The future of the pension system is uncertain. This is mainly due to demographic changes in the form of an ageing population and low birth rates. It is therefore necessary to take the situation into our own hands and provide for our retirement at least partly on our own. State-supported supplementary pension schemes and supplementary pension savings, which we will look at in detail in this article, can help you to do this.
In the past, the pension system consisted of three pillars. However, the second pillar based on pension savings has been abolished and today the whole system is based on the first and third pillars only.
The first pillar is the cornerstone of the Czech pension system and is pension insurance based on pay-as-you-go financing. Participation is compulsory and operates on the basis of regular contributions from wages and other types of income.
The third pillar is voluntary and consists ofsupplementary pension schemes and supplementary pension savings. It is designed to enable people to increase their pensions beyond what the first pillar provides through their own efforts. It is therefore individual pension saving, supported by the state through financial contributions and tax relief.
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Supplementary pension insurance was introduced in 1994 as a state-regulated long-term savings product. The supplementary pension insurance contract could be concluded until 30 November 2012. Since 2013, the supplementary pension scheme has been transferred from a pension fund to a transformed fund managed by pension companies.
The transformed fund operates on the basis of conservative investments in safe sources. This means that the money itself does not appreciate much in value, but at the same time clients are guaranteed not to make a loss. The original conditions, e.g. state contributions and tax advantages, still apply to pension savings.
Pension reform has become a hot topic in recent days. It should bring a number of changes, including raising the retirement age and reducing pension growth. What other changes will it bring? Find out in our next article.
State support for supplementary pension schemes is provided depending on the contributions of the clients themselves. How exactly does this work?
Your employer can also contribute to your supplementary pension scheme, how does this contribution work and what are the benefits?
As we have already said, the annual contribution to pension savings up to CZK 50,000 is exempt from income tax and social and health insurance is not deducted. This ultimately means a saving of 11.6% compared to if the money were paid directly to the employee.
Contributions to superannuation or pension savings are one of the most popular work benefits. Read on to find out what other benefits you can get and what they are in the next article.
In addition to contributions from the state, superannuation is also supported by tax relief. If you save at least CZK 1,700 per month, your tax base will be reduced by 12 times the amount above this threshold. So if you save, for example, CZK 2,000 a month, you will save a total of CZK 540 in tax. The maximum tax deduction is CZK 7,200 if you save CZK 5,700 each month.
There are a number of situations where you are entitled to a pension payment:
You can have the whole amount paid to you in one lump sum if you are entitled to a supplementary pension (e.g. old-age or disability pension) and you have paid into the supplementary pension for a minimum period (3 or 5 years). You will receive the full amount, including state contributions and earnings. However, you must take into account that the proceeds and the employer’s contribution will be taxed at 15 percent.
You can usually only draw your pension at age 60 and if you have saved for at least 5 years. However, the specific age and period of saving depends on the particular pension plan.
All your contributions and the state’s contributions are paid and the amount is not taxable, even including employer contributions. If you keep the amount in payment for at least 10 years, you will not be taxed on the proceeds.
When to retire? It depends not only on your age, but also on how long you have been paying your pension. You can read more in our article.
A supplementary pension may also be paid if you are awarded an invalidity pension and have completed the compulsory period of insurance. Again, the specific conditions depend on the pension plan.
The payout can be a lump sum or a regular annuity. An appreciation of the proceeds is also part of the final amount. If you choose an annuity, neither the proceeds nor the employer contribution are taxed, otherwise 15% is taxed.
You are only entitled to a retirement pension if you have it in your pension contract. The amount paid out also depends on what is in your contract, but usually 50% is paid.
It is possible to have your pension paid after 15 years of contributory pension payments, again either in a lump sum or in regular monthly payments. In the case of a regular payment, again, neither the income nor the employer’s contribution is taxed.
A severance payment is there for when you need the money urgently. The money you have saved from your pension can be paid out after just one year of saving. However, government contributions will be deducted from the amount and you will also have to pay 15% tax on the earnings and employer’s contribution. If you’ve claimed tax relief, you’ll have to pay it back.
A survivor’s pension may be paid to you on the death of a client who has named you as a beneficiary in their pension contract. However, this client must have paid into the supplement for a set period of time, which depends on the specific pension plan (most often three years). If you keep your payout regular for at least ten years, you will not be taxed on the proceeds.
Cancellation of a superannuation plan is on a withdrawal basis. However, in this case you will lose the proceeds and the employer’s contribution will be taxed at 15%. In addition, if you have claimed tax deductions, you will have to tax them retrospectively. If you were to cancel your pension before you reach the vesting date, you will lose the proceeds.
However, you don’t just have to cancel your pension completely, you can also break or defer it. The specific terms and conditions depend on the particular insurance company you have a pension with. However, cancellation is usually possible after three years of supplementary insurance.
When you discontinue , your obligation to pay monthly contributions for a set period ends. You also do not receive contributions from the state during this time and are not entitled to any returns. Nor does this period count towards your total period of insurance.
The deferral works by not paying the premium for a set period of time, but then paying the amount afterwards. During the deferral period, you are not entitled to state contributions or proceeds, but this period counts towards the total period of insurance.
