK 34 900, depending on income. Individuals aged over 65 get an additional allowance, which amount also varies with income.
Incentives for employers to set up or contribute to a funded private pension plan
Employers can deduct 35% of maximum 10 basic amounts (SEK 455 000 for 2018) for contributions to different pension schemes.
There is also a possibility for the employer to use a supplementary provision in cases when a pension agreement is changed or a new agreement is met on early retirement from an employment. Furthermore, the supplementary provision can be used if the pension commitments are insufficiently secured. The supplementary provision states that the whole cost for securing a pension commitment can be deducted if it does not oppose conditions stipulated in law.
Switzerland
Structure of the funded private pension system
Tax treatment of contributions
Employee and employer contributions to occupational pension plans are tax deductible.
Contributions to individual retirement savings plans are tax deductible up to a limit. If the individual has an occupational pension plan, tax-deductible contributions to personal plans are capped at CHF 6 768. If the individual does not have an occupational pension plan, tax-deductible contributions are capped at 20% of annual earnings. In this case, the tax deduction cannot exceed CHF 33 840. Excess contributions are not permitted.
Tax treatment of returns on investments
Returns on investments are not taxed.
Financial transactions are subject to stamp duty, including those done by pension funds. The rate of 0.15% (half paid by each contractor) applies on all securities bought and sold.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
The same tax treatment applies to pension benefits paid by occupational and personal pension plans. Annuities and programmed withdrawals are taxed at the marginal rate of income tax.
The federal government and the regions (cantons) tax lump sums separately from other incomes at preferential rates:
The federal government taxes lump sums as capital income. This tax is progressive and is equal to 1/5 of the income tax which would be generated if lump sums were separately taxed as income.
The fiscal treatment of lump sums differs between cantons.
Non-tax incentives
No such incentives.
Social treatment
Contributions to occupational pension plans are part of the social contributions, paid from the gross salary.
Contributions to individual retirement savings plans are paid from disposable income. This income has already been subject to social contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Income from public pension schemes is taxed at the individual’s marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into pillar 2 are tax deductible from corporate tax.
Turkey
Structure of the funded private pension system
Tax treatment of contributions
Employee contributions into personal pension plans are deducted from salaries that have already been taxed at the marginal rate of income tax and that have already been subject to stamp tax at the rate of 0.759%. Employee contributions are matched by the government up to a limit.
Employer contributions into employer-sponsored group accounts are included in employee’s taxable income. Such contributions do not receive the government match.
Tax reliefs are available only if the pension plan is offered by a pension company established in Turkey.
Tax treatment of returns on investments
Returns on investment into voluntary pension plans are taxed upon withdrawal. The tax rate depends on when the withdrawal takes place:
If the individual reaches 56 years old and has been in the scheme during 10 years at least, the tax rate is 5%;
If the individual has been in the scheme during 10 years at least without reaching 56 years old, the tax rate is 10%;
If the individual has been in the scheme during less than 10 years, the tax rate is 15%.
Individuals can withdraw a lump sum from voluntary pension plans. Only the return on capital component of the lump sum is taxed at a fixed rate, as described above. Part or all of the savings can be converted into an annuity or programmed withdrawal if the individual reaches the age of 56 and has been in the scheme for at least 10 years. Programmed withdrawals are taxed upon each payment made to the member, while the annuities are taxed just before conversion.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income is tax exempt owing to the fact that tax on returns is deducted at the time the total savings amount is converted into an annuity or programmed withdrawal.
Non-tax incentives
The government matches 25% of pension contributions into individual savings accounts or group personal pension contracts up to 25% of the annual minimum wage. The government contribution applies for the automatic enrolment system too, with a separated limit from the one in the individual pension system (i.e. an individual can get the government match twice, within the limit of 25% of the annual minimum wage for each scheme).
Individuals receive 100% of government contributions if they withdraw their assets after reaching 56 years old and if they have contributed for at least 10 years.
If an individual makes an early withdrawal (i.e. if s/he does not fulfil at least one of the two previous conditions), s/he cannot keep all of the matching contributions:
If the individual stays less than 3 years in the scheme, s/he does not receive the government contribution;
If the individual stays between 3 and 6 years in the scheme, s/he receives 15% of the government contribution and investment returns generated by these contributions;
If the individual stays between 6 and 10 years in the scheme, s/he receives 35% of the government contribution and investment returns generated by these contributions;
If the individual stays more than 10 years in the scheme, s/he receives 60% of the government contributions and investment returns generated by these contributions.
The government matching contribution is paid every month into the pension account. If an individual makes an early withdrawal, he/she is not entitled to 100% of the government contribution and so the relevant percentage of government contributions and the investment returns generated by these contributions are withdrawn from the account.
