Section 9: Pension investors

9.1. While saving

9.2. When pension savings are paid out

9.1. While saving

Different rules apply for the different forms of private pension schemes. This is true for both to the income received from pension savings and for contributions paid into the pension savings scheme.

Tax rules do not prevent combining various forms of pension savings. Therefore pension savings can be organised to suit both the individual’s finances while saving up and the amount he or she expects to receive on retirement.

Having an employer-administered scheme does not prevent people from taking advantage of the tax privileges of capital pension schemes. Savings can be placed in both pension types.

Capital pension

A capital pension is a pension savings scheme whereby the money saved up is paid out as a lump sum upon retirement.

The tax rules for capital pensions differ from other private pension schemes. There is a cap on the maximum tax deductible contribution allowed. At the same time the value of the tax allowance for contributions to capital pension schemes is also limited.

You can only deduct annual payments of up to DKK 44,500 from your personal income. For other pension schemes, the same limit does not apply.

Contributions to capital pensions cannot be deducted from top-bracket tax. Therefore, payments to a capital pension have less deductible value than payments to instalment pensions or pensions that provide a regular income. The deductible value for contributions to a capital pension can maximum be 45% compared with up to 60% for other types of pension savings schemes.

Pension schemes providing a regular income

Contributions made by an individual to pension schemes that provide a regular income can be deducted from personal income. As the allowance can be deducted from the top tax rate, it has the highest possible tax value. If an employer makes the contribution, the individual will not receive the allowance but neither is the contribution included in taxable income.

If a person chooses a pension savings scheme that provides regular income, the only restriction is that the deductible amount must not exceed personal income. For most people, this means that the maximum contribution to this type of pension scheme is limited to the size of their wage income.

Many of the pension savings schemes that form part of labour market agreements are schemes that provide a regular income. They are typically worked out so that the employer pays 2/3 of the total contributions while the employee pays the final 1/3.

Instalment pension

An instalment pension is a savings scheme where the amount saved is paid out in instalments over a period of at least 10 years.

There is an allowance in personal income for contributions to an instalment pension. There is no limit on the size of the maximum contribution, apart from the size of personal income, which the contribution must not exceed. A requirement of instalment pensions is that the contributions to the scheme must be made over a period of at least 10 years.

Taxing regular returns

The money paid into a pension savings scheme gives a return that, together with the contributions, increases the size of the savings.

The returns are generated by dividends and capital gains on shares, and interest and capital gains from bonds, and rents and profits from sales of property in which the pension funds are invested.

The returns are not paid to the saver but are assigned to the pension scheme.

All returns from the pension savings are taxed at 15 %. This rate applies both to interest and share returns. However, for share returns, corporate tax of 25 % will have been paid before the money is allocated to the shareholders.

9.2. When pension savings are paid out

Capital pension

A capital pension is paid out as a lump sum. The amount saved cannot be paid out until the recipient is 60 years old. When the money is paid out, it is taxed at 40 %.

Pension savings with regular income and instalment pensions

Payments from pension schemes providing a regular income and instalment pensions are taxable in the same way as wages and the national pension. The same applies to payments from the labour market supplementary pension scheme (ATP) and from the special pension savings (SP).  However, there is the difference that labour market contribution of 8 % must be paid on wage income, whereas these contributions are not levied on payments from pension schemes and from the national pension.

Premature termination

Pension savings can be withdrawn at any time, but if tax privileged pension savings are withdrawn before the person is 60 years old, 60 % tax is payable. This does not apply in cases of life threatening illness. In these cases, tax is 40 %.

Note: Figures for an average municipality with a tax rate of 25.3%.