DENMARK - Forsikring & Pension (F&P), the Danish insurance and pensions industry association, has branded proposals to impose a ceiling of DKK100,000 (€13,407) a year on Danish pensions contributions as "unnecessary and damaging".

The proposal came from the "wise men" of Denmark's Economic Council in their spring 2008 report on the country's economy, as they claim top-rate taxpayers could almost halve their rate by channelling assets into a pensions account under the current terms.

In the report, the four independent chairmen of the council - an official advisory body established in 1962 - recommended a limit should be placed on the annual pension contributions of DKK 100,000 or up to 20% of gross earnings.

In order to make the system flexible for those with fluctuating earnings, the 20% limit should be calculated on the basis of the average gross earnings during the latest three years, it said.

"Individuals who pay the top-bracket marginal income tax rate and have large net wealth can reduce their effective tax rate on capital income by up to 44 percentage points by redistributing assets from outside the pensions system to a pension savings account," the Economic Council report said.

"While arguments can be made in favour of a lower tax rate on pension savings accounts, a capital tax rate reduction of this magnitude invites tax arbitrage," it argued.
But F&P countered this by noting the committee had failed to show the system was being exploited.

"The wise men's report does not in any way document an abuse of the pensions rules that justifies a ceiling on pension contributions," said Carsten Andersen, deputy director of the association.

"None of the arguments put forward for a pensions ceiling stand up to closer scrutiny," he said, citing an analytical report the association has produced in response to the proposal.

According to the council's report, a ceiling on pension contributions was supposed, among other things, to prevent tax speculators taking out loans and paying the capital into a pension, the association noted. However, pension savings did not give a certain profit, it said.

"We don't want to support tax speculators, but the wise men's report completely misses the point as there are costs involved in financing pension savings with loans. Getting a pension from borrowed money is not a good tax dodge. The sum only adds up if one is willing to run a risk with one's pensions investments," said Andersen.

A DKK100,000 ceiling would hit a large group of people who are quite genuinely saving to create security for their old age, the association said, and it would also cost the state money, according to F&P.

A ceiling might prompt high earners to choose to save for their retirement through real estate, it said, adding if this happened, it would cost the state money because residential property is taxed at a much lower rate than pensions.

In its analytical report, F&P said just over 3% of people between the ages of 18 and 64 in Denmark would have exceeded the DKK100,000 or 20% limit if it had been imposed in 2005. The median of those who paid in more than the limit was 25%, it said.

"The self-employed in particular, and people with long periods of higher education were over-represented in those people with high contribution levels," the F&P report's authors said.