DENMARK - Changes proposed in the Danish government's tax reform will reduce the incentive to save for a private pension and create uncertainty for scheme members, according to the country's pensions and banking industry.

The main changes affecting pensions are a switch to effective advance taxation of capital pensions and a reduction in state old-age pension for people with private pensions.

Pensions industry association F&P said though the measures in the reform proposal were generally good, boosting the benefits of working, they had hit the benefits of saving.

Per Bremer Rasmussen
, managing director of F&P, said: "Those Danes who have sensibly saved for the whole of their lives now risk a tax blow on their pension return of more than 100%.

"Even young people are at risk of having to pay 60% tax on their pension return over 20 years. In this way we are punishing those who are doing the right thing by saving."

Commercial pensions company AP Pension said the tax reform made pensions more complicated.

Søren Dal Thomsen
, AP Pension's managing director, said: "It is a bit of hocus pocus, and it will not be easier to be a customer.

"We have several products with different tax structures, which are becoming more difficult to see through. A reform should ideally contribute to simplicity and an easy overview. That is not the case here."

The tax reform is heralded by the Social Democrat-led coalition government as promoting growth and jobs, and a vehicle for getting more people into work.

Key changes include an increase in the tax allowance for employees as well as in the threshold for the highest level of income tax. Two thirds of the tax cuts will be introduced in 2013, with the rest brought in gradually by 2022.

While the tax cuts are funded by means other than pensions taxation, the government is switching to effective advance taxation of capital pensions - kapitalpensioner - in order, it says, to counteract the immediate burden on public finances of the tax reductions.

Bremer Rasmussen criticized the proposal to bring forward the tax on capital pensions as an example of short-sighted thinking.

"Advance taxation is wrong economically - so you will not find a serious independent economist speaking in its favour," he said. "The government is making good enough money here and now, but will lack it for the big generations in the future."

The country's Bankers' association Finansrådet said the shift in capital pension taxation could create unnecessary uncertainty.

Jørgen Horowitz
, director of the association, said: "It is inadvisable to move pensions tax forward, since it could lead to an improvident financial policy.

"At the same time, changing pension savings conditions constantly gives quite the wrong signal. There is a need for calm in the pensions environment, so that individual savers can feel secure."

Contributions to capital pensions, which normally pay a lump sum in retirement, are currently tax deductible up to a certain limit, with tax levied at the payout phase.

But the government stated explicitly that the change would not result in higher tax on capital pension savings.

Savers will be able to transfer their capital pensions into a new type of capital pension, by paying a 37.3% charge, which is below the current 40% tax charged on capital pension payments.

Payments from the new capital pension, however, will be tax-free, although returns will be subject to a 15.3% pensions return tax.

The new capital pension will have a DKK27,600 (€3,590) annual contribution limit.
According to government figures, the capital pension tax changes will raise around DKK10bn in the first year of the reform, with revenues from the step reducing over the following years until 2022, by which time they would be zero.

In addition, the state old age pension - folkepension - will be changed. The current basic rate of DKK68,600 will be cut by DKK13,600 over five years,  with the pension supplement increased by a corresponding amount.
The pension supplement is offset against current payments from annuity pensions or life-long annuity pensions.