In the automatic enrolment system, the government pays a one-time TRY 1 000 contribution for individuals who do not opt out within the first two months. The initial government contribution is vested once the employee is entitled to the pension. There is also an incentive to annuitize pension assets in the form of a subsidy equal to 5% of participants’ savings at retirement for those who choose a minimum 10-year annuity.
Social treatment
Employer contributions up to 30% of the minimum wage are not included in income subject to social contributions. No relief from social insurance contributions is available for individuals’ contributions.
No social contributions are levied on pension income received from the private pension system.
Tax treatment of pensioners
Public pension income is not subject to income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions are deductible from corporate income tax provided that the sum of contributions paid by employers to the individual pension system and personal insurance premiums paid by employees does not exceed 15% of the employee’s monthly wage and the monthly minimum wage. If the sum of the two exceeds the limit, the employer and the employee decide upon the priority of the deduction, i.e. deducting first the insurance premiums from the employee’s personal income tax or the employer contributions to the individual pension system. If, for example, the priority is to deduct insurance premiums from the employee’s personal income tax, the employer can only deduct from corporate income tax the difference between the insurance premiums and the overall limit.
United Kingdom
Structure of the funded private pension system
Workplace pensions include occupational pension schemes, group personal pensions and group stakeholder pensions.
Tax treatment of contributions
Contributions to registered pension schemes benefit from tax relief up to an annual limit (annual allowance). Individuals pay tax at the marginal rate of income tax on any pension savings they have in that tax year above the annual allowance.
Occupational pension schemes: Usually, the employer takes the pension contributions from the individual’s pay, before deducting tax. The individual only pays income tax on what is left. This system of giving tax relief is known as “net pay arrangement”. Employees that do not pay tax do not get tax relief on their pension contributions.
Other workplace pensions: The employer takes the pension contributions from the individual’s pay after deducting tax. The pension provider claims tax back from the government at the basic rate of 20% and the tax refund is paid in the pension account. Individuals paying tax at higher rate (40%) or additional rate (45%) can claim the difference through their tax return. The extra tax refund is not paid in the pension account. This system of giving tax relief is known as “relief at source”.
Personal pensions: The relief at source method applies. Individuals pay income tax on their earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate (the tax refund is paid in the pension account). Individuals paying tax at higher rate or additional rate can claim the difference through their tax return (the extra tax refund is not paid in the pension account).
The maximum amount of pension contributions that an individual can get tax relief on in each tax year is the highest of GBP 3 600, and 100% of the individual’s taxable UK earnings. Where individuals UK taxable earnings are less than GBP 3 600, they can get relief on their contributions only if the pension scheme uses the relief at source method.
If an individual has pension contributions (from both member and employer) in a year of more than GBP 40 000 (annual allowance for the tax year 2017-2018) the excess is subject to a tax charge (the annual allowance charge) that effectively limits tax relief given for the year. Individuals are allowed to make use of unused annual allowance from the previous three years.
The money purchase annual allowance (MPAA) applies to individuals who have flexibly accessed pension benefits and who make money purchase pension contributions. If the MPAA has been triggered (by taking income from a flexi-access drawdown plan or an uncrystallised funds pension lump sum), only GBP 4 000 (the MPAA for tax year 2017-2018) can be paid to all DC plans for an individual in any tax year before the annual allowance tax charge is applied. If the MPAA is triggered part-way through a tax year, only the contributions made after the trigger are tested against the MPAA. However, the total contributions and accruals in that tax year are also tested against the GBP 40 000 annual allowance. The contributions paid before or on the trigger date are measured against an alternative annual allowance of GBP 36 000 (GBP 40 000 - GBP 4 000). Those paid after the trigger date are measured against the GBP 4 000 MPAA. It is not possible to carry forward unused tax relief against the MPAA. Contributions and accruals in relation to a defined benefit plan made after the trigger date are tested against the alternative annual allowance.
Pensions tax relief is restricted by a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) over GBP 150 000 and who have an income (excluding pension contributions) in excess of GBP 110 000. The rate of reduction in the annual allowance is by GBP 1 for every GBP 2 that the adjusted income exceeds GBP 150 000, up to a maximum reduction of GBP 30 000. Where an individual is subject to the money purchase annual allowance, the alternative annual allowance is reduced by GBP 1 for every GBP 2 by which their income exceeds GBP 150 000, subject to a maximum reduction of GBP 36 000.
Although contributions can be paid after a member has reached the age of 75, they are not relievable pension contributions and do not qualify for tax relief.
Tax treatment of returns on investments
The income and gains from most pension scheme investments are not taxable. However, pension schemes do not receive a dividend tax allowance and income from certain investments, such as residential property, is taxable if the scheme is an investment-regulated pension scheme (i.e. a pension scheme where the investments can be directed by a member of the scheme).
