Private pension
Employees and self-employed people can pay up to 6% contribution of total wages to a private pension fund. This contribution is income-tax free, and employees receive an additional employer contribution of 2%.
It couldn't be simpler?
| Private contribution from wages | 2%* | 4% |
|---|---|---|
| Monthly wages ISK 150,000 | 3,000 | 6,000 |
| Tax reduction | 1,116 | 2,232 |
| Employee's real contribution | 1,884 | 3,768 |
| Employer's contribution | 3,000 | 3,000 |
| Value of private pension | 6,000 | 9,000 |
?at the same time the value of your real contribution is tripled
As shown in the table, your real contribution is tripled by saving 2% of ISK 150,000 wages per month. The value of your private pension is ISK 6,000, while your real contribution is only ISK 1,884. Therefore, your real contribution is only 31% of your private pension value: you receive the other 69% from your employer.
Employers pay the contribution to the private pension department of the employee's pension fund, unless the employee otherwise decides.
Starting your private pension is simple
You can have a contract sent to you to sign.
You can also print the contract and send it to the fund.
We then send your employer a copy of the contract.
Private pension saving is an important opportunity which all wage earners should consider.
Private pension is the best savings option
Private pension is the best way to increase your old age pension.
The tax incentive is obvious: up to 6% contribution of wages is tax free and in addition, employees receive 2% contribution from the employer.
Private pension accounts are not subject to investment income tax.
Private pension accounts are not declared as assets in your income tax return, and so they do not affect payments of interest benefits on housing loans, nor of child benefit.
Private pension is exempt from creditors and therefore is not subject to attachment in cases of financial troubles or insolvency.
Pension payments are subject to income tax in the same way as earned income. All individual taxpayers are entitled to a personal tax card which reduces income tax.
Private contribution
How to calculate the private contribution
| Employee contribution |
Employer reciprocal contribution under wage agreement |
Total contribution into the employee's private pension fund |
|---|---|---|
| 2% | 2% | 4% |
| 4% | 2% | 6% |
Total private contribution when salaries are ISK 100,000 per month
| Employee contribution |
Employer reciprocal contribution under wage agreement |
Total contribution into the employee's private pension fund |
|---|---|---|
| 2,000 | 2,000 | 4,000 |
| 4,000 | 2,000 | 6,000 |
Pension payments
From the age of 60, fund members can choose between two types of payments or a mixture of both:
- From the age of 60 to 67, the value of the private pension account is paid out monthly over seven years. At the age of 67, it is possible to receive the total value of the account in a lump sum.
- Another choice is to convert the value of the account into an inflation- protected annuity that guarantees lifetime monthly payments. Any balance remaining in the account at the time of death goes to the Pension Fund, not the fund member´s heirs.
Illnesses or accidents
A fund member who becomes permanently ill or disabled, and is therefore unable to perform his work, has the right to receive the value of his private pension account over a minimum of seven years.
Death
The balance in the account at the time of death is divided among the fund member's heirs as provided in the Inheritance Act.
Example of private pension payments when contribution is ISK 6,000 or ISK 12,000 per month and real investment rate is 5% p.a.
| Savings time | Contribution ISK 6,000 | Contribution ISK 12,000 | ||
| Monthly payments for 7 years | Monthly payments for 10 years | Monthly payments for 7 years | Monthly payments for 10 years | |
| 10 years | 13,042 | 9,773 | 26,085 | 19,547 |
| 20 years | 34,287 | 25,693 | 68,573 | 51,389 |
| 30 years | 68,892 | 51,625 | 137,783 | 103,250 |
| 40 years | 125,260 | 93,865 | 250,519 | 187,729 |