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Self-administered pensions came into effect on 1 April 2017 abolished. The transitional arrangements may remain in place up to and including 31 December 2019 are applied.
So, if you still have a self-administered pension, don’t miss your last chance!
If necessary, take action before 1 January 2020.
Self-administered pension scheme
Just like a “normal” employee, the managing director and majority shareholder (DGA), who works for his (or her) own private limited company, may, until 1 April 2017, accrue tax-favoured pension entitlements with a recognised insurance company or a pension fund.
However, a director and major shareholder (DGA) who held 10% or more of the shares in his or her private limited company was also permitted to place the pension entitlements with the “own” private limited company. We refer to this as a self-administered pension scheme, abbreviated as: PEB.
The latter provision has been abolished. After 31 March 2017, a director and major shareholder (DGA) may no longer accrue a tax-favoured pension with their own private limited company (BV) in the context of their employment with that company, but may, of course, continue to do so with a pension fund or an authorised insurer.
What now? Choose from 3 options
A director and major shareholder has the following three options regarding his or her PEB.
- Accrued entitlements continue.
- Mark down the entitlements and then apply a discount redeem.
- Stamp the claims and then convert them into a retirement liability.
We will outline these options briefly below.
Continue
The accrual of pension entitlements ceased on 31 March 2017 at the latest. Continuation means that the so-called non-contributory entitlements are retained and will be paid out on the retirement date (or dates).
An annual allocation is still made to the pension provision, which is shown on the private limited company’s balance sheet in respect of the frozen/non-contributory entitlements. This allocation is charged to the private limited company’s profit. The allocation is based on the actuarial valuation of the pension entitlements for which accrual has ceased.
Tax claim is not valid
It is not compulsory to make the pension entitlement non-contributory. However, a pension entitlement held under self-administration that continues to accrue after 31 March 2017 is not compliant with tax rules.
A pension scheme that does not comply with tax rules is deemed to have been settled. We explain what ‘settlement’ means below. The concessions described below do not apply in the case of the notional settlement of a pension scheme that does not comply with tax rules.
Split pension entitlement
An alternative is for the pension entitlement under self-administration to be split into:
- a non-contributory entitlement with tax relief accrued up to and including 31 March 2017;
- a constructive claim without tax relief, accrued from 1 April 2017 (however, such an entitlement will generally not be advantageous for tax purposes).
Surrender
Up to and including 31 December 2019, it is permitted to surrender pension entitlements accrued under a self-administered scheme with tax benefits. However, income tax is payable on such a surrender, which the private limited company must pay via its tax return in the calendar month following the month in which the pension is surrendered.
Naturally, the gross lump-sum payment, less the discount (see below), must be included in the director-major shareholder’s income tax return under ‘income from employment and the home’ (Box 1). The payroll tax withheld is set off against income tax.
In connection with this settlement, the State Secretary grants the following allowances.
- No revision interest is charged.
- Payroll tax is calculated on the basis of the tax book value of the entitlements (not on the much higher commercial book value; the State Secretary refers to this as ‘adjusting the commercial value to the tax value’).
- A discount is applied to this lump-sum payment of: 19,5% (For redemptions in 2017 and 2018, this discount was higher: 34.5% and 25%).
The discount is applied to the balance sheet value for tax purposes on 31 December 2015. If the tax balance sheet value at the time of surrender is higher, the difference compared with the value at the end of 2015 must be paid, but the discount will not be granted.
If the tax balance sheet value at the time of surrender is lower, the discount is applied to the lower tax balance sheet value at the time of surrender (this applies to pension entitlements that are already being paid out to the pensioner).
Turnover
The pension entitlement can also be adjusted to its tax value and then converted into a savings balance (old-age pension obligation).
The retirement liability (ODV) is increased annually, with interest charged against the private limited company’s profit. This interest rate is equal to the average U-return for the preceding calendar year. This interest rate is 0.269% (for 2017: 0.059%, for 2018: 0.060%).
The retirement benefit obligation must then be paid out from the state pension age (which is currently 67) at the latest. Payments must be made for at least 20 years. If payments commence before the state pension age is reached, the minimum payment period is extended by the number of years prior to reaching the state pension age.
If the pension entitlement has already been paid out, the retirement benefit obligation must be paid out over a period of 20 years, less the number of years during which payments have already been made since the retirement age.
Partner
A pension scheme usually also grants entitlements to the pensioner’s partner (and often to their children as well). This relates to payments made to the partner and children following the death of the pensioner (the director and major shareholder).
In the event of a divorce, the partner is entitled to:
- half (50%) of the old-age pension accrued during the marriage and;
- on the full survivor’s pension.
This follows from the Act on the Equalisation of Pensions in the Event of Divorce.
The partner is entitled to these rights whether the marriage is under the community of property regime or a marriage contract. Furthermore, pension equalisation is entirely separate from how the divorced spouses divide their assets.
Each of the options described above results in the partner’s entitlements being reduced or even lost entirely:
- if the claim premium-free are made, the partner’s entitlement is based on the amount of the non-contributory retirement pension (prior to the pension becoming non-contributory, the partner’s entitlement was based on the retirement pension to be accrued);
- at lump-sum payment Naturally, the partner loses all rights under the claim;
- after converting the pension entitlement into a retirement liability the partner’s entitlement is limited to that part of the retirement benefit obligation which has not yet been paid out at the time of the pensioner’s death.
The partner will therefore have to give their express consent to the surrender and/or conversion of the pension entitlements into a retirement benefit obligation.
There is a form, which must also be signed by the partner, that must be submitted to the Tax and Customs Administration within one month of the surrender or conversion. However, the legal validity of this form appears to be limited.
Depending on the legal form of the marital relationship, the partner may need to be compensated for the pension entitlements that will lapse. The legislator has not yet clarified how such compensation might be arranged. If the compensation is too high or too low, it may constitute a gift subject to gift tax.
Use of the net surrender value
The net lump-sum payment is the tax value of the pension entitlements less the payroll tax paid by the private limited company. This lump-sum payment is payable to the pensioner, who is free to use it as they see fit.
Of course, there are tax implications.
- If the private limited company pays out the lump-sum settlement, this forms part of the tax base for income from savings and investments (Box 3).
- If the private limited company remains liable for the lump-sum payment, this gives rise to a claim to which the availability scheme (Box 1) must be applied (the interest received, after deduction of the TBS exemption of 12%, taxed at a maximum rate of 51.75%).
Opinion
Which option is most advantageous depends on each individual situation. A calculation can help clarify this. Compensation for the loss suffered by the partner and children is a key consideration. As is the question of how the director-major shareholder will provide for his own retirement (and that of his surviving dependants) following the buy-out or conversion.
In order to settle pension entitlements, including any allowances, sufficient funds must be available to pay the income tax due.
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.