Tax treatment of funds accumulated
There is a cap on the total amount that can be accumulated in a private pension plan that an individual can get tax relief on (lifetime allowance). This is currently set at GBP 1.03 million (uprated annually by the consumer price index). Individuals building up pension savings worth more than the lifetime allowance will pay a tax charge on the excess.
Pension savings are tested against the lifetime allowance when individuals take their pension benefits and on certain other key events:
Defined benefit schemes: pension benefits are tested against the lifetime allowance. This level of pension savings is broadly equivalent to an annual pension of GBP 50 000 if the individual does not take a lump sum, or GBP 37 500 if the individual takes the 25% maximum tax-free lump sum.
Defined contribution schemes: the value of the pension pot that is used to pay pension benefits is tested against the lifetime allowance.
The charge is paid on any excess over the lifetime allowance limit. The rate depends on how this excess is paid to the individual. If the amount over the lifetime allowance is paid as a lump sum, the rate is 55%. If it is paid as a pension, the rate is 25% (the pension income is then taxed at the individual’s marginal tax rate). The scheme administrator should deduct the lifetime allowance charge due from the pension pot before paying the pension.
Tax treatment of pension income
Annuities, programmed withdrawals and lump sums are all taxed as income at the marginal rate of income tax. Income from workplace and personal pension schemes is paid to the individual by the pension or annuity provider with tax already taken off via the PAYE (Pay As You Earn) system.
An individual can have a tax-free lump sum up to 25% of the total value of the pension pot(s) when they take a pension or annuity. DB schemes are deemed to have a pot size 20 times the annual pension to calculate the tax-free lump sum. Where DC schemes pay an uncrystallised funds pension lump sum, 75% of the value of the lump sum is taxable at the individual’s marginal tax rate.
Pension savings accessed before the normal minimum pension age (currently age 55) are charged a 55% rate (unauthorised payments charge and unauthorised payments surcharge).
Non-tax incentives
No such incentives.
Social treatment
There is no National Insurance contributions’ (NICs) relief on employee contributions. Employer contributions are excluded from earnings for both employer and employee NICs.
NICs are not levied on pension income.
Tax treatment of pensioners
The State Pension is taxed as income at the marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions to a registered pension scheme can be deducted as an expense in computing the profits of a trade, profession or investment business, and so reducing the amount of an employer’s taxable profit. There is no set limit on the amount that an employer can pay into a registered pension scheme.
United States
Structure of the funded private pension system
Tax treatment of contributions
There are different types of employee and employer contribution with different tax treatments. Employee contributions can be salary reduction/elective deferral contributions, catch-up contributions, designated Roth contributions or after-tax contributions. This document describes the federal income tax rules that apply to these types of contribution. These contributions are also subject to state income tax rules; the state income tax rules are generally the same as the federal rules, but there are some differences in some states.
Salary reduction/elective deferral contributions
Salary reduction/elective deferral contributions are pre-tax employee contributions to occupational pension plans. There is an annual limit on elective deferrals made to all plans in which the individual participates. If the employee’s total contributions exceed the deferral limit, the difference is included in the employee’ gross income (i.e. the excess contribution is taxed at the individual’s marginal rate of income tax). In addition, the excess amount (and the income earned on that amount) has to be withdrawn from the plan.
If the excess contributions are withdrawn by April 15 of the following year, any income earned on the contribution is reported as gross income for the tax year in which it is withdrawn. The withdrawal is not subject to the additional 10% tax on early withdrawals.
If the excess contributions are not withdrawn by April 15, they are subject to double taxation, i.e., they are taxed both in the year contributed and in the year withdrawn from the plan (at the individual’s marginal rate of income tax). These withdrawals could also be subject to the 10% early withdrawal tax.
Limit on elective deferral contributions depend on the type of plan:
Traditional 401(k), safe harbour 401(k), 403(b) and 457(b) plans: USD 18 500 in 2018.
Savings Incentive Match Plan for Employees (SIMPLE) 401(k) and SIMPLE IRA plans: USD 12 500 in 2018.
Salary Reduction Simplified Employee Pension (SARSEP): USD 18 500 in 2018 or 25% of compensation whichever is less.
The total amount the individual can contribute (elective deferral contributions and designated Roth contributions) to all his/her plans (not including 457(b) plans) is USD 18 500 in 2018.
Catch-up contributions
Certain plans allow participants 50 years old and over to make pre-tax catch-up contributions beyond the basic limit on elective deferrals. Different limits apply to these additional elective deferral contributions:
Traditional 401(k), safe harbour 401(k), 403(b), SARSEP and 457(b) plans: USD 6 000 in 2018.
SIMPLE 401(k) and SIMPLE IRA plans: USD 3 000 in 2018.
Individual Retirement Arrangement (IRA) plans: USD 1 000 in 2018.
