Stéphanie Payet
OECD Pensions Outlook 2024
Improving Asset-backed Pensions for Better Retirement Outcomes and More Resilient Pension Systems
Abstract
This chapter describes and compares the design of financial incentives for retirement savings across OECD countries. It also analyses recent trends in the design of financial incentives and assesses the extent to which countries follow the OECD policy guidelines developed in this area in 2018.
The OECD Recommendation for the Good Design of Defined Contribution Pension Plans (OECD, 2022[1]) states that policy makers should “design financial incentives to maximise the impact on enrolment and contributions”, and thus encourage retirement savings, especially in voluntary plans. Indeed, most OECD countries provide financial incentives to encourage savings for retirement in asset-backed pension plans, with the aim of making complementary retirement savings more attractive (OECD, 2018[2]).
Financial incentives for retirement savings can target different stakeholders and take different forms. Most countries provide financial incentives to individuals indirectly, via the personal income tax system, or directly. Tax incentives are indirect subsidies through the tax code and arise when the tax treatment of retirement savings deviates from the tax treatment of traditional forms of savings. By contrast, non-tax incentives are direct payments into the pension account of eligible individuals. Employers may also receive tax incentives through the corporate income tax system to encourage them to offer or sponsor occupational pension plans and contribute on behalf of their employees. Finally, countries may also offer financial incentives for retirement savings to employers and individuals by providing relief on the payment of social contributions.
This chapter assesses the design of financial incentives for retirement savings in OECD countries. It describes and compares the design of financial incentives for retirement savings across countries using information from the 2023 edition of the OECD Annual Survey on Financial Incentives for Retirement Savings (OECD, 2023[3]). The chapter also analyses recent trends in the design of financial incentives and assesses the extent to which countries follow the OECD policy guidelines in this area (OECD, 2018[4]).
Most OECD countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime, where the taxation of retirement savings is deferred until the individual receives pension benefits. Yet, a wide range of tax regimes exist across countries as well as within countries depending on the type of pension plan, the voluntary or mandatory nature of the plan, and who pays the contributions. Some countries provide non-tax financial incentives in the form of matching contributions and fixed nominal subsidies, either as a complement to or a substitute for tax incentives. While employer contributions are deductible from corporate income tax like any other business expenses and rarely benefit from additional tax incentives, the exemption of social security contributions can make it cheaper for the employer to contribute to the employee’s pension plan than to pay the same amount in salary to the employee. Since 2015, many countries have increased financial incentives for retirement savings as asset-backed pension plans are expected to play an increasing role in financing retirement income.
The design of financial incentives for retirement savings in OECD countries is broadly aligned with the OECD policy guidelines. However, tax rules remain complex in many countries and the parameters linked to financial incentives are not always updated on a yearly basis.
The chapter describes in Section 3.1 the tax treatment of retirement savings from the point of view of individuals, looking in detail at how contributions, investment income and pension benefits are taxed in the different countries. Section 3.2 looks at the different forms of non-tax financial incentives. Section 3.3 analyses the extent to which social contributions are levied on pension contributions and pension benefits. Section 3.4 focuses on the tax treatment of employer contributions through the corporate income tax system. Section 3.5 describes recent trends in the design of financial incentives for retirement savings. Finally, section 3.6 concludes by assessing the extent to which OECD countries design their financial incentives in line with the OECD policy guidelines.
Tax incentives for individuals come from a differential tax treatment applied to savings in asset-backed pension plans as compared to savings in other savings vehicles. In most countries, traditional forms of savings are taxed similarly to other income and earnings, with contributions and investment income included in taxable income, and withdrawals are exempt from taxation. This is generally referred to as the “Taxed-Taxed-Exempt” or “TTE” tax regime. When the tax regime applied to asset-backed pension plans deviates from the “TTE” tax regime, individuals may pay less taxes over their lifetime.1 Tax incentives are, therefore, indirect subsidies provided through the tax code; they are not paid in the pension account of the individuals.
Many countries apply a variant of the “Exempt-Exempt-Taxed” (“EET”) tax regime to retirement savings, where both contributions and investment income are exempt from taxation while benefits are treated as taxable income upon withdrawal. Out of 38 OECD countries, 17 follow this tax regime for the main asset-backed pension plan (Figure 3.1). Yet a wide range of tax regimes can be found as well, from the “EEE” tax regime, where contributions, investment income and pension benefits are tax exempt, to regimes where two of three flows are taxed.
Note: Main asset-backed pension plan in each country. “E” stands for exempt and “T” for taxed for contributions, investment income and pension benefits, respectively. Countries offering tax credits on contributions are considered as taxing contributions when the tax credit does not cover the full amount of tax paid on those contributions for some individuals. The tax treatment of an annuity is assumed when different tax treatments apply to different types of retirement income payments.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
There are disparities within countries, however. Table 3.1 shows that the tax treatment of retirement savings may vary according to the type of plan, the type of contribution (i.e. mandatory or voluntary) and the source of contribution within the same plan (i.e. the employer or the individual). A unique tax treatment applies in 16 out of 38 OECD countries.2 In the other countries, several tax treatments apply. The following subsections provide further details on the tax treatment of contributions, investment income and pension benefits.
Note: T = Taxed; E = Exempt (usually up to a limit); T/PE = Taxed but partially exempt; credit = Tax credit. The tax treatment of an annuity is assumed when different tax treatments apply to different types of retirement income payments.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
3.1.1. Tax treatment of contributions
Countries generally provide tax relief on pension contributions (Table 3.2). Tax relief on contributions can take different forms:
Tax exemption: Tax exempt contributions are not subject to personal income tax and provide tax relief at the individual’s marginal tax rate. In most countries, employer contributions are not considered as taxable income for the employee and, therefore, are fully tax exempt from the perspective of the individual.
Tax deduction: The most common approach to provide tax relief on contributions paid by individuals is to make them deductible from taxable income, up to a limit. Similar to a tax exemption, tax relief is provided at the individual’s marginal tax rate as contributions are deducted before calculating personal income tax. Tax deduction may only be partial. In Portugal, for example, only 20% of employee contributions to all their pension plans is tax deductible. In Denmark, France and Norway, pension contributions are deductible for the calculation of some taxes but not others.3
Tax credit: Tax relief on individual contributions may also be provided in the form of a non-refundable tax credit. Contributions are not tax deductible, but the individual receives a tax credit that reduces the amount of personal income tax due. The tax credit is expressed as a percentage of the contributions paid, up to a limit. It reduces the individual’s tax liability potentially down to zero but not beyond (the excess tax credit is lost to the individual). Tax credits can be found in Belgium (with a credit rate of 30%), Estonia (20%), Israel (35%), Korea (13.2% or 16.5% for lower earners) and the United States (0% to 50% depending on income). Depending on the individual’s marginal tax rate, the tax credit may be as generous, more generous or less generous than a tax deduction.4
Reduced taxation: Tax relief may also occur when contributions are taxed but at a lower rate than other income. For example, in Australia, employer contributions to superannuation accounts are taxed at the fixed rate of 15% for most employees.5 As this rate is usually lower than their marginal tax rate, most individuals benefit from a tax rate relief on their contributions.
