The absence of a maximum limit on personal third-pillar voluntary contributions, which have been considered tax deductible to the actual amount paid since 1 January 1999, in combination with a liberal system where a contributor deducts for tax purposes the voluntary contributions paid directly into another person’s third-pillar individual retirement account – with no requirement for employment or kinship relatons between the contributor and the beneficiary – seem to have recently brought about some internal revenue jealousy. While preserving the system of maximum-limit free deductibility of personal third-pillar voluntary contributions, the latest amendments in the tax legislation were aimed at modifying the Bulgarian model of solidarity between generations.
Under the third pillar of voluntary retirement provision it is possible for a pension fund member – physical person – to transfer once per annum the total or part of his individual account accumulation from personal contributions and the respective investment returns to family members’ individual accounts with a third-pillar voluntary pension fund. The elder family members could receive pensions for a certain period of time, pensions for life or planned withdrawals of that transferred accumulation. The income received from a third-pillar voluntary pension fund is taxable as ordinary income. Being retirees, elder family members most often fall into lower tax brackets than their young family members would otherwise. The more income the old receive from third-pillar voluntary pension funds, the less dependent they are on the government’s PAYG retirement programme.
Thus, after the tax amendment, the Bulgarian individualised redistribution scenario under the third-pillar pension arrangements was preserved in its nuclear form, ie redistribution between family members only. The difference from the pre-amendment regime is that third-pillar pension fund members – physical persons – are no longer allowed to enjoy tax incentives while paying contributions directly into another person’s individual account with a third-pillar voluntary pension fund. Transfers between accounts are based on individual choice and kinship relations between the contributor and the beneficiary and may be made only once per annum. This amendment is considered to have a substantial effect in a modern society where family relations are not that strong.
There is no change in the six-year-old system where legal entities – employers – pay third-pillar voluntary contributions and deduct them for tax purposes with a current maximum limit of 30 Bulgarian leva (E15) per month per insured person provided contributions are paid for the benefit of the legal entity’s managers and employees. The difference from the pre-amendment regime is that legal entities are no longer allowed to deduct third-pillar voluntary contributions for tax purposes while paying them for the benefit of physical persons who do not have employment relations with the contributing legal entity. Though this amended provision has not had much real practice, due to its recent introduction, it might have alleviated the social burden of rising unemployment had it been preserved in its more liberal form.
While economists, lawyers, politicians and mass media are trying to make the public look up to the second pension pillar giant milestone, current retirees are ill at ease: a more liberal second pillar does not make it much different provided it is compensated for by a less liberal third pillar. After all, retirees will not keep different pockets for their different pillar retirement incomes. There is some concern that the unemployed and those who do not have family members able and willing to support them will instinctively look down at their smarting bare feet every time they suddenly step on the latest tiny tax pebble. Nickolai Slavchev Stoikov