403(b) plans: If permitted by the 403(b) plan, an employee who has at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organisation), has a 403(b) elective deferral limit that is increased by the lesser of USD 3 000; USD 15 000 reduced by the amount of additional elective deferrals made in prior years because of this rule; or USD 5 000 times the number of the employee’s years of service for the organisation, minus the total elective deferrals made for earlier years. When both the age-50 catch-up and the 15-year catch-up are available, the 15-year catch-up contributions apply first and count towards the overall limit on contributions, while the age-50 catch-up contributions extend this overall limit.
457(b) plans: special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years before the normal retirement age (as specified in the plan) to contribute the lesser of twice the annual limit (USD 37 000 in 2018); or the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age-50 catch-up contributions).
If an individual aged 50 or over participates in only one 401(k) plan that does not permit catch-up contributions, the USD 18 500 limit applies. However, if that individual participates in two 401(k) plans, s/he can contribute up to USD 24 500 (18 500 + 6 000) on aggregate even though neither plan has catch-up provisions. The USD 18 500 limit still applies to each plan.
Designated Roth contributions and after-tax contributions
Designated Roth contributions are included in gross income (but tax free when withdrawn if certain requirements are met) and are therefore taxed at the individual’s marginal rate of income tax. Roth contributions can be made to Roth Individual Retirement Accounts (Roth IRAs) and to 401(k), 403(b) and governmental 457(b) plans.
After-tax contributions are contributions from compensation that an employee includes in taxable income. After-tax contributions can be made to traditional IRAs and to other types of pension plans that permit these types of contribution.
IRA contribution limits
In addition to the contribution limits described above, limits apply to contributions to Roth and traditional IRAs. Contributions that exceed these limits are excess contributions. Excess contributions are taxed at 6% per year, as long as the excess amounts remain in the IRA. The excess contribution can be avoided by withdrawing the excess contribution and any income earned on it by the due date of the individual income tax return.
The maximum an individual can contribute to all of his/her IRA plans is the lesser of USD 5 500 (USD 6 500 including catch-up contributions); or the individual’s taxable compensation for the year. Although the same overall limit applies to both Roth and traditional IRAs, Roth IRA contributions may be limited based on the participant’s filing status and income (see Table A A.12).
Table A A.12. United States: Amount of Roth contributions allowed for 2018
Note: Calculation method to calculate the reduced amount: https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2018.
Contributions to a traditional IRA are made after-tax but may be deductible. The deduction may not be full if the participant or his/her spouse is covered by an occupational pension plan and his/her income is above certain limits, as described below (see Table A A.13 and Table A A.14).
Table A A.13. United States: Deduction limits for traditional IRA contributions if the participant is covered by an occupational pension plan (2018)
Table A A.14. United States: Deduction limits for traditional IRA contributions if the participant is not covered by an occupational pension plan (2018)
Deductible contributions to a traditional IRA are not allowed in the year an individual reaches 70½ or later years. However, an individual can make contributions to a Roth IRA, and can make rollover contributions to a Roth or traditional IRA, regardless of age.
Employer contributions
Employers can make matching contributions or discretionary/non-elective contributions. In both cases, employer contributions are not included in the individual’s gross income. There are limits to how much employers and employees can contribute on aggregate to each plan each year. The limits differ depending on the type of plan.
Overall limit on contributions
Defined contribution plans (including 401(k) plans): total annual contributions to all the accounts of an individual in plans maintained by one employer (and any related employer) are limited. Total annual contributions cannot exceed the lesser of 100% of the participant’s compensation; or USD 55 000 (USD 61 000 including catch-up contributions) in 2018. The limit applies to the total of all types of contribution, including elective deferrals, employer matching contributions, employer non-elective contributions and allocations of forfeitures.
SIMPLE 401(k) plans: smaller limits apply.
403(b) plans: the limit on the combination of all employer contributions and employee elective deferrals to all 403(b) accounts is the lesser of USD 55 000 (USD 61 000 including catch-up contributions) or 100% of the amount of taxable wages and benefits the employee received in his/her most recent full year of service.
457(b): annual contributions cannot exceed the lesser of 100% of the participant’s compensation; or the elective deferral limit (USD 18 500 in 2018, USD 24 500 including catch-up contributions).
Simplified Employee Pension Plans (SEP): contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation; or USD 55 000 in 2018. Elective deferrals and catch-up contributions are not allowed in SEP plans.
SIMPLE IRA plans: elective deferrals are limited to USD 12 500 in 2018 (USD 18 500 including catch-up contributions). Employer contributions are limited to either (1) a dollar-for-dollar match of employee contributions up to 3% of the employee’s compensation; or (2) a non-elective contribution of 2% of each eligible employee’s compensation.