Note: m=mandatory; v=voluntary; p2=pillar 2; p3=pillar 3.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
Pension contributions do not get tax relief when they are included in the taxable income of the individual. In that case, contributions are considered to be taxed at the individual’s marginal tax rate. In Austria, Hungary, New Zealand and the Republic of Türkiye (hereafter Türkiye), individual contributions never attract tax relief (Table 3.2).
Employer contributions are fully taxable for individuals in a few countries only. Table 3.2 shows that in Hungary, Poland (PPE and PPK plans), Portugal (PPR plans), the Slovak Republic (third pillar) and Türkiye, employer contributions are considered taxable income for the employee and added to the employee’s income before calculating personal income tax.6 Such employer contributions are therefore taxed at the individual’s marginal tax rate. In New Zealand, the employer superannuation contribution tax is calculated based on the employee’s salary in the previous tax year and the tax rate applicable to employer contributions for the employee varies from 10.5% to 39%.7 By contrast, in some cases, employer contributions are treated as taxable income for the employee but are deemed to be made by the employee for tax relief purposes, meaning that they are deductible within the individual’s tax deductibility limit. This is the case for example in Ireland for employer contributions into retirement annuity contracts.
There is usually a limit on the contributions attracting tax relief. This contribution limit may be defined as a percentage of the individual’s income. Figure 3.2 shows the maximum limit on contributions attracting tax relief expressed as a percentage of income that exists in each country. The contribution limit does not exceed 10% of income in eight countries. At the other extreme, contributions attracting tax relief are capped at 100% of income in the United Kingdom and the United States. In several countries, the limit covers both employee and employer contributions.8 Figure 3.2, however, hides disparities within countries across different types of plans. For example, in Belgium, contributions up to 3% of gross salary are eligible for the tax credit in VAPW plans, while contributions up to 9.4% of professional income are deductible from professional income for the self-employed in social VAPZ plans.
As a percentage of the individual’s income
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
The limit on contributions attracting tax relief may also be a fixed amount. In most countries expressing the contribution limit as a percentage of income, there is also a cap in absolute amount to put a ceiling on the tax relief granted to high-income earners. Additionally, in many countries, the limit on contributions attracting tax relief is the same for all individuals and is directly expressed as a fixed amount. This fixed limit is sometimes a multiple of a reference value in the country. For example, in Germany, the joint limit for employer and employee contributions to occupational pension plans attracting tax relief is equal to 8% of the social security contribution ceiling, i.e. 8% of EUR 87 600 in 2023.9 Figure 3.3 shows the maximum fixed limit on contributions attracting tax relief expressed as a percentage of the average wage in each country. In Australia, Chile, Colombia, Poland, Sweden and the United Kingdom, this limit exceeds 100% of the average wage for certain types of plans (left panel of Figure 3.3). For example, in Australia, the limit for voluntary contributions (AUD 110 000) represents 119% of the average wage.10 In most countries, the fixed contribution limit represents less than 40% of the average wage (right panel of Figure 3.3) and can be as low as 1% in the Slovak Republic for contributions to third pillar pension plans (EUR 180).
As a percentage of the average wage in the economy in 2022
Notes: Countries in the left panel have limits above 80% of the average wage. Countries in the right panel have limits up to 40% of the average wage.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
Some countries allow individuals to carry forward the limits on contributions attracting tax relief unused in the previous years. This is possible in Australia, Canada, Italy and the United Kingdom. Individuals can carry forward up to five years of unused limits on contributions attracting tax relief in Australia and three years in the United Kingdom. In Italy, employees can recoup the unused annual tax relief of their first 5 years of participation during the following 20 years, up to 50% of the maximum annual relief per year. There is no time constraint in Canada.
Limits on contributions attracting tax relief may vary with age. In Ireland and the Netherlands, older workers can deduct a higher proportion of their income than younger ones. In Ireland, the contribution limit varies from 15% of earnings for individuals younger than 30 years old to 40% for individuals aged 60. In the Netherlands, it varies from 3.9% for individuals aged 15-19 to 27.5% for individuals aged 65-67. Additionally, some countries have higher fixed contribution limits for older workers. In Denmark, the annual contribution limit to age savings plans increases from DKK 8 800 to DKK 56 900 for individuals within seven years from the retirement age. In Korea, an extra KRW 2 million of contributions can be taken into account for the calculation of the tax credit for people older than 50 years old with a gross income of up to KRW 100 million. In the United States, certain plans allow participants aged 50 years old and over to make pre-tax catch-up contributions beyond the basic limit on employee contributions. Catch-up contributions vary from USD 1 000 for IRA plans to USD 7 500 for 401(k) plans. In Portugal, only 20% of the contributions can be deducted from taxable income, and in contrast with the other countries, the deduction limit declines with age, from EUR 400 for individuals under 35, to EUR 350 for individuals aged 35-50, and EUR 300 for individuals above 50.
Some countries link the limit on employee contributions attracting tax relief to the amount contributed by the employer. Several countries have joint contribution limits for employee and employer contributions in occupational or personal pension plans. This is the case in Canada, Colombia, Costa Rica, Denmark, Estonia, Finland, Germany, Italy, Japan, Latvia, Mexico, the Netherlands, Slovenia, Spain, the United Kingdom and the United States (Figure 3.2 and Figure 3.3). In Austria, Japan (corporate defined contribution plans) and Norway, employee contributions cannot exceed employer contributions. However, in Austria, the employee may still contribute up to EUR 1 000 if the employer contributes less than this amount. In Spain, employees can contribute more than the employer in an occupational pension plan only if the employer contributes less than EUR 1 500 annually. In Finland, if the employee contributes more than the employer in a voluntary occupational group plan, the excess amount is not tax deductible. Additionally, some countries adjust the contribution limit to personal pension plans to whether the individual is already covered by an occupational pension plan. In Japan, individual contribution limits to personal pension plans depend on whether their employer sponsors an occupational plan and the type of occupational plan. The limit is the lowest when the employer already sponsors a defined benefit plan (JPY 12 000 monthly) and the highest when the employer does not sponsor any occupational plan (JPY 23 000). Similarly, in Switzerland, the contribution limit to personal plans is higher when the individual is not covered by an occupational pension plan (CHF 35 280 as opposed to CHF 7 056).
Some countries distinguish limits on contributions attracting tax relief between employees and self-employed workers. Contribution limits tend to be lower for employees than for the self-employed because the former can receive employer contributions, which are usually tax exempt for the employee. For example, in Belgium, contributions by the self-employed to free supplementary pension plans (VAPZ) cannot exceed 8.17% of professional income up to EUR 3 859.40, while contributions by employees in the equivalent plans (VAPW) cannot exceed EUR 1 830 or 3% of gross salary received two years before, whichever is higher. In France, employees can deduct 10% of their earnings net of professional costs of the previous year up to EUR 35 194, while self-employed workers and heads of agricultural holdings can deduct 10% of taxable profit capped at 8 times the annual social security ceiling, plus 15% of taxable profit between 1 and 8 times the annual social security ceiling. In Norway, employee contributions into occupational pension plans up to 4% of salary are deductible from ordinary income but not from personal income, while contributions by self-employed workers into voluntary occupational plans are deductible from both ordinary income and personal income, up to 7% of imputed personal income from self-employment up to 12 G.11 By contrast, in Spain, the contribution limit is lower for the self-employed. An initial EUR 1 500 contribution limit applies to all workers. This limit can be increased by EUR 8 500 if the contribution is done by the employer or by the employee into the same occupational plan, or by EUR 4 250 if the contribution is done by a self-employed worker into a simplified occupational pension plan.
