Pension reform prompts new regulations from 2018 – gain an overview here
Following the adoption of the first part of the pension reform, PFA’s consumer economist Carsten Holdum sums up the new regulations that are going to take effect from 1 January 2018.
New pension regulations will take effect in the New Year after the Danish Parliament passed a number of motions on 19 December 2017.
Increased payments on an old age savings plan when approaching retirement will make it more attractive to save up for retirement. At the same time, the payout period for instalment pension will be extended to 30 years, whereas the payout start for a pension plan will be tightened.
“It should always pay off to save up for retirement, and the Government’s total pension reform will help solve the complex issues with the interplay between public benefits and private pension plans that affect the majority of the customers. Now that the first part of the reform has been passed, it is important to learn how to optimise your pension payments already from the turn of the year,” says Consumer Economist Carsten Holdum.
New type of old age savings plan promotes financial saving closer to retirement
The first part of the pension reform that has just been passed deals with improving the terms that apply to the part of the pension saving which is accumulated close to retirement. This will be possible by allowing higher payments to be made to the old age savings plan as retirement approaches.
Previously, you could pay a total amount of DKK 29,600 per year without any set-off. In future, it will be possible to pay DKK 46,000 per year (2018). However, the increased payment is not accepted until you are less than five years from the public old-age pension. When you are still more than five years from public old-age pension, the annual cap on payments made to old age savings is DKK 5,100.
“A pension reform is much needed, as, although most people benefit from having a pension plan, this is not always the case when it comes to the part of the savings that you accumulate late in life. If you are not a top-bracket tax payer, then the new terms of old age savings will probably be an advantage to you, as the old age savings plan makes it possible for you to save up and not have your savings set off against the public benefits at the time of payout,” Carsten Holdum says.
You should bear in mind, however, that if you or your spouse receive public benefits (for instance housing benefit or pension supplement) which depend on the size of the household income, any payments made to an old age savings plan can increase the household income, as the payments are non-deductible, and thus lead to a reduction of these benefits.
Postponed payout requires extra attention in the event of job change
The first part of the pension reform will also change the scheduled time of payout of your retirement pension. It applies to pension plans established after 1 January 2018 that payout cannot be made until three years before the retirement age.
It applies to pension plans established before 2018 that you can start the payout five years before the public old-age pension becomes due. As for pension plans established before 1 May 2007, you can start the payout when attaining the age of 60.
“This will affect anyone who enters his or her first pension plan in 2018 and onwards. But it will also have significant implications for others who enter a new pension plan when they change jobs or when their employer signs with a new pension supplier. In these situations, you may keep the former and more favourable terms of payout if you immediately transfer your former plan to the new pension company,” Carsten Holdum explains.
Please note that plans established after 1 May 2007 require that the payout follows the public old-age retirement age, not as it is today, but as it will be in future. The current plan is to increase the age for public old-age pension with one year every five years – up until the public old-age retirement age is so high that the average payout period of public old-age pension will be approximately 15 years. The longer we live, the higher the public old-age retirement age will be.
The second half of the pension reform will be concluded in autumn 2018
The negotiations on the second half of the pension reform will focus on translating DKK 2.4 billion into a solution that solves the issues between public benefits and private pension plans. The funds are to be implemented during spring 2018 by the signatory parties to the agreement of the first half of the job reform. A motion has been submitted to implement a new tax deduction on pension payments.
Facts: Key elements of the new retirement agreement
- Five years before reaching the public old-age retirement age, you may pay up to DKK 46,000 (2018) per year to an old age savings plan. The same amount can be paid after reaching the public old-age retirement age. The payouts can be made as a lump sum, in instalments or as a life annuity at your own option.
- The maximum payment on an old age savings plan for younger age groups will be reduced to DKK 5,100 (2018). These age groups comprise everyone with more than five years to retirement.
- It applies to newly effected pension plans that the payout cannot begin until three years before reaching the public old-age retirement age.
- The payout period for instalment pension plans will be extended from 10 - 25 years to 10 – 30 years.
- The agreement will take effect on 1 January 2018.
- In addition, it was agreed as part of the Danish Finance Act 2018 that the equalisation tax on pensions will be discontinued in 2018 – two years ahead of schedule.