Expansion of the third pillar of retirement provision

After the (rotten) first pillar of state pension provision in the form of the pay-as-you-go system was attempted to be shored up with rather inadequate means through the Company Employee Pension Act in the form of exclusively employer contributions, and the pension system is evidently already up to its neck in water, the third pillar of pension provision in the form of subsidised retirement provision further extended for everyone (Section 108g – of the Income Tax Act).
Both support measures have been effective since 1 January 2003. The following explanations are confined exclusively to the legislator's latest creation.

:: Subsidised pension provision
From 1 January 2003, this pension model applies to all individuals subject to unlimited tax liability who have not yet reached the age of 62. This allows self-employed individuals to also benefit from tax-favoured retirement provision.

:: Tax reliefs
– Contributions eligible for tax relief
The pension contribution allowance is calculated as a certain percentage of the maximum contribution limit, as defined in more detail in the Act. In 2002, the maximum contribution limit eligible for the allowance is €1,801,– per annum, with the tax-free allowance amounting to 10 % (i.e. €180,– per annum).
As a result of the interest rate cut to 9.5 % and an increase in the maximum contribution bases, the tax-free premium is expected to fall to around €175,– from 2003 onwards. Contributions in excess of this amount are possible.

– KEST-exempt investment income
The capital gains earned by the occupational pension scheme are exempt from capital gains tax.

– Tax-free pension
This can be claimed at the earliest after 10 years and upon reaching the statutory retirement age.

:: Prerequisite for the care bonus
The tax-free premium for supplementary pensions is only payable if an irrevocable declaration of a 10-year capital commitment is made. The taxpayer cannot access their capital within this period.

:: Availability of funds after the expiry of the lock-in period
– Payment of all claims
– Transfer to another pension scheme
– Transfer to an insurance company for the purposes of supplementary pension insurance, or
– to a bank for the purpose of acquiring pension investment funds or
– to a pension fund.

:: Tax consequences of enforcement measures
– Payment of all claims
Half of the premium received must be refunded, and the tax-free investment income received is taxable at a rate of 6 %. The capital guarantee lapses.

– Use for long-term financial planning in the form of a pension
Pension payments are only tax-free to the extent they are attributable to contributions that triggered the pension premium at the time of contribution. If the contributions at that time were higher than the base for the pension premium, then these payments are subject to tax.

:: Investment principles
– At least 60 % of the funds must be invested in shares.
– No profits may be distributed (retention principle)
– The payout in the form of a pension must not be less than the sum of the contributions paid in, plus the pension bonus (capital guarantee)

:: Transitional arrangement
– The previous Pension provision scheme In accordance with Section 108a of the Income Tax Act (contributions up to €1,000,– per annum), this provision will expire on 1 January 2004.
– For pension investment funds under Section 108b of the Income Tax Act (EStG), it is to be made possible to switch to the new ‘Zukunftsvorsorge’ scheme in 2003 and 2004.

:: Critical concluding remark
The sudden change in the long-term framework conditions for setting up a tax-advantaged private pension scheme has rightly been criticised, particularly as the tax-advantaged pension scheme – which has only been in force since 2000 – and supplementary pension insurance are already being rendered obsolete by tax-advantaged pension investment funds. Another point of criticism is the requirement to invest at least 60 % of the funds in shares, which banks and insurance companies consider too high to be able to guarantee capital preservation. Further changes are therefore likely in this regard, such as a reduction in the equity allocation to 40 %. n

Image: © Yanik Chauvin - Fotolia