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Pension Reform 2021

Pension Reform 2021

For pension agreement clients

Your pension agreement has been concluded and you are satisfied with the way you receive your pension

If you have already entered into a pension agreement and are satisfied with the choice you have made, there is no need for further action on your part. The pension agreements you have concluded will continue to be active by default and your pension will continue to be paid.

If you have entered into a pension agreement where the pension will be paid until the end of your life, the appeal of this agreement is that no matter how long you live you can always count on your second pillar pension. You will also receive a pension if the amount you yourself accumulated has already been paid out.

Changes in taxation effective 1 January

As of 1 January 2021, tax incentives apply to the second pillar pension.

The lifetime pension and the fixed-term pension spread out over average remaining life expectancy will both become tax-exempt.

The tax rate for shorter fixed-term periods will drop from 20 per cent to 10 per cent.

The changes will apply automatically to the agreements already in place.

If you nevertheless feel receiving a regular pension is not really right for you

A pension agreement is a type of contract that cannot just be cancelled easily. If the lifetime pension or a fixed-term pension is not what you need, you can cancel your pension agreement extraordinarily in 2021, by submitting a declaration of cancellation of pension agreement to your insurer.

Applications can be submitted until 31 March 2021.

In terms of disbursement of pension money, cancelling the pension agreement is like leaving the second pillar – money will be paid out in September 2021. Until August (incl.), the pension will continue to be paid to you. If the funds have been paid and the contract has been terminated, after that you will no longer receive a pension from the insurance company.

Redemption value

If you decide to leave the pension agreement, the redemption value of your agreement will be subject to disbursement in September.

Redemption value is the amount of money that the insurance company will pay out if your contract is terminated prematurely.

Income tax at a rate of 10% must be paid on the redemption value, as the situation is no longer covered by the exemption for a lifetime pension and fixed-term pension spread out over average remaining life expectancy. The tax is withheld immediately upon payment of the redemption value.

Cancellation fee

When cancelling the agreement, be aware that usually, in accordance with the terms and conditions of the agreement, a cancellation fee will be charged. Consult your pension agreement as to whether you will be charged a fee and what the amount of the fee is.

Take time out to consider your decision

A pension agreement can be cancelled under exceptional conditions only from January to March 2021. Still, that is enough time to carefully consider whether you wish to do so. You should consider what your other income is, and whether that will be sufficient or if it will be important to supplement it with monthly income from the second pillar.

If you decide to withdraw the funds immediately, remember that the first pillar pension from the first pillar will be slightly less than for a person who never joined the second pillar.

It is certainly worth asking your insurance company for advice. Besides giving up the pension, you may also have the option of changing the conditions for payment of your pension.

Additional information on redemption value

If you decide to cancel the pension agreement and submit an application to your insurer for this purpose, they will calculate the preliminary redemption value of your agreement within five business days and notify you. This is an early estimate of the redemption value, as the true and final redemption value will be determined only in August.

Then it will be clear what the interest rates were on 31 July 2021. The rules for calculating redemption value are listed in the terms and conditions of your pension agreement. 

The redemption value is the present value of the future cash flows from your pension agreement, i.e. the current value of the pension paid in the future and contract fees, calculated based on the interest rate stated in your pension agreement and the currently valid actuarial data, minus the cancellation fee. If you decide to cancel the pension agreement and submit an application to your insurer for this purpose, they will calculate the preliminary redemption value of your agreement within five business days and notify you.

This is an early estimate of the redemption value, as the true and final redemption value will be determined only in August. Then it will be clear what the interest rates were on 31 July 2021. The rules for calculating redemption value are listed in the terms and conditions of your pension agreement.

The redemption value is the present value of the future cash flows from your pension agreement, i.e. the current value of the pension paid in the future and contract fees, calculated based on the interest rate stated in your pension agreement and the currently valid actuarial data, minus the cancellation fee.


Additional information on the cancellation fee

Insurance companies compete against each other to offer pension agreements and may use different strategies to enable a better pension.

For example, the signing fee and management fee that must be paid during the term of the agreement may be lower, and the cancellation fee may be higher.