Finally, tax relief may be provided for contributions made on behalf of a spouse with low earnings. For example, in Australia, a tax credit may apply to after-tax contributions made on behalf of non-working or low-income-earning spouses. It is payable to the contributor, not to the spouse. The tax credit is calculated as 18% of the lesser of AUD 3 00012 and the total amount of contributions paid. However, few people make use of this option (OECD, 2021[5]). In Spain, an individual can deduct up to EUR 1 000 per year for contributions paid to his/her spouse’s pension plan when the spouse’s net income is less than EUR 8 000. This deduction can be carried forward for five years. If the spouse is disabled, the individual can make an additional deductible annual contribution of up to EUR 10 000 to the spouse’s pension plan. Individuals can also contribute to their spouse’s pension plan in Canada, Chile, the Czech Republic (hereafter Czechia), Latvia, New Zealand, Hungary, Lithuania, the United Kingdom and the United States. In these countries, contributions to the spouses’ account are included in the contributor’s own contribution limit.
3.1.2. Tax treatment of investment income
Countries generally exempt from taxation investment income resulting from assets earmarked for retirement. Only 12 OECD countries tax investment income at least for selected pension plans.13 In Belgium, investment income is only taxed when the yearly investment return exceeds the guaranteed return, and the individual is granted a share of the excess return. In Latvia, investment income is only taxed in voluntary pension schemes. In the Slovak Republic, it is only taxed in voluntary personal pension schemes (third pillar). In France, Mexico, the Slovak Republic and Türkiye, investment income is taxed when the individual retires and not during the accumulation phase. The part of pension income originating from investment income is taxed separately.
Some countries tax investment income in asset-backed pension arrangements at a fixed rate that is usually lower than the one applying to other forms of saving vehicles. A fixed tax rate applies to investment income in Australia (15%), Denmark (15.3%), Greece (5%), Latvia (10%), the Slovak Republic (19%) and Sweden (15%). In the case of Sweden, the 15% tax rate applies on an imputed return on investment rather than on the actual return on investment generated by the assets of the pension plan. The imputed return corresponds to the previous year’s average government borrowing rate, but it cannot be negative.
Different tax rates may apply to investment income depending on various parameters. In Australia, investment income becomes tax free when the assets accumulated at retirement are transferred, up to a cap, to an account supporting a retirement income stream. In Italy, the taxation of investment income depends on the type of asset class. Investment income is taxed at a 20% standard rate, but income from government bonds held by the pension fund is taxed at a more favourable rate of 12.5%. In New Zealand, the taxation of investment income depends on the type of scheme and on the taxable income of the plan member. If the scheme is an occupational pension plan, a single tax rate of 28% applies. If the scheme is a Portfolio Investment Entity (e.g. all KiwiSaver default schemes), the tax rate varies from 10.5% to 28% depending on taxable income. In Türkiye, the tax rate on investment income depends on when the individual receives benefits. The tax rate varies from 5% if the individual is aged at least 56 and has been a member of the scheme for at least 10 years, to 10% if the individual is younger than 56 and has been a member of the scheme for at least 10 years, and to 15% if the individual has been a member of the scheme for less than 10 years.
3.1.3. Tax treatment of pension benefits
Countries generally tax pension benefits. Some countries that tax pension benefits provide some tax relief when compared to other types of income. For example, in Canada, a 15% tax credit is provided on the first CAD 2 000 of eligible pension income. In France, annuities are taxed at the individual’s marginal tax rate after a 10% deduction. In Italy, pension benefits are taxed at a fixed rate of 15%, with a reduction of 0.3% for every year of participation beyond 15 years. The maximum reduction is 6%, leading to a 9% tax rate after 35 years of participation. In Japan, a pension-related deduction jointly applies to public pensions and private pension annuities. In Slovenia, only half of the amount of the calculated annuity is taxed at the individual’s marginal tax rate.
The tax treatment of pension benefits is usually identical across all types of retirement income payments (e.g. annuities, drawdowns, lump sums). However, lump sums and pensions paid over a minimum period may attract different tax treatments. In particular, lump sums may be tax free up to a certain amount or only partially taxed. The rationale is to reach a more neutral tax treatment across the different types of retirement income payments as lump sums can be quite large and significantly increase the individual’s marginal tax rate the year of withdrawal. For example, in Ireland, individuals can withdraw up to 25% of their savings (capped at EUR 200 000) as a lump sum tax free. In Switzerland, the federal government taxes lump sums as capital income. This tax is progressive and is equal to 1/5 of the income tax that would be generated if lump sums were separately taxed as income. In the United Kingdom, an individual can have a tax-free lump sum up to 25% of the total value of the pension account (capped at GBP 268 275).
Only four OECD countries use tax incentives to encourage people to take a lifetime annuity or to withdraw their assets over a minimum length of time. In Czechia, lifetime annuities and drawdowns over more than 10 years are tax free, while drawdowns over shorter periods and lump sums are taxed. In Estonia, lifetime annuities and pensions paid over the average remaining life expectancy are tax exempt. The tax rate for shorter periods and for full lump sums is 10%. In Korea, individuals taking an annuity for the part of benefits originating from employer contributions only pay 70% of the amount due in the case of a lump sum. In Türkiye, the government pays a subsidy equal to 5% of participants’ savings at retirement for those who choose a minimum 10-year annuity.
A minority of countries use the tax system to discourage early withdrawals. The age limit defining early withdrawals differs in each country and there may be more than one limit to define different tax treatments. For example, in Australia, pensions are taxed at the individual’s marginal tax rate before the preservation age, there is a 15% tax offset between the preservation age and 59 years old, and pensions are tax free from age 60.14 Other countries discouraging early withdrawals with the tax system include Belgium, Denmark, Estonia, France, Italy, Lithuania, Türkiye, the United Kingdom and the United States.
Finally, only Ireland taxes the total amount of funds accumulated at the point of retirement once it exceeds a certain limit.15 The limit has been set at EUR 2 million since 1 January 2014. Upon withdrawal, the amount of assets exceeding this limit is subject to an upfront income tax charge at the higher rate of income tax (currently 40%).
Several countries have introduced more direct financial incentives to encourage participation in, and contributions to, asset-backed pension plans, especially for low-income earners. Non-tax incentives considered herein include matching contributions from the government or from the employer, and government fixed nominal subsidies. These payments are provided to eligible individuals who participate in or make voluntary contributions to an asset-backed pension plan. Both matching contributions and subsidies are paid into the pension account, thus increasing the assets accumulated to finance retirement income. They are never considered taxable income for individuals. Table 3.3 shows that 17 OECD countries have such incentives.
