Denmark Expat Pensions

The Danish pension system has three pillars:

• Pillar 1: State Pensions;
• Pillar 2: Occupational Pensions;
• Pillar 3: Private Pensions & Wealth.

Pillar 1

Consists primarily of the State Old Age Pension. This is a guaranteed Defined Benefit (DB) plan which is financed by general taxes. It aims at guaranteeing a minimum pension.

Pillar 2

Consists primarily of:

• Additional mandatory State Pensions for workers called ATP.
• Mandatory privately organized collective labour market pension plans called CPP.
• It includes a civil servant pension which is in the process of being phased out.

Pillar 3

Consists primarily of:

• Individual voluntary pension plans similar to the plans in Pillar 2.
• The public voluntary early retirement pension called VERP is also placed in this pillar.

Conclusion

It is typical for Denmark that State Pensions are also included in Pillar 2 and Pillar 3. Which you will not see in most Western countries.

For a large part of Danish pensioners, the pensions they receive from Pillar 1 and Pillar 2’s ATP are not just their basic but their major source of income. Which will remain like that.

I. Qualifying Conditions

The public pension plan is universal and covers the entire Danish population. Entitlement to pension is acquired on the basis of residence in Denmark. It is not conditional on payment of contributions.

A full public old age pension requires 40 years of residence until 1 July 2025. Thereafter a full public old age pension requires 9/10 years of residence as of age 15 until till the public retirement age. Shorter periods qualify for a pro-rated benefit.

II. Benefits

The system guarantees a Basic Pension which can also be increased by a Supplement Pension if there is not a lot of additional income.

Basic Pension

The basic amount in 2020 is annually DKK 77.000,- equivalent to 18% of average earnings. There is an individual earnings test which means that the basic pension will be reduced if earned income exceeds DKK 322.500,- (approximately 3/4 of average earnings). The benefit is reduced at a rate of 30% against earned income above this level.

Supplement Pension

The full pension supplement is annually DKK 80.736,- for single pensioners and annually DKK 39.996,- for married pensioners. The actual amounts are tested against all sources of personal income (including ATP and occupational pensions) apart from public pensions.

The pension supplement is reduced by 30,9% of personal income exceeding DKK 71.200,- for single pensioners. For married pensioners who both receive public pension, the pension supplement is reduced by 16% of their total personal income exceeding DKK 142.800,-.

If the partner does not receive a public pension, the supplement is reduced by 32% of the couples total personal income exceeding DKK 142.800,-.

Indexation

The Basic and Supplement Pension are adjusted annually based on average earnings. The adjustment is based on an index of wage increases during the two preceding years.

If nominal earnings growth exceeds 2%, a maximum of 0,3% of the excess increase is allocated to a social spending reserve. Thus indexation of pensions and other social benefits is based upon wage increases less any allocation to the reserve.

III. Premiums

The costs are covered by the State and funded by general taxation.

IV. Retirement Age

The public retirement age is currently in 2021 age 66,5 but will be increased to age 67 as of 2022 and gradually to age 68 in 2030. After this increases are directly linked to increases in life expectancy.

The standard minimal retirement age has gradually increased from age 60 to age 62.

I. Structure

We can distinguish two different type of coverages:

• A mandatory state occupational pension plan (ATP). It supplements the Pillar 1 State Pension for those that work and have paid the premium.
• Mandatory occupational collective pension plans (CPP) negotiated as part of collective agreements between Employers and Unions. Which covers 85% of the employed work force.

II. Providers

ATP

Every employee as of age 16 who works in Denmark has to pay contributions to the Danish Labour Market Supplementary Pension Fund (ATP). Self-employed workers can optionally participate. 94% of all Danes have made contributions to ATP.

ATP is Denmark’s largest pension and processing company and one of Europe’s largest pension funds. ATP has its own regulation but on topics related to life insurance activities, the ATP regulation is similar to the Danish regulation of life insurance companies and pension funds.

Contributions to ATP vary slightly and are sector related. Total contribution is normally 12%-18% of the wages. 2/3 paid by the employer and 1/3 by the employee. The typical contribution is around annually DKK 3.400.

ATP is a partly guaranteed Defined Contribution plan. For 80% of the contribution the investment return is guaranteed in nominal terms for rolling periods of 15 years.

ATP provides the following services:

• ATP premium will be automatically deducted from the worker’s paycheck.
• ATP pays an extra monthly lifelong pension in addition to the basic state pension.
• ATP pays lifelong pension by installments with no Lump Sum options.
• Only in case of a very small capital can there be a Lump Sum pay-out.
• The size of the installments depends on how much ATP premium the worker has paid during his working life which premiums have been invested by ATP.

