DENMARK - Thousands of Danes may be forced to stop or lower their payments into retirement savings if the government's gets approval to reform tax laws.

Economist Las Olsen from Danske Bank said the move will only affect affluent Danes who already have solid retirement savings but those individuals who do invest a lot of money towards their retirement savings each month will be hit hard as they will be required to pay an additional tax on pension payments.

The government has announced it will impose a "compensatory tax on pension payments of over DKK284,000 (€38,123)" a year between now and 2043 to make up for a lower rate of income tax the government is introducing.

However, this means the incentive to save more for a pension is lessened if retirement is before or at 2043, assesses economist Las Olsen.

"This will make it less attractive to save for a large group of people," said Olsen.

"First of all, the tax benefit will be less when the top rate of tax falls and, furthermore, they will be affected by the compensatory tax for the payment if they retire before 2043," he continued.

The top marginal rate of income tax is being cut from 63% to 55.6% by 2011 in a bid to create fiscal stimulus, so the compensation tax is apparently being set up to ensure there is no reduction in the tax on pension savings while the new level of higher tax credits are being introduced.

This higher-rate tax on pensions will amount to 7.5% in 2010, 8% in 2011 but will then be phased out by a quarter percentage point annually until it is finally gone in 2043.

"It is unfortunate and highly complicated for the tax system," said Olsen.
Forsikring & Pension, the Danish Insurance Association (DIA), has also warned the government's proposals to impose an individual 8% tax on annual savings will undermine the pension system.

The DIA claimed these changes would lead to more people taking early retirement as it claimed once they reach a certain age for every DKK100 of pension saving it would actually only be worth DKK 92.

Per Bremer Rasmussen, chief executive of the DIA, warned an individual tax on pensions is "a direct threat to the mandatory occupational pensions", which are the foundation of the pension system Denmark has built up over the last 20-30 years, as pension schemes will have to advise every Dane who is approaching the limit of DKK284,000, whether they should stop saving for a pension.

The DIA claimed the reforms would create a parallel tax system which only affects retirees, creating uncertainty about the pension system.

It instead suggested if the government wants to introduce a temporary tax it should be reduced "significantly faster, for example over four years", rather than at a quarter percent a year for 32 years.

Rasmussen said the tax would mean people could no longer save for retirement without constantly having to check how close they are to the allowed limit, and argued "people will stop their retirement savings, go into earlier retirement or buy a holiday home as savings" in a bid to avoid paying the tax.

He added while the reform would make little money for the Treasury, as people would change their behaviour to avoid the tax, it would "create a worse pension system".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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