Note: The UTM is a monthly unit for taxation purposes. It was set at CLP 63 326 in July 2023. The letter “t” in lowercase represents cases where the income flow is only partially taxed or taxed at a lower rate than the marginal tax rate.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
Matching contributions are the most common type of non-tax financial incentive used to promote retirement savings. Governments or employers may pay matching contributions. Matching contributions encourage contributions from the individual as their payment is conditional on the individual contributing. Government matching contributions are expressed as a proportion of the individual’s own contribution, up to a maximum amount. The generosity of the match rate varies greatly across countries, from 4.25% in Austria to 325% in Mexico (solidarity savings programme for civil servants).16 The most common match rates are 20% (Colombia, Czechia, Hungary) and 50% (Australia, Chile, New Zealand). The maximum entitlement varies across countries and represents between 0.3% of the average wage in Austria and 3.3% of the average wage in Chile. Employer matching contributions are usually expressed as a minimum contribution rate (i.e. as a percentage of salary).
Governments can use matching contributions to target specific groups of workers, in particular low earners. For example, in Australia, the government super co-contribution is for individuals with a total income below AUD 58 445 making voluntary non-deducted contributions.17 The match rate provided is 50% with a maximum entitlement of AUD 500 (0.5% of the average wage). For every dollar that the individual earns above AUD 43 445, the maximum entitlement is reduced by 3.333 cents. In Chile, workers aged between 18 and 35 with an income lower than 1.5 times the minimum wage are entitled to a government matching contribution for their first 24 monthly continuous or discontinuous contributions to the pension system. The matching contribution is equivalent to 50% of the mandatory contribution of the worker if his/her wage is lower than or equal to the minimum wage, or 50% of the mandatory contribution over the minimum wage if his/her wage is greater than the minimum wage and lower than 1.5 times the minimum wage. In Colombia, the BEPS programme encourages voluntary contributions by low-income earners. At retirement, individuals receive a 20% matching contribution from the government.
Seven OECD countries provide government subsidies to promote retirement savings. Government subsidies are fixed nominal amounts and are therefore more valuable to low-income earners, as the fixed amount represents a higher share of their income. In Chile, Estonia, Germany and Lithuania, at least some of the subsidies are targeted at women:
In Chile, women aged 65 or older are entitled to a government subsidy for each child alive at birth. The subsidy is equivalent to 18 months of mandatory contributions (10%) over the minimum wage in place at the birth of the child, and earning the returns of fund type C since 2009 or since the birth of the child, whichever is later.
In Estonia, one of the parents is entitled to monthly contributions equal to 4% of the national average wage into their mandatory asset-backed pension plan for a maximum duration of three years per child (whether or not the parent has returned to work), for children born after 1 January 2013.
In Germany, the child subsidy is paid into the Riester account of the parent receiving child allowances, which is the mother by default. The maximum subsidy amounts to EUR 185 per year and per child born before 1 January 2008, or EUR 300 per year and per child born on or after 1 January 2008.
In Lithuania, the government contributes 1.5% of the average gross salary of the year before the last in the account of people who have children up to three years old and who receive maternity benefits. For persons with more than one child under the age of three, the government pays contributions for all children to one of the parents.
Governments usually pay subsidies and matching contributions directly in the pension account of entitled individuals. In some countries, matching contributions are technically tax credits paid directly in the pension account instead of coming as a deduction of the tax liability. This is the case for example in New Zealand. Pension providers may also claim the financial incentive from the government on behalf of members. For example, in the United Kingdom, the employer may deduct pension contributions to an occupational pension plan from the employee’s salary either before or after deducting personal income tax, depending on the pension scheme. In the second case, the pension provider claims tax back from the government at the basic rate of 20% and the tax refund is paid in the pension account.18
In most countries, non-tax incentives complement tax incentives coming from the preferential tax treatment of retirement savings. This could be because it is difficult to remove incentives already in the tax code. The three exceptions are Australia, New Zealand and Türkiye, where government matching contributions essentially substitute tax incentives.
Besides the personal income tax system, contributions to asset-backed pension plans and benefits paid from these plans can be subject to social contributions. Social contributions are usually levied on gross salaries and wages to finance, among other things, health insurance, unemployment insurance, public pensions and disability pensions. Table 3.4 classifies OECD countries according to whether social contributions are fully levied, partially levied or not levied on pension contributions and pension benefits.
Note: Denmark does not collect social contributions.
Source: OECD (2023[3]), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf..
Several countries use the social security system to encourage employer contributions. Employer contributions in many countries are not subject to social contributions or benefit from a reduced rate. This preferential treatment of employer contribution makes it cheaper for an employer to contribute to an employee’s pension plan than to pay the same amount in salary to that employee. For example, in Australia, Austria, Belgium, Ireland, Italy, Poland, Slovenia and the United Kingdom, employer contributions are not included in the income base to calculate social contributions, or they benefit from a reduced rate. In Italy for instance, employer contributions are subject to a rate of 10% instead of the standard 24% rate, on earnings up to a ceiling.
While pension benefits are usually not subject to social contributions, some countries levy part of the social contributions usually applicable to wages and salaries on pension benefits. In particular, several countries only levy social contributions related to health and long-term care insurance on pension benefits.
Employer contributions to asset-backed pension plans are always considered as tax-deductible business expenses for the purpose of corporate income tax. However, certain limits may apply for these contributions to qualify as tax deductible. For example, employer contributions cannot exceed 6% of salary in the Slovak Republic and Slovenia, 7% in Norway19 and Poland (PPE plans), 10% in Austria and Latvia, 20% in Luxembourg, and 35% in Sweden (up to a ceiling). In Belgium, employer contributions to an occupational pension plan are deductible as business expenses to the extent that total retirement benefits, including the statutory pension, do not exceed 80% of the last gross annual salary. In Portugal, annual contributions made by the employer cannot exceed 15% of the annual total costs with wages and salaries. In Türkiye, the sum of contributions paid by employers to the individual pension system and personal insurance premiums paid by employees cannot exceed 15% of the employee’s monthly wage and the annual minimum wage per annum.20
In addition to the possibility of exempting employer contributions from social contributions discussed in section 3.3, only four countries provide additional financial incentives to employers to encourage contributions to pension plans:
In Chile, workers aged between 18 and 35 with an income lower than 1.5 times the minimum wage are entitled to a government matching contribution for the first 24 monthly contributions to the pension system. This contribution consists of two payments: a subsidy to employers for hiring this type of worker and a direct contribution to the worker’s pension account of the same amount. The matching contribution is equivalent to 50% of the mandatory contribution of the worker if their wage is lower than or equal to the minimum wage, or 50% of the mandatory contribution over the minimum wage if their wage is greater than the minimum wage and lower than 1.5 times the minimum wage.
In Germany, if employers contribute at least EUR 240 per year to an occupational pension plan on behalf of a low-income earner (earning less than EUR 2 575 monthly), they get a tax allowance of 30% of the contribution, up to a maximum contribution of EUR 960 (i.e. the tax allowance varies between EUR 72 and EUR 288 per year). The allowance is administered through the wage tax and reduces the employer’s wage tax liability.
In Korea, charges for the Wage Claim Guarantee Fund are reduced by up to 50% if employers set up occupational pension plans rather than severance payment schemes.
In Spain, employers can deduct from corporate income tax 10% of their contributions into an occupational pension plan in favour of employees with an annual gross remuneration of less than EUR 27 000. When the worker earns more than EUR 27 000, the deduction applies to the proportional part of the employer contribution that corresponds to a remuneration at that threshold.
