Repayment of Personal Income Tax and Other Benefits of Latvian Private Pension System The Pension System in Latvia
The Pension System in Latvia
The private voluntary pension scheme or the 3rd pension pillar stipulates the free choice of any person to create additional savings for their pension by paying contributions into the private pension funds. It means that additionally to the 1st pillar (state compulsory unfunded pension scheme) and the 2nd pension pillar (state funded pension scheme) part of person’s income is invested in private pension funds personally or by employer.
At the beginning of 2015 there are five open pension funds in Latvia providing a number of pension plans with differing investment policies: 1) CBL Open Pension Fund; 4) Finasta Open Pension Fund; 5) Nordea Latvia Open Pension Fund; 3) SEB Open Pension Fund; 2) Swedbank Open Pension Fund.
Benefits of Latvian Private Pension System
A person has a possibility to choose the amount of payment into the pension plan and its regularity. Amount and frequency of contributions are not limited. An interruption of payments into the pension plan does not affect the right of a participant for the private pension savings and the income received from their further investment. A person can also participate in several pension plans simultaneously and change the pension plan without restrictions of frequency.
Pension scheme participants may participate in a pension scheme both directly by entering into an individual participating contract with a pension fund or through the intermediation of their employers. Moreover in case of individual participation another person can make the contributions in favor of a participant.
The retirement age specified in the pension scheme in Latvia shall not be less than 55, however there are exceptions when the retirement age can be lower for persons employed in special professions, such as healthcare and education. Upon reaching the retirement age a person has unlimited rights to decide upon the pension benefits. A participant, according to the provisions of the pension scheme, can receive pension benefits all at once or in parts or continue participation in the pension scheme.
Assets accumulated of the private pension scheme are inheritable. In case of the death of a pension scheme participant the person indicated by him/her, or if there is no such a person, his/her heirs have the right to receive pay-outs.
A person can benefit of a repayment of personal income tax from payments made into the pension plan.
Repayment of Personal Income Tax from Private Pension
As a significant benefit of Latvian private pension system is that a person can get a repayment of personal income tax on payments made within a year (in 2014 - 24%; in 2015 - 23%). Such payments may not exceed 10% of annual gross income. The total of donations and gifts, payments into private pension funds, insurance premium payments and purchase costs of investment certificates of investment funds may not exceed 20% of the amount of the payer’s taxable income. From the amount of annual taxable income, also such payments can be deducted which are made to pension funds registered in another Member State of the European Union or the European Economic Area State.