Why is pen­sion sav­ings so com­pli­cat­ed?

The pension funds available to employees vary between professions. In some cases, it is mandatory to contribute to a specific pension fund that is tailored to the needs of its contributors.

Many people, however, have the option to choose which pension fund they contribute to. This often presents people with a complex choice, as there are many different funds, and various terms are thrown around that many don't fully understand.

We will try to simplify the process and explain some of these terms, which will hopefully help you choose a pension fund that suits your needs.

Mandatory Contribution

All working individuals aged 16-70 must pay a monthly percentage of their wages into a pension fund. The percentage is 15.5%, with 4% being the employee's own contribution and 11.5% being the employer's contribution. Upon retirement, people gain the right to receive their pension monthly. The contribution is deducted from wages before income tax is calculated. When the pension is paid out at retirement, it is taxed as earned income.

Supplementary Pension Fund

Supplementary pension savings are optional private savings which, as the name suggests, are in addition to the mandatory contribution. An employee can pay up to 4% of their monthly wages into such savings, and in most collective agreements, the employer contributes a 2% matching contribution. Part of the private savings can be used to purchase real estate or to pay down mortgage loans. Both options are tax-free.

Mutual Insurance

Mutual insurance is the portion of what you have paid that is jointly owned by those who contribute to the pension fund. With mutual insurance, you are guaranteed retirement pension and contingency pension due to disability or death. Mutual insurance also includes spouse's pension and children's pension. What is paid into mutual insurance, or joint ownership, and has not been paid out at death, is not inheritable.

Free Private Pension

Private pension is a type of mandatory pension savings that does not fall under mutual insurance. Private pension is fully inheritable and is freely available for withdrawal from the Free Pension Fund as convenient from age 60. You can withdraw the entire amount at age 60 or distribute the payment as convenient.

Bound Private Pension

Like free private pension, bound private pension is part of mandatory pension savings. The amounts earmarked for bound private pension are fully inheritable but are bound to monthly payments from age 60 to at least age 82. In the Free Pension Fund, bound private pension is only formed if the inheritable option in pension payments is chosen to maximize inheritability.

Designated Private Pension

When new pension payment laws took effect on January 1, 2023, the employer's matching contribution increased from 8% to 11.5%. This additional 3.5% that the employer pays into the pension fund on behalf of the employee falls by default into mutual insurance and joint ownership of the employee. However, it is possible to apply for this 3.5% to go into designated private pension, which is part of your private pension and can first be paid out at age 62, with payments to be distributed at least until age 67.

Spouse's Pension

A surviving spouse has the right to receive pension payments for at least two years after the death of a fund member. The conditions for the payments are that the fund member has contributed to a pension fund for at least 2 years of their life. The amount of payments is 50% of the accrued rights of the fund member, but in some cases, the amount can be projected based on estimated pension rights at retirement.

Children's Pension

Children's pension is paid for each child, adopted child, or legally adopted child of a fund member until the age of 18. It is also paid for stepchildren and foster children as well as unborn children of a deceased fund member. The amount of children's pension is a fixed monthly amount that changes annually.

We hope these explanations have made things a bit clearer. We always welcome you for consultation if you want to go over matters in more detail.