Beyond the changes to income thresholds and limits on contributions attracting tax relief that some countries update on a yearly basis, most countries have made changes to the design of their financial incentives since 2015 when the OECD started monitoring this information.21 The main trend has been to increase financial incentives to encourage people to save more for retirement. However, some countries reduced financial incentives to lower the fiscal cost and limit the share of the fiscal cost benefitting high-income earners. Countries followed different approaches to change the value of financial incentives.
3.5.1. Increase in the value of financial incentives for retirement savings
Some countries eliminated certain taxes that penalised high-income earners contributing too much to asset-backed pension plans. For example, Australia eliminated the excess concessional contributions charge on 1 July 2021. This charge was penalising high-income earners receiving mandatory employer contributions above the concessional contributions cap.22 In Slovenia, since 1 January 2020, individuals taking a lump sum from their pension plan may request that the portion corresponding to contributions made in excess of the annual tax-deductible contribution cap is excluded from the annual taxable base upon withdrawal. This eliminated the double taxation of excess contributions. The United Kingdom eliminated the tax charge that applied when an individual had built up pension savings worth more than the lifetime allowance as of the tax year 2023/24.23 It also increased in 2021 the income limit from which the annual allowance is reduced, from GBP 150 000 to GBP 240 000. This reduced the proportion of individuals exceeding their annual contribution limit and paying the annual allowance charge.
Some countries also reduced or eliminated certain taxes to encourage specific behaviours. For example, Estonia and Korea increased the attractiveness of retirement income options paying benefits over a minimum period. Lifetime annuities and pensions paid over the average remaining life expectancy are no longer taxable since 2021 in Estonia. Korea reduced the taxation of pension benefits taken over periods exceeding 10 years in 2020. To encourage employer contributions on behalf of employees, Ireland since 2023 no longer considers employer contributions paid into a PRSA as taxable income for employees. Finally, in Italy, returns on new investment in stocks of Italian and European companies made since 2017 are tax free (instead of a standard tax rate of 20%) if the securities are held for at least five years.
Several countries increased the limits on contributions attracting tax relief beyond the normal indexation rules to encourage individuals to contribute more to their pension plans. For example, in 2017, Czechia doubled the level of tax-deductible contributions that members can pay annually from CZK 12 000 to CZK 24 000. They also increased the level of employer contributions not considered as taxable income from CZK 30 000 to CZK 50 000. In 2020, Korea increased the amount of contributions that can be taken into account for the calculation of the tax credit by KRW 2 million for people aged 50 or older with a gross income of up to KRW 100 million. Norway increased in 2019 the tax-deductibility limit for contributions by self-employed workers into voluntary defined contribution occupational plans from 6% to 7% of imputed personal income from self-employment between 1 and 12 G.24 They removed the lower income threshold of 1 G in 2023. In 2023, the Netherlands increased the tax-deductibility limit for contributions to voluntary personal plans from 13.3% to 30% of annual income. The goal was to create a level playing field when it comes to the taxability of pension accrual between occupational and personal plans. Spain increased the tax deductibility limit for the combined employer and employee contributions in 2021, from EUR 8 000 to EUR 10 000. However, contributions from individuals could not exceed EUR 2 000 and the extra EUR 8 000 could only be paid by employers into occupational pension plans. In 2022, the limit for contributions to occupational plans increased to EUR 8 500, while the limit for individual contributions decreased to EUR 1 500 (keeping the overall limit at EUR 10 000), and employees were allowed to pay part of the contributions to occupational plans. Finally, the United Kingdom increased the annual contribution limit (annual allowance) from GBP 40 000 to GBP 60 000 in 2023.
Some countries introduced new tax incentives. In Germany and Spain, the new tax incentives targeted employers and were meant to encourage employer contributions into their employees’ pension plan. In Germany, since 2018, employers contributing at least EUR 240 per year to an occupational pension plan on behalf of a low-income earner (earning less than EUR 2 575 monthly) get a tax allowance of 30% of the contribution, up to a maximum contribution of EUR 960. In Spain, starting from 2023, employers can deduct from corporate income tax 10% of their contributions into an occupational pension plan, up to an employee’s annual gross remuneration of EUR 27 000. Moreover, Denmark introduced an extra tax exemption in 2018 to keep up the pension saving incentives and avoid the interaction problem with income-related government pensions and housing support. In 2018, for pension savings up to a limit, an extra exemption of 22% was obtained the last 15 years before retirement, while for pension savers with more than 15 years to retirement, the extra exemption was 8%. The extra exemptions were further increased in 2020 to 32% and 12% respectively, meaning that 132% or 112% of contributions are tax exempted instead of 100%. Finally, Korea introduced in 2022 a tax credit of 10% for individuals transferring their deposits in an individual savings account reaching maturity into a pension account.
Alternatively, several countries introduced new non-tax financial incentives. In Lithuania, Poland and Türkiye, these non-tax incentives were introduced at the same time as automatic enrolment. In Lithuania, individuals contributing at least 3% of gross income in voluntary personal pension plans (second pillar) receive a government subsidy equivalent to 1.5% of the pre-last year’s average gross national salary. In Poland, PPK members benefits from an employer matching contribution and from government subsidies equal to PLN 250 when the member joins the plan and PLN 240 annually when the employee contributes at least 1.5% of salary. In Türkiye, the government initially matched 25% of individual pension contributions up to 25% of the annual minimum wage at the time of the introduction of the automatic enrolment mechanism in 2017. Both rates were increased to 30% in 2022. The government also pays a one-time TRY 1 000 contribution for individuals who do not opt out within the first two months, and a subsidy equal to 5% of participants’ savings at retirement for those who choose a minimum 10-year annuity. Germany also introduced employer matching contributions in 2018. Employers must pay a 15% matching contribution if employees ask to convert part of their salary into a contribution to an occupational pension plan and if the employer pays less in social insurance contributions due to the salary conversion.
Finally, some countries reduced the taxation of early withdrawals of retirement savings, in particular during the COVID-19 pandemic. Australia, Chile, France, Iceland, Spain, Portugal, and the United States allowed special early access to retirement savings in 2020 and beyond in order to provide short-term relief for members affected by the COVID-19 crisis. Their approach regarding the taxation of these early withdrawals varied, however. In Spain, Portugal and the United States, special COVID-19 withdrawals remained taxed as any other withdrawals or benefits but did not incur the penalties that early withdrawals usually trigger. In addition, in the United States, individuals could report the taxable portion of the withdrawal proportionally over 2020, 2021 and 2022 to smooth tax payment, and could repay all or part of the withdrawal within three years to avoid paying the tax on it. In France, the self-employed could withdraw up to EUR 8 000, but only EUR 2 000 was tax exempt. In Australia and Chile, the special COVID-19 withdrawals were generally tax free, while early withdrawals would normally be taxed.25 Iceland is the only country where withdrawals linked to the pandemic remained taxed the same way as any other early withdrawals, i.e. subject to the individual’s marginal income tax rate.
