Taxation of pension fund payouts
April 15, 2011 | 25,00 EUR | answered by StB Manuela Ponikwar
Dear Sir or Madam,
Since 2004, I have been contributing to a pension fund through salary conversion (in 95% of the time, in the remaining time I have contributed from my net salary, as the employer did not know about or did not want to use the salary conversion option). This contribution is free of social security contributions/taxes. (Is that correct?)
My retirement is set to begin in 2037. It is planned that I will receive a monthly regular old-age pension from this fund. Alternatively, I can apply to receive the capital as a lump sum 3(?) years before the start date.
How will the payout be taxed? Do I have to fully tax both payout methods at the current tax rate during the retirement period, so should I expect a very high tax burden in the year of the lump sum payout? I have read several different answers on the internet, and the insurance company mentioned a profit share of 18%...
So, do I have to fully tax my entire payout, whether as a lump sum or lifetime pension, and also pay social security contributions on it? At what tax rate do I have to do this? What does the profit share mentioned above mean - is this then the tax rate with which I have to tax the payouts? Or do I only have to tax this 18%? Or the contributions + these assumed 18%?
Thank you for your answers, which are also understandable for laypeople.
Dear enquirer,
Thank you for your inquiry, which I would like to answer within the scope of an initial consultation, taking into account the offered fee:
First remark in advance: The topic is unfortunately very complex.
The tax treatment of benefits from a pension fund in the payout phase depends on whether and to what extent the contributions in the accumulation phase have been taxed in advance or possibly taxed afterwards since 2002.
It is also important to consider whether there was state support through the Riester pension scheme for the contributions during the accumulation phase.
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Generally, the pension payments from your pension fund can fall into one of the following groups:
1)
Benefits based solely on state-supported capital are subject to full subsequent taxation (§ 22 No. 5 sentence 1 EStG). This means that you will pay tax on the pension payment in full using your tax rate, after deducting a lump sum amount of EUR 102 for work-related expenses.
This includes benefits from company pension schemes whose contributions were tax-exempt during the accumulation phase (§ 3 No. 56, 63 and No. 66 EStG) or for which Riester support was granted.
2)
Benefits based on non-supported contributions and an old commitment made before January 1, 2005 are to be recorded as other income with the income share for income tax purposes when paying annuity payments (§ 22 No. 5 sentence 2 EStG).
This means that when retiring at the age of 65 or 66, you will be taxed on 18% of your pension at your tax rate.
In cases of lump sum payment in old cases, the profits included in it are only taxable as other income if they would also be subject to taxation as capital income according to the general regulations (if the payment is made before the end of 12 years).
Then, the interest, both calculated and non-calculated, included in the lump sum payment are taxable income within the meaning of § 22 No. 5 EStG.
3)
In most cases, the conditions for tax support of company pension schemes (e.g. tax exemption or eligibility for the entitled persons) are only temporarily present during the accumulation phase, therefore, for tax purposes during the payout phase, a division of benefits into supported and non-supported capital is necessary.
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There is a correspondence between the tax treatment in the accumulation phase and in the payout phase:
- Tax-exempt = state-supported accumulation phase = full subsequent taxation of benefits (§ 22 No. 5 EStG)
- while, for example, lump sum taxed contributions to a pension fund were not state-supported = only partial subsequent taxation (based on the income share)
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So, what exactly is the supported capital:
In the case of employer payments to a pension fund, taxation as wages should generally already take place at the time of contribution payment to the retirement provision institution (so-called upfront taxation), as the employee directly receives a legal claim to provision from the retirement provision institution.
However, the employer's contributions to build up this company pension scheme are tax-exempt in certain limits according to § 3 No. 63 EStG = supported.
Benefited by the tax exemption are all employer contributions within the meaning of § 1 para. 2 BetrAVG.
In addition to purely employer-funded contribution payments, the employer's contribution payments according to § 3 No. 63 EStG are also tax-exempt, for which the employee waives future salary entitlements, i.e., salary conversion.
For tax exemption, it does not matter who ultimately bears the burden of the contribution payments economically, but only that it is contribution payments (i.e., a payment flow) of the employer.
The tax exemption is initially limited to 4% of the contribution assessment ceiling in the general pension insurance.
However, the so-called own contributions (§ 1 para. 2 No. 4 BetrAVG) of the employee are exempt from tax, as these, unlike in the case of salary conversion, are no longer contributions of the employer; this also applies if they are transferred by the employer to the retirement provision institution. Therefore, if you have partially financed benefits from your net income, these - even if the transfer was done through the employer - are not tax-exempt = non-supported contributions.
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The social security treatment of salary-financed company pension schemes fundamentally differs from income tax. While the possibility of tax exemption and lump-sum taxation in the income tax procedure is completely independent of whether the contribution payments are made by the employer (= employer-funded old-age provision) or through salary conversion by the employee (= salary-financed old-age provision), it is crucial for contribution collection in social security who bears the contributions economically.
Employer-funded contribution payments that remain tax-exempt or are taxed flat rate at 20% are generally not considered contributory earnings.
The treatment with regard to contributions is significantly more complicated in cases of salary conversion. In payments to pension funds, employer contributions up to 4% of the contribution assessment ceiling of the pension insurance are exempt from contributions. In the case of salary conversion, another 4% of the contribution assessment ceiling is exempt from contributions.
In old cases, a maximum of EUR 1,752 if lump-sum taxed within the scope of a one-time payment.
In the payout phase, both the pension and the one-time payment are subject to social security contributions
