Starting in January, important changes affect pension saving schemes and tax deductions in the Czech Republic. These changes include new tax deduction limits, rules on employer contributions and investment options.
As of January this year, important changes to tax deductions applicable to state-supported retirement savings products came into effect. The limit for tax deductions was set at CZK 48,000, allowing taxpayers to choose more freely between various savings products. This new limit applies to all retirement savings products, including supplementary pension, supplementary retirement savings and life insurance, allowing taxpayers to decide how to distribute the limit among various products and optimise their savings strategy.
Tax support has also been extended to other financial products, particularly in the field of investments. These include supplementary state-contributed pension schemes, supplementary retirement savings, long-term care insurance, private life insurance and long-term investment products (LTIP). This extension allows for greater diversification and potential tax benefits for taxpayers.
For new contracts taken out since January, the minimum mandatory savings period has been extended to 120 months, doubling the previous requirement of 60 months. This change ensures that savings are properly managed, for example in the form of an annuity or lump-sum compensation, improving the sustainability of the pension system.
In addition, there has been a change regarding contributions and withdrawals: tax support now only applies to savings that exceed the maximum state contribution. As a result, it is possible to deposit amounts exceeding CZK 1,700, compared to the previous CZK 1,000. It is also possible to apply for a partial subsistence allowance within 24 months of turning 18, provided you have saved for at least 10 years. Previously, this was only allowed in the year of reaching the age of majority.
Under the supplementary savings scheme, it is now possible to have both transformed funds and participation funds due to the mobility of savings. The state wishes to incentivise Czech citizens to save in the newer funds, even though many still prefer the old transformed funds. These funds invest very conservatively, offering low returns but guaranteeing that one will never withdraw less than the amount invested.
Since January this year, there have been important changes for retirement savings. For new contracts taken out since January, employer contributions are added if the payment is made in a lump sum. If a saver decides to withdraw funds prematurely (called ‘early withdrawal’), the employer’s contributions will be taxed retroactively for 10 years. This means that the saver will have to include these contributions in his tax return and pay tax on them for the previous 10 years. Older employer contributions, on the other hand, will be taxed directly by the pension company.
Also from January, pension companies can offer a new type of fund called an ‘alternative participation fund’. This fund allows investments in riskier products, such as real estate, infrastructure or private equity funds, which can lead to higher returns. However, the management fees for this type of fund will be higher than for other funds. Finally, another novelty concerns the possibility of transferring funds from the old supplementary pension scheme. As of this year, it is possible to transfer these funds directly to a DPS (Supplementary Pension Savings) of another pension company. In the past, it was necessary to first transfer the funds to the DPS of the existing pension company and then transfer them to the DPS of a competitor, making the process more complicated.
Changes to State Pensioner Contributions
As of July, the state contribution to third-pillar pension savings will no longer be paid to savers who have obtained an old-age pension. This change reflects the intent of supplementary pension savings, or pension insurance, which is not conceived as a short-term or medium-term product with state support, but as a long-term savings instrument. The objective is to accumulate funds that can be used at retirement to mitigate a possible drop in financial income.
The report illustrates that, given the current conditions for entitlement to a state pension allowance, it is common practice for people who have obtained an old age pension and for those over 65 to continue receiving the state contribution. Currently, many participants, once they reach the age of 60, withdraw funds from their pension savings contracts every 60 months and then take out a new contract, repeating this cycle to continue receiving state contributions.
Under the new rules, the state contributions already required before the old age pension is paid will remain in the existing contracts. However, no new state contributions will be made once the old age pension is reached. Some pension companies have announced that they will compensate their customers for the loss of state support. In addition, pensioners who continue working can still deduct the full amount of the ‘pension’ deposit from the tax base from the first deposit made. Keeping the contract active may also be advantageous for those whose employer contributes to the pension.
Changing the amount of the state contribution
Aleš Poklop, president of the Association of Pension Companies of the Czech Republic, expects that within three years up to 80% of participants will optimise their savings according to the new rules. Starting in July, the minimum amount to be contributed each month to reach at least the minimum level will increase. If the monthly contribution is sufficient, more state support will be possible than under the current system.
The state contribution will be 20% of the monthly deposit, but will apply to amounts between CZK 500 and CZK 1,699. In order to obtain at least the minimum amount of the state contribution, which will be CZK 100 instead of the previous CZK 90, it will be necessary to deposit at least CZK 500, compared to the current CZK 300. The maximum contribution that can be received will also increase: the maximum obtainable will be CZK 340 per month if you deposit CZK 1,700 or more. Currently, with a deposit of CZK 1,000, you can obtain a maximum of CZK 230 per month. Savers who contribute more than CZK 1,150 to their pension will benefit from the new rules, as above this amount the state contribution will be higher than under the current rules. Conversely, those who save less will receive a lower contribution than under the current rules.
If savers wish to change the amount of their savings to benefit from the new rules, they will have to inform the pension institution of the change. In order to start receiving the increased state contribution from the beginning, of July 2024, it will be necessary to notify the pension institution of the new contribution amount by June if possible. In July, the pension institution will send the money to the pension company according to the new settings and the state will send the contribution to the pension company.
Sources: https://www.mesec.cz/clanky/jak-se-od-cervence-zmeni-penzijko-prinasime-souhrn-zmen/#google_vignette
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