Beyond the pandemic, Canada, Iceland and Portugal used the tax system to favour the withdrawal of retirement savings to buy a residence. In these three countries, the rules concern only voluntary personal pension plans. In Canada, since 1 April 2023, RRSP funds can be transferred to a Tax-Free First Home Savings Account, subject to a lifetime limit of CAD 40 000, and then be withdrawn tax-free for the purpose of buying a first home. Iceland passed a law in June 2014 allowing active members in voluntary personal pension plans to withdraw assets tax free to pay down residential housing debt, up to ISK 750 000 per year for couples taxed together and ISK 500 000 per year for single persons. Individuals who do not own their residential housing can withdraw up to ISK 500 000 per year and per person to invest in residential housing. This kind of tax-free withdrawal was initially supposed to end in 2019 but has been extended several times, currently until 31 December 2024. Portugal approved a law in October 2022 allowing the redemption of PPRs until 31 December 2023 without penalties and for any motive, up to the monthly limit, per taxpayer, of the social support index (EUR 480.43 in 2023). Moreover, the partial or total redemption of PPRs without penalties was allowed in 2023 for (i) the payment of instalments of mortgage-backed credit on the saver’s own permanent residence; (ii) the payment of credit instalments for the construction or benefit of households for permanent and own residence; (iii) the payment of social housing corporations for permanent and own residence; and (iv) the early repayment of the credits referred above.
3.5.2. Decrease in the value of financial incentives for retirement savings
Some countries increased tax rates or introduced new taxes in relation to retirement savings. For example, Greece started to tax returns on investment in 2019 at the rate of 10%, later reduced to 5% in 2020. In Hungary, since 2019, employer contributions to voluntary pension funds and to institutions for occupational retirement provisions are considered taxable income for the employee. Before, these contributions were subject to personal income tax, but the tax was paid directly by the employer. Latvia increased the tax rate on investment returns from voluntary pension plans from 10% to 20% in 2019. New Zealand introduced in 2021 a new tax rate of 39% for employer contributions when the total amount of salary or wages earned by the employee exceeds NZD 216 000. Slovenia introduced in 2021 an insurance premium tax of 8.5% for voluntary supplementary pension contributions withdrawn during the first 10 years of a pension contract.
Other countries eliminated or reduced tax-deduction possibilities. In Austria, individual pension contributions are no longer tax deductible for new pension contracts since 2016. Japan reduced in 2020 the level of the tax deduction for annuities applicable to both public and private pensions for pensioners with income other than public pensions above certain thresholds. Since 2016, Sweden restricts the possibility to deduct contributions to voluntary personal pension plans to the self-employed and employees who completely lack pension rights in employment.
Finally, some countries reduced the limits on contributions attracting tax relief. For example, Australia introduced a range of measures in July 2017 to reduce incentives for high-income earners. The limit on contributions attracting a 15% tax rate was reduced; the income limit above which contributions are taxed at 30% was lowered; and a cap of AUD 1.6 million was introduced to the amount that can be transferred to a retirement phase account (i.e. an account supporting retirement income streams) with tax-free investment earnings. Denmark reduced the annual contribution limit to the age pension scheme in 2018 from DNK 29 600 to DNK 5 100 for individuals with more than five years to the retirement age. However, the limit was increased to DNK 46 000 for individuals with five or fewer years to the retirement age. The higher limit was extended to individuals with up to seven years to the retirement age in 2023. Lithuania reduced the limit for tax-deductible voluntary personal pension contributions and life insurance premiums from EUR 2 000 to EUR 1 500 in 2019. Norway reduced the contribution limit for individual pension savings schemes from NOK 40 000 to NOK 15 000 in 2022.
The design of financial incentives for retirement savings in OECD countries and their recent changes generally align with the OECD policy guidelines in this area, but more work still needs to be done in particular on reducing complexity. In 2018, the OECD (2018[6]) developed policy guidelines to improve the design of financial incentives for retirement savings for countries wanting to use them to support their policy goals (Box 3.1). The previous sections of this chapter examined the tax treatment of retirement savings across OECD countries and recent trends in the design of financial incentives, highlighting how some countries have increased those incentives, while others have decreased them. The next step is to look at how these financial incentives align with OECD policy guidelines.
1. Financial incentives are useful tools to promote savings for retirement. They encourage people to participate in and contribute to retirement savings plans, while keeping individual choice and responsibility for retirement planning.
2. Tax rules should be straightforward, stable and common to all retirement savings plans in the country. Different tax rules for different types of plan and frequent changes to those rules may create confusion and reduce people’s trust in the system.
3. The design of tax and non-tax incentives for retirement savings should at least make all income groups neutral between consuming and saving. This tax neutrality is achieved when the way present and future consumption is taxed makes the individual indifferent between consuming and saving. The tax treatment of retirement savings should at least not discourage savings.
4. Countries with an “EET” tax regime already in place should maintain the structure of deferred taxation. The upfront cost incurred at the introduction of the pension system with deferred taxation is already behind in most countries and the rewards in the form of large tax collections on pension income are in the horizon.
5. Countries should consider the fiscal space and demographic trends before introducing a new retirement savings system with financial incentives. The maturity of the pension system and demographics influence the fiscal cost related to financial incentives.
6. Identifying the retirement savings needs and capabilities of different population groups could help countries to improve the design of financial incentives.
a. Tax credits, fixed-rate tax deductions or matching contributions may be used when the aim is to provide an equivalent tax advantage across income groups. Financial incentives that equalise the tax relief provided on contributions for all individuals, independently of their income level and marginal income tax rate, achieve a smoother distribution of the overall tax advantage across the income scale.
b. Non-tax incentives, in particular fixed nominal subsidies, may be used when low-income earners save too little compared to their savings needs. Non-tax incentives are better tools to encourage retirement savings among low-income earners, who are less sensitive to tax incentives.
7. Countries using tax credits may consider making them refundable and converting them into non-tax incentives. Individuals with a low tax liability can still benefit from tax credits when they are refundable. The value of the credit is strengthened when it is paid directly into the pension account, in order to help individuals to build larger pots to finance retirement.
8. Countries where pension benefits and withdrawals are tax exempt may consider restricting the choice of the post-retirement product when granting financial incentives. When withdrawals are tax exempt, financial incentives may lose their purpose if individuals withdraw early or take a lump sum. To counter this, policy makers could restrict the choice of when and how to withdraw the money; take back part or all of the financial incentives when individuals take a lump sum or withdraw early; or encourage people to selected post-retirement products that are more in line with the objective of people having a retirement income.
9. Countries need to regularly update tax-deductibility ceilings and the value of non-tax incentives to maintain the attractiveness of saving for retirement. Keeping tax-deductibility ceilings for contributions and the value of non-tax incentives (maximum matching contribution, subsidy) constant over time may reduce the attractiveness of saving for retirement and lower the positive impact on participation and contribution levels.
Source: OECD (2018[4]), “Policy guidelines to improve the design of financial incentives to promote savings for retirement”, in Financial Incentives and Retirement Savings, OECD Publishing, Paris, https://doi.org/10.1787/9789264306929-9-en.
OECD countries seem to acknowledge the usefulness of financial incentives to promote savings for retirement as they all provide them to individuals saving for retirement. Figure 3.1 shows that, in most countries, the tax treatment of retirement savings deviates from the “TTE” tax regime applicable to other forms of savings. Moreover, even in the three countries applying the “TTE” tax regime to retirement savings, some tax relief actually applies or non-tax incentives substitute tax incentives. Indeed, in Australia, pension contributions and investment income are taxed, but for most individuals a tax rate of 15% applies that is lower than their marginal income tax rate (Table 3.1). In New Zealand, financial incentives take the form of employer and government matching contributions. In Türkiye, individuals receive government matching contributions and fixed nominal subsidies, and the tax rate on investment income may be as low as 5% if the individual withdraws benefits from age 56 after at least 10 years of participation in the pension plan.