Savers’ Credit
Individuals may receive a non-refundable tax credit for making eligible contributions to an IRA (traditional or Roth) or occupational pension plan (401(k), SIMPLE IRA, SARSEP, 403(b) or 457(b)). The amount of the credit (so-called Saver’s Credit) is 50%, 20% or 10% of the contribution up to USD 2 000 (USD 4 000 if married filing jointly), depending on the individual’s adjusted gross income (AGI).
Table A A.15. United States: Saver’s Credit (2018)
Note: All other filers include: single, married filing separately or qualifying widow(er).
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Withdrawals from pension plans must be included in taxable income (and therefore taxed at the individual’s marginal rate of income tax), except for designated Roth accounts.
Individuals must pay an additional 10% early withdrawal tax if the withdrawal occurs before the individual reaches 59½ years old.23
Most payments an individual receives from a pension plan (other than annuity payments) can be “rolled over” by depositing the payment in another pension plan within 60 days. By rolling over a pension plan benefit, the individual does not pay tax on amounts that are rolled over until they are withdrawn from the new plan.
Once reaching age 70½, the individual generally must withdraw a minimum amount (so-called Required Minimum Distribution, RMD) from his/her pension plan each year. It is possible to withdraw more than the RMD. If the individual fails to take the full amount of an RMD, the individual generally will have to pay a 50% excise tax on the amount not withdrawn as required. Under the RMD strategy, the percentage of financial assets that retirees can withdraw each year increases as they age, from 3.13% at 65 to 4.37% at 75, 6.76% at 85, and 15.78% at 100.
Roth IRAs do not require withdrawals until after the death of the owner. In a Roth IRA, a retiree can withdraw money, including the investment income, totally tax free if s/he has had the Roth IRA for more than five years.
Non-tax incentives
Employers are permitted to automatically enrol employees into a 401(k) plan and to automatically escalate elective deferral/salary reduction contributions. For a Qualified Automatic Contribution Arrangement, the initial automatic employee contribution must be at least 3% of wages, increasing by 1 percentage point annually, so that by the fourth year, the automatic elective deferral/salary reduction contribution is at least 6% of wages. Under this arrangement, the employer must match 100% of the first 1% of wages contributed by the worker, plus 50% of the next 5% of wages, for a maximum match of 3.5% of wages to each employee. Alternatively, the employer can make a non-elective contribution of at least 3% of wages to all eligible non-highly compensated employees.
Employees covered by the Federal Employees Retirement System (FERS) and members of the uniformed services covered by the Blended Retirement System (BRS) can participate in the Thrift Savings Plan (TSP) and receive matching contributions from their agency or service on the first 5% of pay they contribute every pay period. The first 3% is matched dollar-for-dollar, while the next 2% is matched at 50 cents on the dollar.24
Social treatment
There is no social contributions relief on salary reduction/elective deferral contributions. Social contributions include social security tax (6.2% of taxable earnings for the employer and 6.2% for the employee), Medicare tax (1.45% for the employer and 1.45% for the employee) and Additional Medicare tax (0.9% of wages in excess of USD 200 000 for the employee). Other employer contributions are not subject to social security and Medicare tax.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Social security benefits include monthly retirement, survivor and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable. To determine whether social security benefits are taxable, the individual must compare the base amount for his/her filing status with the total of one-half of his/her benefits, plus all his/her other income, including tax-exempt interest. If the total is more than the base amount, part of the benefits is taxable. The base amounts for 2018 are the following:
USD 25 000 for single, head of household or qualifying widow(er);
USD 25 000 for married individuals filing separately and lived apart for all of the year;
USD 32 000 for married couples filing jointly;
USD 0 for married couples filing separately and living together at any time during the year.
Generally, up to 50% of the social security benefits are taxable. However, up to 85% of the benefits can be taxable if either of the following situations applies to the individual:
The total of one-half of benefits and all other income is more than USD 34 000 (USD 44 000 if married filing jointly);
The individual is married filing separately and living with his/her spouse at any time during the year.
Incentives for employers to set up or contribute to a funded private pension plan
Although employers generally cannot deduct amounts provided to an employee until the year in which those amounts are included in the employee’s income, employers can deduct amounts contributed to pension plans (including elective deferral/salary reduction contributions, which are treated as employer contributions for this purpose) in the year that they are contributed to the pension plan.
The income tax deferral provided by pension plans is a particularly desirable benefit for highly compensate employees, including the working owners of smaller businesses and the executives of larger companies. Non-discrimination rules prohibit employers from providing significantly greater pension plan benefits to highly compensated employees than they provide to employees who are not highly compensated (referred to as non-highly compensated employees). However, the non-discrimination rules allow employers to provide somewhat better benefits to highly compensated employees than they provide to non-highly compensated employees. Limiting the ability of employers to provide pension benefits to highly compensated employees by the amount that they provide to non-highly compensated employees is intended to give working employee, owners and executives an incentive to establish, and make contributions to, pension plans for all employees.
