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Tax changes to Icelandic pensions could be 'hazardous'

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ICELAND - Proposals from the Icelandic opposition political party - the Independence Party - to alter the taxation of pension fund savings have been described as "hazardous" by both the Icelandic Pension Funds Association (IPFA) and the Confederation of Icelandic Employers (SA).

Under the recommendations from the Independence Party, the largest political party in Iceland, the taxation of pension savings could switch from an Exempt, Exempt Taxed (EET) system, to Taxed, Exempt, Exempt (TEE).

However, the IPFA and the SA said they consider these recommendations "hazardous" as the impact from these changes would be numerous and could have significant effects on the Icelandic economy.

A memo produced by the SA reviewing the proposed changes said the universal pension plan in Iceland has been in development for over 40 years and is the result of careful consideration and discussion to ensure it lasts for generations.

But it warned that a change in the tax system would lower pension payments from the pension funds and would result in higher payments from the Icelandic Social Insurance Fund because of a connection between income calculations and the corresponding deduction between the two Icelandic pension pillars.

It pointed out this interaction would need to be considered when changes are made that could lower the payments from the pension funds.

Hrafn Magnússon, managing director of IPFA, said: "Taxation of pension savings would be a step backwards from a funded system to a pay-as-you-go pension system, something opposite to what is needed in the light of the changes in the age of Icelanders."

He pointed out that in recent years the ratio of pensioners has been one pensioner to six working inhabitants, however in 2020 this is estimated to fall to 1:4, then to 1:3 in 2030 and 1:2 by 2050.

"In such circumstances, a PAYG system would not be sustainable and a pension based on a funded scheme is vital so that the tax rate would not become a burden to future generations."

"Furthermore, it is worth pointing out that because of the European Economic Space (EES) agreement and free flow of people within the EU, there are certain regulations in place concerning the transfer of pension privileges between countries. The recommendations of taxation on pension savings go against those regulations," said Magnússon.

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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