Tax rules are still complex in many OECD countries. Table 3.1 shows that tax rules tend to vary by type of plan, by type of contribution (mandatory or voluntary) and by source of contribution (employer or individual). Even in countries where only one tax treatment applies to all retirement savings generally, differences may exist in tax-deductibility limits, tax rates, or tax credit levels depending on the situation. For example, in Canada, contribution limits are different between defined benefit occupational plans, defined contribution occupational plans, deferred profit-sharing plans, and personal pension plans. In the Netherlands, a “TEE” tax treatment applies to contributions made on income exceeding a certain threshold, rather than “EET”. Moreover, frequent changes to tax rules have been made in some countries, not necessarily towards a simplification. For example, Spain has made significant changes to the tax rules in the past 20 years, eliminating the tax reduction for lump sum payments in 2007, removing the larger contribution limit for older individuals in 2015, and constraining employee contributions into an occupational pension plan to what employers contribute into that plan in 2022. Frequent changes could deter individuals from saving in asset-backed pension plans as changes make people uncertain about the tax treatment that may apply to them in the future given the long-term nature of saving for retirement.
In general, the tax treatment of retirement savings in OECD countries is likely to provide most individuals with an incentive to save, but it may not be the case for all pension plans. The incentive to save is measured by comparing the after-tax and before-tax rates of return of a savings vehicle. A tax system is neutral when individuals are indifferent between consuming and saving and this is achieved when the after-tax rate of return is equal to the before-tax rate of return (OECD, 2018[4]). The “EET” tax regime achieves tax neutrality when the individual has the same marginal tax rate during working life and retirement. The “TEE” tax regime also achieves tax neutrality when the rate of return does not exceed the “normal return to saving” or the risk-free return (Adam et al., 2011[7]). There is a disincentive to save (or an incentive to consume rather than to save) when the after-tax rate of return is lower than the before-tax rate of return, and vice-versa. The tax treatment of selected personal pension plans in some countries provides a disincentive to save. This is the case for example in Austria and Germany, where contributions are paid from taxed income and pension benefits are partially taxed (“TEt”), and in Denmark, Greece, Mexico and the Slovak Republic, where contributions are paid from taxed income and investment income is taxed (“TtE” or “TTE”).26 Moreover, in Denmark, Greece and Sweden, some individuals may have a disincentive to save in occupational pension plans. Contributions are tax exempt, investment income is taxed, and pension benefits are taxed (“EtT”). For individuals having the same marginal tax rate throughout their life, this tax treatment provides a disincentive to save. However, many people are likely to have a lower marginal tax rate in retirement because their pension income is lower than their past work income. In that case, there may still be an incentive to save despite the taxation of investment income.
Over the past 10 years, all the OECD countries using deferred taxation, such as the “EET” tax regime, have kept this regime. In Poland, however, the fiscal cost related to financial incentives may increase in the future. Indeed, the OFE plans, to which the “EET” tax treatment applies, are losing importance as participation is no longer mandatory since 2014. Meanwhile, employees have been enrolled automatically into PPK plans since 2019, and the applicable tax regime is “TEE”. If membership trends continue between the two types of plans, the fiscal cost for the Polish treasury may fall in the short term and increase in the long term as the collection of taxes on OFE pension benefits will fade away (OECD, 2018[4]).
Several OECD countries have introduced new types of asset-backed pension schemes with financial incentives over the past 10 years despite pressures on the general budget. Some of them applied the same incentives as those that were already applicable to pre-existing schemes. For example, Belgium introduced in 2019 VAPW plans for employees not already covered by an occupational pension plan and applied the same tax treatment as for other types of personal pension plans. France introduced PER plans in 2018 and the tax treatment is the same as for the pre-existing plans that they replaced. Spain introduced simplified occupational pension plans in 2022 and their tax treatment is the same as for other occupational pension plans. Several countries also introduced new schemes with automatic enrolment and provided non-tax financial incentives in addition, or as a substitute to tax incentives. For example, Poland introduced PPK plans in 2019 with a “TEE” tax treatment. In addition, the government pays fixed nominal subsidies when people join a plan and annually conditional on the employee paying a minimum contribution, and employers pay matching contributions too. Similarly, Lithuania introduced automatic enrolment in its second pillar pension scheme in 2019. The “TEE” tax treatment applies, and the government pays subsidies as a match to workers’ contributions. By contrast, non-tax incentives mostly substitute tax incentives in Türkiye. The government pays matching contributions and one-off subsidies to employees enrolled automatically into personal plans since 2017, and the tax treatment is “TTE”.27
Most OECD countries tend to provide higher overall tax advantages to middle and high-income earners. Indeed, most countries provide tax relief on contributions in the form of tax exemptions or tax deductions (Table 3.2). Moreover, personal income tax systems are progressive in most countries, meaning that tax rates increase with taxable income. This implies that the higher the earnings, the larger the tax relief provided by tax exemptions and tax deductions on each unit of contribution. By contrast, in Estonia and Hungary, a single personal income tax rate applies irrespective of the level of taxable earnings (20% and 15%, respectively), so all individuals receive the same tax incentive in proportion to their earnings. Additionally, Belgium, Estonia, Israel, Korea and the United States use tax credits. This form of tax incentive provides the same tax relief on contributions to all individuals, except in Korea and the United States where higher credit rates are provided to lower earners. Matching contributions also achieve a smoother distribution of incentives by income level and can be found in Australia, Chile, Colombia, Czechia, Hungary, New Zealand, Türkiye and the United States, for example. In addition, the cap associated with state matching contributions reduces the value of the incentive for higher earners. Finally, fixed nominal subsidies favour lower-income earners and can be found in Chile, Estonia, Germany, Lithuania, Mexico, Poland and Türkiye.
Tax credits are non-refundable in all the countries using this form of tax relief on contributions, meaning that individuals with a tax liability lower than the tax credit only partially benefit from the tax credit. In Hungary and New Zealand, tax credits are paid into the pension account of entitled individuals instead of coming as a deduction of the income tax liability, making them state matching contributions. However, in Hungary, the tax credit is non-refundable.
Among the countries exempting pension benefits from taxation, at least for selected types of plans, most restrict how and when individuals can take money out. Some countries tax withdrawals taken before reaching a certain age or a minimum length of the pension contract (e.g. Australia, Chile, Hungary, Lithuania, Mexico, Poland, United States). For example, in Lithuania, pension benefits from third pillar pension funds are taxed at 15% if the pension contract lasted less than five years or if the individual is more than five years before the statutory age of retirement. Other countries condition the tax-free status of pension benefits to selected types of retirement income payments (e.g. Austria, Czechia, Estonia). For example, in Czechia, annuities and programmed withdrawals paid over at least 10 years are tax free, while lump sums and programmed withdrawals over shorter periods are taxable. Another approach is to take back financial incentives if certain conditions are not met regarding the withdrawal of pension benefits (e.g. Austria, Chile, Poland). For example, in Poland, early, unconditional withdrawals from PPK plans are possible but, in that case, returns on investments are taxed at 19% (instead of being tax free), 30% of the employer matching contributions are transferred to the social security institute, and government subsidies are transferred back to the general budget. Still, some countries do not restrict tax-free withdrawals, such as Colombia, Costa Rica, Denmark (age savings), Greece (personal pensions), Latvia (voluntary pensions), New Zealand, the Slovak Republic and Türkiye.
