“On 1 January 2017, a new requirement came into force: to use personal income tax relief for contributions to private pension funds, customers will have to keep these contributions for at least two taxation years. The goal of these amendments is to promote the creation of savings, stimulating that with tax relief and simultaneously preventing the possibility of using private pension funds for the receipt of tax relief, thus actually creating no savings”, explained Iļja Arefjevs, Board Member of Nordea Pensions Latvia.
3 crucial things customers of private pension funds should know about changes to the law:
Customers at least 55 years old used to have the possibility of making contributions, immediately receiving money and using tax relief.
Recently, there were increasingly more cases encountered when customers that reached the age of 55 (standard age, which upon reaching customers have the right to withdraw funds from private pension funds without any limitations) made large one-time contributions to the private pension fund at the end of the year, immediately applying for the capital pay-out, and applied for the refund of personal income tax a few months later, at the beginning of the next year, submitting an annual income declaration. Even though laws and regulations applicable until now allowed doing so, it did not quite correspond to the goal of the Law On Personal Income Tax, i.e. promoting the creation of private pension savings. Therefore, relevant amendments were introduced to the Law On Personal Income Tax to prevent the use of legal norms in bad faith.
Customers still have the possibility of receiving tax relief.
It is crucial to note that with the introduction of the new requirement, no customers who have already started withdrawing capital from private pension funds “are punished”. It means that if contributions were made in previous years and capital had accumulated as a result, it will be possible to withdraw the capital accumulated so far. Likewise, it will be possible to make new contributions and use tax relief for new contributions. However, if a customer, in addition to the already accumulated capital, also wishes to withdraw new contributions sooner than within two calendar years, he will have to return the already received tax relief.
Procedures for receiving tax relief remain unchanged
It is to be noted that in order to receive tax relief, an annual tax declaration still must be submitted. However, if a customer withdraws funds from a private pension fund and, as a result, granted tax relief is no longer due, the State Revenue Service will increase the taxable income of the taxation or pre-taxation year by this amount. It means that in these cases the customer will first receive tax relief, while a re-calculation will be performed later and they will have to be returned to the state.
Refund of personal income tax of 23% can be received for contributions made by a private person to private pension funds, if these contributions do not exceed 10% of gross salary or another income subject to the full personal income tax rate (e.g., income from economic activities, old-age pensions that exceed EUR 235 a month, etc.).
For additional information contact:
Signe Lonerte, Head of Communication, Baltic States, phone: 6 700 5469, GSM: 29 116 146, signe.lonerte@nordea.com