Bulgaria
Structure of the funded private pension system
Tax treatment of contributions
Employee contributions into UPF and PPF are tax deductible. Employer contributions into UPF and PPF are not included in the employee’s taxable income.
Employee contributions into VPF and VPFOS are tax deductible up to 10% of the individual’s taxable income. Excess contributions are taxed for the individual (fixed income tax rate of 10%). Employer contributions are not included in the employee’s taxable income up to BGN 60 per month (excess contributions are taxed for the employee).
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension income from UPF, PPF, VPF and VPFOS is tax exempt. Benefits from UPF and PPF are tax free in all cases. Benefits from VPF and VPFOS are tax free only after the person becomes eligible for a pension.
Individuals can withdraw annuities, programmed withdrawals, lump sums or a combination of them from VPF in case of retirement or disability. If the individual is not in retirement or in a disability scheme, s/he can also withdraw assets but the part of withdrawal corresponding to contributions, which enjoyed tax deduction, is taxed at the rate of 10%.
Non-tax incentives
No such incentives.
Social treatment
Both employee and employer contributions are not subject to obligatory social contributions.
Pension income is exempt from social security contributions.
Tax treatment of pensioners
Pensions from the first pillar (public pay-as-you-go) are tax exempt.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into UPF, PPF, VPF and VPFOS are deductible from corporate income tax. For VPF and VPFOS, the tax relief is valid: i) for contributions not exceeding the amount of BGN 60 per month per employee and ii) if the employer does not incur any coercively enforceable public obligations.
Colombia
Structure of the funded private pension system
The Global Pension System (GPS) is a mandatory system with two competing schemes: (1) the public pension scheme and (2) the private pension scheme. Insured individuals must contribute to either the public or the private pension scheme and may switch membership every five years up to the last ten years before retirement.
Tax treatment of contributions
Mandatory contributions to the General Pension System paid by the employee and the employer are not considered as income for the employee and are therefore exempt from income tax.
Voluntary contributions made by the employee, the employer, or the independent worker are exempt from income tax provided these amounts, added to deposits into special savings accounts to support the purchase of housing (AFC), do not exceed 30% of the employee’s employment income or COP 125 992 800 (3 800 UVT) annually.25
In case these voluntary contributions are withdrawn by the affiliate within ten years, the withdrawn contributions are considered as taxable income in the year of withdrawal, except if this withdrawal is due to the affiliate’s retirement, disability or death, or the withdrawal is made for home buying.
The sum of all exempt income and deductions cannot exceed 40% of gross income less health and pension contributions up to 5 040 UVT, i.e. COP 167 106 240, for fiscal year 2018.
Tax treatment of returns on investments
The investment returns on pension fund assets are exempt from income tax.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
The sum of mandatory (public or private) and voluntary pension benefits is exempt from income tax unless the aggregate monthly benefits are over 1 000 UVT.
Non-tax incentives
The Beneficios Económicos Periódicos (BEPS) programme allows some of the lowest income groups to voluntarily contribute to GPS, as long as they are affiliated to either the private or the public component of the GPS. At retirement, individuals receive a 20% matching contribution from the government. The government matching contribution is only deposited in the pension account when the individual retires and therefore does not accrue interests during the accumulation phase.
For the public component of the GPS, individuals eligible for the BEPS programme are those who could not complete all the weeks required to become beneficiaries of a pension income and have reached the age of retirement, or those who cannot contribute on the basis of a minimum salary.
For the private DC component of the GPS, members who cannot accumulate the minimum capital to become eligible for the minimum pension guarantee are eligible for the BEPS programme.
Social treatment
Contributions to private pension funds come from a base salary and are therefore subject to social contributions.
Private pension income is subject to health care contributions. A rate of 12% is applied to pension benefits to contribute to the health care system, which is lower than the rate applied when the member is an employee (12.5%, of which 8.5% is paid by the employer). However, this 12% must be fully paid by the member.
Tax treatment of pensioners
The sum of mandatory (public or private) and voluntary pension benefits is exempt from income tax unless the aggregate monthly benefits are over 1 000 UVT.
Incentives for employers to set up or contribute to a funded private pension plan
Pension contributions made by an employer are tax exempt from its gross corporate income tax.
Croatia
Structure of the funded private pension system
Tax treatment of contributions
Contributions into open mandatory pension funds (5% of wages) are tax exempt. The maximum monthly earnings considered to compute contributions are HKR 48 120.
Employee contributions into open and closed voluntary pension funds are taxed at the marginal rate of income tax and matched by the government.