For more information: https://www.atp.dk/en

CPP

These kind of mandatory occupational collective pension plans are provided by:

• Multi Employer Pension Funds;
• Life Insurance Companies;
• Single Employer Company Pension Funds (all closed for new members).

Multi Employer Pension Funds are non-profit organisations mutually owned by members. In Denmark they are regulated as Life Assurance Companies by the EU Solvency II Directive. The product offered used to be Defined Contribution with investment return guarantees. In recent years this has changed to unguaranteed Defined Contribution plans.

Life Insurance Companies are organised as limited companies and regulated by the EU Solvency II Directive. Many are owned by members or by Unions and Employers’ Organisations. I.e. they offer the same product as Occupational Pension Funds. Products for new clients are often investment based Defined Contribution pension plans.

Single Employer Company Pension Funds are regulated by the IORP II-Directive and are only allowed to offer pension plans to employers in one specific company. These funds are all closed to new members and represent less than 1% of the pension assets in Denmark.

CPP Coverage

These kind of plans are a result of:

• Industry wide investment based Defined Contribution (DC) pension plans collectively agreed between Unions and Employers organisation;
• Company level investment based Defined Contribution (DC) pension plans established voluntary by the employer but often quasi-mandatory for the employee as participation in the pension plan is often a condition for employment
• 85% - 90% of all employees in Denmark are covered by these type of plans.

III. Benefits

In General

Pension claims with ATP and CPP are accrued on a what-you-pay-is-what you-get basis. The longer the working career, the higher the employment rate, the longer contribution record and the higher the contribution level, the greater the pension benefits.

CPP Benefits

Benefits are either Annuities, Instalments or Lump Sum.

The nature of the plans offered has changed from guaranteed to unguaranteed Defined Contribution.

Some pension funds offer products with “conditional” guarantees which means that the benefits can be reduced under certain conditions. Like in The UK and The Netherlands.

IV. Retirement Age

In general it follows the State retirement age which is now age 66,5 and age 67 as of 2022 and will gradually increase to age 68 in 2030. After this increases are directly linked to increases in life expectancy.

The minimal retirement age has gradually increased from age 60 to age 62.

Examples of voluntary private pension saving which sometimes have fine tax benefits:

• Saving by employees or self-employed in Multi Employer Pensions Funds (as supplementary voluntary contributions) and in Life Assurance Companies.
• Saving by employees or self-employed in Banks which is always unguaranteed. The benefit can be paid out as a Lump Sum or as Instalments.
• Self-employed can also voluntary participate in the ATP.
• Self-employed can at the end of business transfer up to DKK 2.800.000,- to a pension plan paying Instalments or Annuities and thus avoid high taxation at the end of business.

DFSA

The Danish Financial Supervisory Authority (DFSA) is the financial regulatory authority of the Danish government.

It is responsible for the regulation of financial markets in Denmark and the supervision of financial companies like Banks, Insurance Companies and Pension Funds.

The most important supervisory task is the Solvency Supervision and thus to monitor financial companies for their own capital versus risks/obligations ratio.

The Mission Of The DFSA

• Counteracting that financial companies get into financial difficulties;
• Assessing the viability of their business models;
• Including the systematic perspective.

The Vission Of The DFSA

• Pro active and looking forward.
• Focus on the overall view with respect for details.
• To enter into dialogue before it decides.

For more information: https://www.dfsa.dk/

I. State Pensions

The public retirement age is currently in 2021 age 66,5 but will be increased to age 67 as of 2022 and gradually to age 68 in 2030. After this increases are directly linked to increases in life expectancy.

The minimal retirement age has gradually increased from age 60 to age 62.

II. Occupational Pensions

In general it follows the State retirement age.

I. State Pensions

State pensions only have the lifelong pay-out. No Lump Sum or Flexi Draw Down options.

II. Occupational Pensions

ATP pays lifelong pension by installments with no Lump Sum options. Only in case of a very small capital can there be a Lump Sum pay-out.

CPP benefits are either Annuities, Instalments or Lump Sum.

III. Private Pensions

The benefits can (depending on the type) be paid out as Annuities, Lump Sum or Instalments.

I. Structure

An individual may be taxed in Denmark as having:

• Full tax liability to Denmark;
• Limited tax liability to Denmark;
• Special expatriate rules or rules regarding work force hire.

Individuals who are residents in Denmark are subject to full tax liability: liable to tax on their worldwide income unless the individual is considered to be tax resident in another country according to a double taxation treaty.

