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The pension reform’s new rules will apply from New Year 2018
Are you retired or approaching retirement, it may be beneficial for you to consider some adjustments to your contributions and disbursements.
The Danish Parliament has adopted a number of proposals which may be of significance to your retirement savings as of 1 January 2018.
The decision concerns the agreement entered into by the Danish Government and the Danish People’s Party (Dansk Folkeparti) in June 2017.
Key elements of the reform
- The retirement savings plan will be adjusted to receive a maximum of DKK 5,100 annually during a 5-year period prior to the state pension age. At present, the maximum limit is DKK 29,600. If there is less than 5 years until the state pension age, it will be possible to contribute a maximum of DKK 46,000 in 2018. This sum will increase gradually to a maximum of DKK 51,100 in 2023. The retirement savings will be disbursed as a lump sum benefit.
- In future the period of disbursement for annuity pension may be expanded to a maximum of 30 years – compared to 25 years at present.
- Disbursement of Kapitalpension and Aldersopsparing may be deferred another 5 years if the money is not required at the time. From now on the latest date for disbursement of the capital pension will be set to 20 years after reaching the state pension age.
- Applying to new pension schemes established after 1 January 2018, the disbursement can start 3 years before the state pension age versus now which is 5 years prior to the state pension age.
- The equalisation tax on pension schemes is to be discontinued in 2018. This is two years earlier than previously agreed and this decision forms part of the adoption of the Budget 2018.
- Early tax-free payment of early retirement benefits.
Changes to your retirement savings
The new rules applying to the retirement savings plan will make saving for retirement more appealing during the final years of service.
The retirement savings plan may be very beneficial for you as it will allow you the possiblity of building up your savings without suffering any deductions to your public benefits at the time of disbursement.
The retirement savings plan will allow you to build up a reserve without suffering a deduction in public benefits when your pension disbursements begin.
However, you must pay attention to the fact that the retirement savings plan will not grant you any right of deduction in your personal income tax Also, the contributions for the retirement savings plan will be reducing the level of any public benefits received by you or your spouse – for example housing benefit, early retirement benefit or pension supplement.
From 1 January 2018 the new amount limits become effective. If you contribute too much annually in relation to the new, reduced limit of DKK 5,100, this will be adjusted automatically on 1 January 2018 so you will not be affected by the new penalties. If there is less than 5 years until your state pension age and you want to benefit from the opportunity to contribute more, then please give us a call.
Annuity pension can be disbursed over several years
The maximum duration of disbursement applying to annuity pensions is raised from 25 to 30 years, meaning that you will be able to extend the period of disbursement if you anticipate your need for pension disbursements to continue for more than 25 years. This will also apply to you if you are already receiving pension disbursements. Indeed, it may be financially beneficial to you if you are retired or about to retire and:
- Your disbursements are affected by the top tax rate
- Your pension disbursements risk causing a reduction in benefits/public pension supplements
Changes apply for the entire calendar year which is why you need to contact us no later than October 2018 to receive our pension advice – the changes will then become effective from 2019. f you wish to extend your payout period, we recommend that you first get advice.
Newly established pension plans from 1 January 2018 will be disbursed later
Disbursements made from pension schemes that are established after 1 January 2018 can start three years before the state pension age, at the earliest. It used to be five years before the state pension age. Also, regarding pension schemes established before 1 May 2007 it will be possible to start the disbursement already when the age of 60 has been reached.
This change has effects extending beyond anyone who will be establishing their first pension scheme in 2018 or later. In case you change job or your workplace chooses another pension providing company, you will be able to maintain your option of early disbursement in your present pension scheme by transferring your pension scheme immediately to the new pension providing company.
If you are about to retire and are interested in a deferment, please contact us.
Voluntary payment of early retirement benefits
The reform makes it possible to opt out of the early retirement scheme and receive the paid-up benefits tax-free.
The tax-free payment applies to payments made since 1999 and until June 22, 2017. Thus, the maximum tax-free payment is approximately DKK 105,000 corresponding to the payments for 18 years or more. If you have paid in less than 18 years, the amount is smaller.
The opportunity applies to persons who have not yet reached the due date at the time of application. Thus, you have to be born in year 1956 or later.
- You must apply for your withdraw from the scheme. You can apply during the period 1 January to 30 June 2018. After 30 June, it is no longer possible to get your contribution tax-free.
- We recommend individual advice. A rule of thumb is that you should raise the scheme if you were born in the period 1964-72, and expect to work in early retirement years. If you do not expect to work during the early retirement years, it may be beneficial to accept the offer for payment if your pension savings are greater than mDKK 2½
More benefits on the way
In the Danish Parliament a majority has set aside a sum of DKKbn 2.4 to make contributions to pension savings even more beneficial for the individual. The sum will be earmarked in the spring 2018 and proposals have been introduced to implement a new tax deduction on contributions made for retirement savings. We are looking forward to informing you about this next year.