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Does it make sense to convert your internal pension reserve to an IPT?

Friday 23/10/2020

If you ever entered into a pension allocation agreement with your company with a view to building up a pension, the balance will now be dormant on your balance sheet.

It is advisable to take steps in good time to ensure that you are not penalised from a fiscal point of view when you retire. Externalisation is an option.

Before the Programme Act dated 22 June 2012

In the past, company managers could enter into an internal pension allocation agreement with their company. The agreement stipulated that you would receive a supplementary pension from your company at a specific age (60-65 years). A provision that was tax deductible subject to certain conditions was made by your company for this specific purpose.

Current situation

Since the introduction of the 2012 Programme Law, the further accumulation of this kind of internally funded pension reserve has been prohibited. Supplementary pensions can only be built up externally with an insurer or pension fund.

Existing agreements have since been frozen and no additional provisions can be made. The company's balance sheet only shows the balance accrued at that time.

These internal pension reserves must also be registered in the Supplementary Pensions Database (DB2P), managed by Sigedis. If you omitted to complete this registration, the accrued pension reserve is not deductible.

Link to statutory pension date

Since 1 January 2016, the payment of a supplementary pension has been linked to the date of the statutory pension. This concerns a supplementary pension built up using professional income, including the pension reserve referred to above. Since that date, it has also no longer been possible to subscribe to a supplementary pension after the start of the statutory pension.

This link ensures that the 'frozen' pension reserve cannot be paid out before or after the date you retire by law. This obligation also applies if you take early statutory retirement.

Only if you meet the conditions required to receive your statutory pension or have reached the statutory retirement age, but continue to work, will you be free to choose whether or not to have the supplementary pension paid out.

Potential fiscal problems and key concerns

If, as a managing director, you apply for your statutory pension, your existing internal pension reserve must also be paid out. From a fiscal point of view, this implies:

  • That the 80% rule should be rechecked. After all, the provision is removed from the balance sheet and, at the same time, the payment of the pension capital is recorded as an expense. These costs are only deductible within the limits of the 80% rule. The deductibility of costs may be problematic if remuneration has decreased in the meantime.
  • The payment of the pension will be taxed separately in your capacity as managing director (20% or 16.5% + municipal tax) if you resign as a director as a result of your retirement and cease all activities on behalf of your company.
  • However, if you remain active within your company, the pension capital paid out will be progressively taxed as part of your personal income, as it is regarded as remuneration because of the taxation attraction principle.
  • You can opt to externalise your pension reserve and transfer the accrued balance to an Individual Pension Allowance with an insurer or pension fund. You will not pay any premium tax on this conversion and provided you comply with the 80% rule, your company will not be taxed on the transferred balance. The advantage is that when you retire, the IPA insurance will be paid out, but subject to the commonly used more advantageous rates of 20%, 16.5% or even 10%.

Do you still have an internal pension reserve of this kind? Then you should seek advice on what you can do in order to avoid tax disadvantages when you retire, and it has to be paid out. Externalising your pension reserve is an option. A lot depends on when you retire and whether you cease your activities.

Do you have further questions? If so, please do not hesitate to contact our experts for tailor-made advice. 

Authors: Stephanie Seré en Hendrik Hubau

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Stephanie Seré
Stephanie Seré
Manager Tax & Legal