An individual who is fully tax resident in Denmark will, as a main rule, be taxed according to the ordinary tax scheme by up to 52.06% (55.89% including AM tax) in 2021. A number of deductions are applicable. Thus the effective tax rate is lower in most cases.

With a few exemptions, Denmark applies “ETT taxation” of the pension saving meaning that contributions are tax exempt (deductible) while pension investment return and pension benefit are taxed.

II. Contributions

Pension plan paying annuities: Contributions are tax-deductible and benefits are taxed as personal income when paid out. No limits for deduction.

Pension plan paying instalments: Contributions are tax-deductible and benefits are taxed as personal income when paid out. The tax deduction is limited to DKK 57200 per year.

The last 15 years before retirement age an extra tax deduction of annually 32% /max DKK 23.392 is granted for pension saving in annuity schemes and in instalment schemes.

Age saving: No tax deduction of saving and no taxation of lump sum benefit. Maximum saving per year DKK 53.000 until 5 years before retirement and DKK 50.200 the last 5 years before retirement.

III. Taxation Of Benefits:

• Annuities and Pensions received as instalments: Taxed as Personal Income.
• Lump Sum Benefits from old capital pension plans: Taxed at a flat 40% rate.
• Lump Sum Benefits from age saving: Not taxed.
• Some agreements allow withdrawal before retirement age. Tax privileged pension saving withdrawn before the age of 60 is taxed by 60%. Early withdrawals due to death or life threatening illness face tax of 40 %.

I. State Pensions

Expats living in Danmark can receive State Pension from another country. State pension claims can never be transferred to another country.

II. Occupational Pensions

Expats living in Danmark can receive Occupational Pension Claims from another country.

A transfer of a pension claim to another plan in another country is not always possible. Within the EU context we hope that due to action of the EU (by taking The Netherlands to EU Court for not making such a transfer possible) that these kind of transfers will be always possible in the near future.

III. Tax

If you receive pension pay-out from another country than the country where you retire, then it is advisable to see if there is a Double Tax Treaty in order to prevent or mitigate double taxation in the residenital country and at source.

If there is no such treaty, you can only appeal to unilateral rules in order to try to prevent the effect of a possible double taxation.

Expats with a UK Occcupational Pension Claim often hear that it is very attractive to transfer their UK claim to a QROPS pension plan.

QROPS stands for ‘Qualifying Recognised Overseas Pension Scheme. A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered pension schemes in the UK.

The initial idea of a QROPS was to get the value out of the UK without paying any UK tax on the transfer value. Which is now not always possible.

To qualify as a QROPS the scheme must meet the requirements set by UK tax law. For example being available to residents in that country and not being accessible before age 55 unless under special circumstances.

If you are interested in such a QROPS transfer, please make sure that a specialist looks into all relevant aspects. Among which there are the following questions:

• Would it result in a much lower tax exposure or would it increase substantially?
• Are the related QROPS costs not too high?
• Is the related transfer capital big enough to earn back the extra costs?
• Are the available investment funds of a quality level?
• Does your advisor have financial benefit from such a transfer by getting a percentage of the transfer value? (For Dutch advisors this is prohibited by law, fortunately.)

A new early pension scheme in Denmark since 1 January 2021

Denmark pioneered longevity indexing of the statutory pension age and the phasing out of early retirement rights. Now, since 1 January 2021, it has reinstituted a right to earlier pensions for workers with long work records and improved early retirement for workers with diminished work capacity.

Under the new Early Pension Scheme, persons who at the age of 61 (the age of assessment) have a work record of at least 42, 43 or 44 years can take out an early pension one, two or three years respectively before the statutory pension age.

In addition to years in employment (including part-time and self-employment), periods of receiving unemployment, sickness and maternity benefits, as well as traineeships and later-life training and upskilling are also taken into account in the work record.

The flat-rate, taxable benefit amounts to €1,815 a month, i.e. almost the same as the public pension for single people. In order to target the right primarily at blue collar workers who obtained occupational pension rights later than other groups, the benefit is gradually reduced for persons with substantial private pension savings or income from work.

Persons with private pension savings of more than € 270.000,- have their pension gradually reduced, until it becomes zero for such savings above € 671.500,-. Similarly, persons earning more than € 3.225,- annually have their pension reduced by 64% of their income from work above this figure.

On 1 January 2021, when the statutory pension age is 66.5, the age of assessment is 61 and the youngest age of early eligibility for the public pension is 63.5 (three years before the statutory pension age, for people with a 44-year work record).

Both the age of assessment and the length of previous work record follow the increases in the strictly longevity-linked statutory pension age. Thus, on 1 January 2030, when the statutory pension age will be 68 and the age of assessment 62.5, the earliest eligibility age will rise to 65.