Employer contributions into closed voluntary pension funds are not considered as employee’s taxable income up to HRK 6 000 a year. The same limit applies to self-employed individuals saving for themselves. Excess contributions are considered as employee’s taxable income.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Income from open mandatory pension funds is taxable. Pensioners only pay 50% of the tax that would be due if that income was taxed as income from employment at the marginal rate of income tax.
Individuals can claim annuities from open mandatory pension funds if they are eligible to get a retirement pension from the public pension scheme. It is not possible to withdraw lump sums or programmed withdrawals from open mandatory pension funds. Early withdrawal is not possible.
Income from open and closed voluntary pension funds is tax exempt. Individuals can withdraw lump sums, programmed withdrawals, annuities or combinations of them from their open and closed voluntary pension funds if they are 50 years old or more.
Non-tax incentives
Member’s contributions into open and closed voluntary pension funds are matched by the government. The government matches 15% of the member’s first HRK 5 000 of contributions (for a maximum matching contribution of HRK 750 per year). Contributions above HRK 5 000 a year are not matched.
Social treatment
Contributions into open mandatory pension funds are part of the social contributions levied on employee’s earnings.
As of 1 January 2015, employers who conclude an employment contract for an indefinite period with a person younger than 30 years of age will be exempt from employer’s social contributions (that is, health insurance contribution, unemployment contribution and contribution for work related injuries – currently cumulatively 17.2%) for a period of 5 years from employing such a person. Therefore, only employee contributions will be payable (i.e. pension insurance contributions pillar I and pillar II).
No social contributions are levied on private pension income.
Tax treatment of pensioners
Public pension income is taxed at the marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into closed voluntary pension funds are not subject to corporate tax up to HRK 6 000 a year.
Cyprus
Structure of the funded private pension system
Tax treatment of contributions
Employee contributions into occupational defined benefit pension funds for public servants and into provident funds are tax deductible up to one sixth of the employee’s annual taxable income. This cap applies to the sum of tax-deductible contributions paid for defined benefit pension funds for public servants, provident funds, medical funds (up to 1.5% of employee’s income), social insurance, and life insurance (up to 7% of the insured amount). Excess contributions are taxed at the marginal rate of income tax.
Tax treatment of returns on investments
Returns on investments are not subject to income tax.
Interest income earned by provident funds is taxed at the flat rate of 3% (special contribution for defence).
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Pension benefits paid by provident funds only take the form of tax-free lump sums.
Non-tax incentives
No such incentives.
Social treatment
Contributions to private pension plans are subject to social contributions.
Social contributions are not levied on pension income.
Tax treatment of pensioners
Pension income from public pension schemes is taxed at the marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into occupational defined benefit pension funds for public servants and into provident funds are tax deductible from corporate tax.
Malta
Structure of the funded private pension system
Tax treatment of contributions
Employees who contribute into voluntary occupational and personal retirement schemes receive a non-refundable tax credit equal to 15% of the member’s contribution up to a maximum of EUR 150 a year.
Employer contributions into voluntary occupational retirement schemes are not considered as taxable income for the employee.
Employers can contribute into personal retirement schemes but receive no tax credit on their contributions and the contributions are considered as employee’s taxable income.
Tax treatment of returns on investments
Returns on investments (i.e. interests, dividends and capital gains) of any retirement fund or retirement scheme licensed, registered or otherwise authorized under the Special Funds (Regulation) Act or any Act replacing the said Act are tax exempt, except income derived from immovable property situated in Malta.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
Lump sums are tax free up to 30% of the accumulated assets. Above they are taxed at the marginal rate of income tax.
Other payment options are taxed at the marginal rate of income tax.
Non-tax incentives
No such incentives.
Social treatment
The social security contributions are calculated on the gross pay.
No social security contributions are deducted from the pension income.
Tax treatment of pensioners
Pension income from public pension schemes is taxed at the marginal rate of income tax.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into voluntary occupational retirement schemes are deductible from corporate income tax up to a maximum of EUR 2 000 per employee per year. In addition, employers receive a non-refundable tax credit amounting to the lower of 15% of the amount of contributions paid or EUR 150 for each employee in respect of whom the contributions are paid.
Romania
Structure of the funded private pension system
Second pillar private pension funds are mandatory for employees and self-employed persons up to 35 years old and voluntary between 35 and 45 years old.
Tax treatment of contributions
Contributions into mandatory private pension plans are tax deductible. They are 3.75% of gross earnings in 2018.
Employee and employer contributions into voluntary private pension plans are commonly capped at 15% of the employee’s gross earnings. Employer contributions are not considered as employee’s taxable income. Employee contributions are tax deductible up to EUR 400. Excess contributions are taxed at the fixed income tax rate of 10%.
Tax treatment of returns on investments
Returns on investments are not taxed.
Tax treatment of funds accumulated
There is no ceiling on the lifetime value of private pension funds. No tax applies on funds accumulated.