Finally, many countries do not update the parameters linked to financial incentives on a yearly basis. While some countries update income thresholds and contribution limits for tax relief purposes in line with inflation or wages (e.g. average wage, minimum wage) on an annual basis, this was not the case between 2022 and 2023 for all thresholds and limits in countries such as Australia, Austria, Czechia, Estonia, Finland, Greece, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, New Zealand, Portugal, the Slovak Republic, Slovenia and Spain. Moreover, countries offering government matching contributions or subsidies tend to update the maximum entitlements discretionally only, at best. For example, Germany has increased the maximum subsidy in Riester plans only once since 2008, from EUR 154 to EUR 175 in 2018. The maximum entitlements for government matching contributions in Australia (AUD 500) and New Zealand (NZL 521.41) have not been updated at least since 2015, when the OECD started to monitor this information. This reduces the attractiveness of financial incentives over time.
References
[7] Adam, S. et al. (2011), Tax by design, Oxford University Press, https://ifs.org.uk/books/tax-design.
[8] OECD (2024), Asset-backed pensions, https://www.oecd.org/en/topics/asset-backed-pensions.html.
[3] OECD (2023), Annual survey on financial incentives for retirement savings, https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/asset-backed-pensions/Financial-incentives-retirement-savings-2023.pdf.
[1] OECD (2022), OECD Recommendation for the Good Design of Defined Contribution Pension Plans, https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0467.
[5] OECD (2021), “Gender implications of the design of retirement savings plans”, in Towards Improved Retirement Savings Outcomes for Women, OECD Publishing, Paris, https://doi.org/10.1787/8be79bb8-en.
[2] OECD (2018), “Does the design of financial incentives provide a tax advantage when people save for retirement?”, in Financial Incentives and Retirement Savings, OECD Publishing, Paris, https://doi.org/10.1787/9789264306929-5-en.
[6] OECD (2018), Policy guidelines for improving the design of financial incentives to promote savings for retirement, https://web-archive.oecd.org/2018-12-03/501157-Policy-guidelines-for-improving-the-design-of-financial-incentives-to-promote-savings-for-retirement-Policy-Brief-4.pdf.
[4] OECD (2018), “Policy guidelines to improve the design of financial incentives to promote savings for retirement”, in Financial Incentives and Retirement Savings, OECD Publishing, Paris, https://doi.org/10.1787/9789264306929-9-en.
← 1. OECD (2018[2]) calculates the overall tax advantage that individuals saving in asset-backed pension plans may enjoy over their lifetime in OECD countries based on 2018 tax rules.
← 2. Canada, Colombia, Finland, France, Hungary, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Slovenia, Spain, Switzerland, Türkiye and the United Kingdom.
← 3. In Denmark, employee contributions are deductible for personal income tax but not for labour market tax. In France, contributions are deductible for personal income tax but not for social taxes (CSG and CRDS). In Norway, employee contributions to occupational plans are deductible from ordinary income but not from personal income.
← 4. For example, in Belgium, individuals earning up to EUR 15 200 in 2023 paid personal income tax at a marginal rate of 25%, while those earning up to EUR 26 830 paid personal income tax at a marginal rate of 40%. The 30% tax credit was, therefore, more advantageous than a tax deduction for the lower earners, but less advantageous for the higher earners.
← 5. Individuals on adjusted taxable income of up to AUD 37 000 receive a tax offset of up to AUD 500 annually from the government that is effectively a refund of the 15% tax paid on employer contributions. For individuals for whom the sum of adjusted taxable income and employer contributions exceeds AUD 250 000, a tax rate of 30% instead of 15% is applied on the portion of employer contributions that are above the AUD 250 000 threshold.
← 6. In Luxembourg, employer contributions are taxed at the rate of 20% and this tax is paid directly by the employer.
← 7. The tax rates are the same as for personal income tax, but the thresholds are higher. This implies that, for some individuals, the tax rate applied to employer contributions is lower than their marginal tax rate.
← 8. In Belgium, Canada (defined benefit plans) and the Netherlands (defined benefit plans), there is a limit on the accrual rate or on the total pension entitlement rather than a limit on contributions.
← 9. This limit only applies to occupational pension plans implemented via direct insurance and pension funds (Pensionskassen and Pensionsfonds). There are no corresponding limits for pension plans implemented via direct commitments and support funds.
← 10. However, the limit for mandatory employer contributions into a superannuation account (AUD 27 500) only represents 30% of the average wage.
← 11. G is the basic amount and is set to NOK 116 239 as of 1 May 2023.
← 12. This amount is reduced by one dollar for every dollar that the sum of the spouse’s income, total reportable fringe benefits and reportable employer superannuation contributions exceeds AUD 37 000.
← 13. Australia, Belgium, Denmark, France, Greece, Italy, Latvia, Mexico, New Zealand, the Slovak Republic, Sweden and Türkiye.
← 14. The preservation age is the age at which individuals can access their superannuation assets if they are retired. It depends on the date of birth (55 years old for people born before 1 July 1960, increasing gradually to 60 for people born from 1 July 1964).
← 15. From the tax year 2023/24, there is no longer a tax charge in the United Kingdom when an individual builds up pension savings worth more than the lifetime allowance.
← 16. For each peso that the worker contributes voluntarily for retirement purposes, the federal government in its capacity as employer contributes 3.25 pesos, with a contribution capped at 6.5 times the worker’s basic salary. Workers can contribute either 1% or 2% of their basic salary.
← 17. In addition, individuals must be younger than 71, at least 10% of their total income must be from employment or business, and their total superannuation balance must be less than the general transfer balance cap on 30 June of the previous financial year.
← 18. Individuals paying personal income tax at a higher rate (40% or 45%) can claim the difference through their tax return or by calling or writing to His Majesty’s Revenue and Customs. The extra tax refund is not paid in the pension account.
← 19. In Norway, employer contributions to defined contribution schemes are capped at 7% of wages up to 12 G and 18.1% of wages between 7.1 and 12 G.
← 20. If the sum of the two exceeds the limit, the employer and the employee decide upon the priority of the deduction, i.e. deducting first the insurance premiums for the employee or the employer contributions for the employer.
← 21. Readers can find previous editions of the OECD Annual Survey on Financial Incentives for Retirement Savings on the OECD website (2024[8]).
← 22. Contributions over the cap are taxed at the individual’s marginal income tax rate, rather than at 15%.
← 23. The lifetime allowance was completely abolished in April 2024.
← 24. G is the basic amount in the National Insurance scheme of Norway. The tax regulations contain a number of amounts and amount limits which are directly linked to G.
← 25. In Chile, there were three opportunities to withdraw between 2020 and 2021. For the second withdrawal, individuals who had an annual taxable income exceeding 30 UTA in the year of the withdrawal were required to pay taxes. The UTA is an Annual Tax Unit. It was set at CLP 759 912 in July 2023.
← 26. The letter “t” in lowercase represents cases where the income flow is only partially taxed or taxed at a lower rate than the marginal tax rate.
← 27. However, the tax rate on investment income can be lower than the marginal tax rate.