Self-employed pensioner: how much do you actually pay and how much pension do you get? You can find the answer to this in the next article.
Supplementary pension savings is a new product created in 2013, which is in a way a successor to the older supplementary pension insurance. It follows similar rules to the supplementary pension scheme – it includes state contributions, tax deductions or employer contributions. However, unlike a pension, it is more flexible and you can earn more but also lose more.
The conditions for receiving a state contribution are similar to those for a pension. You must pay a minimum of CZK 500 per month. The state contribution increases here in the same way as for the pension scheme, which you can see in this table:
| Your monthly contribution | Contribution from the state |
|---|---|
| Less than 500 crowns | 0 crowns |
| 500 crowns | 100 crowns |
| 600 crowns | 120 crowns |
| 700 crowns | 140 crowns |
| 800 crowns | 160 crowns |
| 900 crowns | 180 crowns |
| 1 000 crowns | 200 crowns |
| 1 100 crowns | 220 crowns |
| 1 200 crowns | 240 crowns |
| 1 300 crowns | 260 crowns |
| 1 400 crowns | 280 crowns |
| 1 500 crowns | 300 crowns |
| 1 600 crowns | 320 crowns |
| 1 700 crowns and more | 340 crowns |
You must also be a permanent resident of the Czech Republic or the EU or have Czech health or pension insurance. Your age does not matter. If you are a parent, you can also apply for state support for your minor children’s pension savings. If you save for your child for at least 10 years, your child can withdraw up to a third of the money saved at 18.
Your employer can also contribute to your pension savings, which is worthwhile for both you and them. The annual contribution ofup to CZK 50,000 is exempt from income tax and social security and health insurance is not deducted, which ultimately represents a saving of 11.6% compared to the amount paid directly.
Employers, on the other hand, can benefit from a tax advantage because contributions to supplementary pension schemes are a tax-deductible expense. This reduces their income tax base and saves further on social security and health insurance contributions for employees.
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The conditions are again the same as for supplementary pensions. This means that you can also claim tax relief on your pension savings. If you regularly save at least CZK 1,700 per month, your tax base will be reduced by 12 times the amount above this threshold. For example, if you save CZK 2,000 a month, you will save a total of CZK 540 in tax. The maximum deduction is CZK 7,200 if you save CZK 5,700 per month.
The payout options for pension savings differ from supplementary pension schemes in several respects. Let’s take a look at when you have the option of having your savings paid out:
You can take a lump sum if you are at least 60 years old, have saved for at least 5 years and have a contract until 2023. If you have a contract after 2023, then you must have saved for at least 10 years.
In this case, you will be taxed on the income and the employer’s contribution of 15%. However, you will not be taxed on the employer’s contribution if you took out the contract after 2023.
You can also have the amount paid to you gradually each month. The conditions for earning this pension are the same as for a lump sum – you must be at least 60 years old and have 5 or 10 years of savings under your belt.
You can have your pension paid out for a minimum of three years and the minimum amount is CZK 500. Unpaid money continues to appreciate.
In this case, the employer’s contribution will not be taxed and if you keep your pension for at least 10 years, then the returns will not be taxed either.
Do you plan to continue working in retirement? Read on to find out what to do in retirement.
It is also possible to have your pension paid out as a regular pension if you have reached the third degree of invalidity and have met the minimum saving period of three years. No portion is taxed.
Here too, the condition of having the pension paid for at least 3 years and the minimum amount paid is CZK 500 applies. At the same time, there is also a condition to be paid out at least four times a year.
Pre-retirement in the form of regular pension payments can be taken five years to two years before your retirement age. However, you must meet the minimum savings period condition (5 years for contracts taken out no later than 2023 and 10 years for contracts taken out after 2023). You also need to save enough money.
You are only taxed on the proceeds and the period of pre-retirement income does not affect the taxable base for the standard retirement pension.
You become entitled to a retirement pension after you have saved for at least two years. However, government contributions will be deducted from the amount and you will also have to pay 15% income tax and employer’s contribution. If you have claimed tax relief, you will have to pay it back.
If you’ve saved money for your child’s pension for at least ten years, they have the option to withdraw up to a third of this money when they turn 18 (within two years).
You can terminate your pension savings on a withdrawal basis. However, this is an early termination of the contract and you will lose your state contributions. However, you will be left with the proceeds of the amount you have saved. However, the earnings and the employer’s contribution will be taxed at 15%. In addition, if you have claimed tax deductions, you will have to tax them retrospectively. At the same time, you only have the option to interrupt your pension savings for a certain period of time.
However, if you were to cancel your pension savings before you reach your withdrawal entitlement, you will lose the proceeds.
Let’s conclude with a summary of the main differences between the two types of savings:
Superannuation and supplementary pension savings are key tools for individual retirement provision. Supplementary pensions are characterised by a conservative investment strategy with a guarantee of non-negative appreciation, while supplementary pension savings offer greater flexibility in investment strategies and the potential for higher returns, but at the cost of increased risk.
Both products offer different payout options, ranging from a lump sum to a regular pension to a retirement or survivor pension. In addition, supplementary pension savings allow you to take advantage of pre-retirement. Early termination of savings is associated with a loss of state contributions and taxation of the proceeds.
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