Tax treatment of pension income
There is no pay-out legislation yet. However the secondary legislation has been amended in order to allow members to receive their accumulated account in monthly instalments up to 5 years starting April 2018.
Pension income below RON 2 000 per month is tax free. This limit is common with public pensions. Pension income above this threshold is taxed at the fixed income tax rate of 10%.
Non-tax incentives
No such incentives.
Social treatment
Contributions into mandatory private pension plans are part of the social contributions levied on employee’s earnings.
Employee and employer contributions into voluntary private pension plans are not subject to social contributions.
No social contributions are levied on pension income.
Tax treatment of pensioners
Pension income (public and private) is tax exempt up to RON 2 000 per month, above it is taxed at the fixed income tax rate of 10%.
Incentives for employers to set up or contribute to a funded private pension plan
Employer contributions into voluntary private pension plans are tax deductible up to EUR 400 from corporate tax.
Notes
← 1. This description applies to the majority of pension funds. Some funds do not pay taxes on concessional contributions nor on returns on investment, but withdrawals from these funds are taxed.
← 2. Salary sacrifice contributions are when the employee and the employer make a valid agreement to pay some of future before-tax salary or wages into the employee’s superannuation fund.
← 3. People can only make non-concessional contributions to their spouse’s account if their spouse is younger than 65 or aged 65‑70 and working. No tax offset is available when the spouse receiving the contribution has exceeded their non-concessional contributions cap or their balance is AUD 1.6 million or more.
← 4. Rebate income is the aggregate of taxable income, adjusted fringe benefits amounts, total net investment loss and reportable superannuation contributions.
← 5. As municipal tax is levied on total income tax, the tax credit also reduces the taxable base for municipal tax.
← 6. Employers can offer individual company plans to specific employees, if they already offer a collective plan to all their employees. In that case, employer contributions cannot exceed EUR 1 525 in 2018 (EUR 2 440 in 2019). These arrangements are rare.
← 7. The employer must however pay an additional 4.4% contribution for the solidarity components.
← 8. The UF (Unidad de Fomento) is a price-indexed unit of account.
← 9. The UTM is a Monthly Taxation Unit.
← 10. It is not possible to withdraw a lump sum before the age of 60. Early withdrawal is possible as an annuity or programmed withdrawal up to 5 years before the official retirement age.
← 11. The retirement age is 60 for members affiliated between 06/05/2004 and 31/12/2012, and 55 for members affiliated before 06/05/2004.
← 12. There is a debate on how to classify the CSG. The French Law considers it as a tax because it does not entitle workers to any right or benefit (as opposed to social contributions). The Court of Justice of the European Union considers it as a social contribution because the money is only used to finance the social security system and is levied on wages (although not only). Following French interpretation, both CSG and CRDS are considered as taxes in this analysis, rather than as social contributions.
← 13. The tax authority checks whether individuals are entitled to the tax deduction. The tax authority first deducts the capped gross contributions (i.e. own contributions plus the subsidy, up to EUR 2 100) from the personal income tax base and calculates an adjusted tax liability. It then adds the amount of the subsidy to the adjusted tax liability and compares it with the regular tax liability (i.e. without deducting contributions). The tax relief corresponds to the difference between the two tax liabilities. If the difference is negative, the tax authority does not deduct contributions.
← 14. For contracts signed before 2011, the minimum age to receive payments is 60.
← 15. The tax credit rates include local income tax.
← 16. The rules described here correspond to those that will apply fully from 2020. There is a transition from the old rules to the new rules between 2016 and 2019, with the portion of the tax calculated based on the new rules increasing over time.
← 17. The Wage Claim Guarantee Act of Korea (WCGAK) guarantees payment of employees’ wage claims covered as preferential claims in the insolvency process.
← 18. In July 2018, the Parliament of Lithuania approved significant tax reforms that will take effect in 2019. In particular, the reform plans a shift from a fixed 15% personal income tax rate to a progressive income tax system.
← 19. The general deduction limit also applies to other expenses such as hospital and medical expenses, funeral expenses and mortgage real interests.
← 20. Individuals whose only taxable income is composed of interest income can consider the withholding tax as their final tax payment as long as these interests do not exceed MXN 100 000 per year.
← 21. G is the basic amount and is worth NOK 95 800 in 2018.
← 22. This percentage is obtained by applying 24% on the employer and employee contributions into the public pension scheme: 0.24×0.2435=5.844%.
← 23. Exceptions are listed here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions.
← 24. The agency or service also pays automatic contributions equal to 1% of basic pay for FERS and BRS participants. Participants do not have to contribute any money to their TSP account to receive these contributions.
← 25. The value of each tax unit (Unidad de Valor Tributario or UVT) is equivalent to COP 33 156 for fiscal year 2018.