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A different tax treatment between mandatory and voluntary contributions may be justified. Incentives to save for retirement through the income tax system may be necessary in voluntary pension arrangements as a way to encourage people to save in complementary funded private pension plans. In mandatory pension arrangements, the reasons for providing incentives may be less clear. Incentives may be useful in order to make people accept the policy of compelling them to save for retirement. Moreover, in countries with high informality, incentives may also be needed to increase contribution densities.
Most countries exempt from taxation returns on investment in private pension plans. When returns are taxed, they are usually taxed every year during the accumulation phase. However, some countries tax returns upon withdrawal only. Tax rates may vary according to the duration of the investments, the type of asset classes, or the income of the plan member. Most countries do not tax the accumulation of funds and impose no lifetime limit on the total amount that can be accumulated in a private pension plan.
The tax treatment of pension income is identical across different types of pay-out options (life annuity, programmed withdrawal or lump sum) in half of the OECD countries and seven non-OECD EU Member States. Only two OECD countries incentivise people to annuitize their pension income through a more favourable tax treatment for annuities as compared to programmed withdrawals. Conversely, lump sums are tax-free up to a certain amount or only partially taxed in nearly half of the OECD countries and five non-OECD EU Member States in order to reach a more neutral tax treatment across the different pay-out options. A minority of countries discourage early withdrawals through the tax system.
Besides the personal income tax system, contributions to private pension plans and private pension benefits can be subject to social contributions. In general, contributions paid by individuals from their after-tax income to voluntary personal pension plans are also subject to social contributions. Private pension income is usually not subject to social contributions or only a part of the social contributions usually levied on wages and salaries is levied on pension income.
The confusion resulting from the complexity of the tax system may have led some countries to introduce more direct financial incentives to encourage participation and contribution to the private pension system, especially for low-income people. Financial incentives considered here in include matching contributions from the state or from the employer, state subsidies and tax credits. These incentives are provided to eligible individuals who actually participate or make voluntary contributions to the private pension system. Such incentives can be found in 12 OECD countries and 2 non-OECD EU Member States.
This stocktaking exercise will be extremely useful for the next steps of the project on Financial Incentives and Retirement Savings. This information will be used as input to calculate comparable indicators across countries assessing the value of the tax incentive to save in private pension plans as opposed to traditional savings vehicles. Such indicators would allow for the examination of which design features may lead to higher incentives for individuals, whether these incentives are efficient to promote retirement savings in private pension arrangements, and how much they may cost the Treasury.