The Danish government has unveiled further details of its new tax reform plan aimed at improving incentives for private pension saving – but the pensions industry has highlighted flaws in the proposal.
The plan was built on a proposal published earlier in the summer entitled More Years on the Labour Market. It contained measures to increase the advantages of saving for private pensions and reduce the number of people who save little or nothing into a pension.
Peter Damgaard Jensen, chief executive of pensions management firm PKA, said: “You could certainly have created more of an effect for the same money by targeting the deduction more towards those people who are hardest hit by the interplay problem.”
Damgaard Jensen said it was also unfortunate that the new model was so complicated to understand.
“Many of PKA’s members will surely think it is hard to understand what the whole thing is about and what the consequences are,” he said.
The plan was outlined yesterday as part of the government’s proposal to reduce taxes on work, cars and pensions by DKK23bn (€3bn) called “JobReform II”. The reform was aimed at extending the effects of the country’s economic upturn seen over the last few years.
It proposed increasing the amount that can be saved into an old-age pension plan (alderspension) in the last five years before state pension age to DKK50,000 (€6,720).
In the new plan, the government detailed how it would use the DKK2.5bn sum had earmarked for resolving the long-standing “interplay” problem in the pensions taxation system. It refers to contributions made later in life that do not pay off because of the way pension payments are offset against state benefits in retirement.
In yesterday’s announcement, the government said the DKK2.5bn would be used to increase by 3.9% the tax value of the deduction for pension contributions for people with more than 15 years to state pension age. For those with less than 15 years to go, the increase would be 7.7%.
The new system is to take effect from 1 January next year.
Per Bremer Rasmussen, chief executive of the Danish Insurance Association, Forsikring & Pension, said: “It is absolutely crucial that we make it attractive for every to save up for a pension. So I am glad the government is doing something about that.”
But the association said the new system introduced an extra complication with the new tapered job deduction for low-paid people. This, it said, reduced the incentive for blue-collar workers to save for a pension – therefore creating another interplay problem.
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