Changes in retirement savings products

Lucie Šutovská
Since the beginning of this year, people can use a new state-supported retirement savings product, a long-term investment product that expands the existing portfolio. However, the changes to the retirement savings will also affect existing products.

The Long-Term Investment Product (hereinafter "LTIP") is a new alternative to the products of the third pension pillar, which are supplementary pension insurance, pension insurance and supplementary pension savings, and the private life insurance product. The LTIP is an investment-type financial product that can be provided by legally regulated financial institutions, namely banks, credit cooperatives, securities dealers, investment companies or self-managed investment funds. This product can be an interesting tax-efficient form of retirement savings for investors who wish to choose their own investment strategy, which distinguishes it from supplementary pension schemes or supplementary pension savings, where it is only possible to invest in participating funds offered by the pension company concerned.

The investment instruments that can be registered under the LTIP include:

  • cash,
  • shares and bonds traded on an exchange, including foreign bonds, or sovereign or covered bonds from EU countries,
  • units of an investment trust,
  • derivatives used to hedge currency or interest rate risk.

Changes in the area of retirement savings will also affect the existing third pension pillar products, namely in the area of state contributions with effect from 1 July 2024. The aim of the planned changes is to motivate higher deposits, and therefore the lower limit of the participant's contribution from which the state contribution is provided and the maximum contribution of the participant for which the maximum amount of the state contribution of CZK 340 is provided will be increased. Thus, the state contribution will now be granted for a deposit between CZK 500 and CZK 1 700, with the state contribution always amounting to 20% of the participant's deposit. The state contribution will no longer be paid to participants who have been granted a retirement pension.

The tax-efficient retirement savings products previously consisted of supplementary pension insurance, supplementary pension savings and private life insurance, but they will now be joined by LTIP and a long-term care insurance product. The reason for tax support for private long-term care insurance is the growing need to finance care for people who are fully or partially dependent on the help of others with managing basic daily needs and tasks, and the state hopes to increase the incentive for people to take out these products.

The total limit for all four supported products will now be CZK 48 000 per year per taxpayer, which corresponds to the sum of the previously valid limit of CZK 24 000 per year for supplementary pension insurance and supplementary pension savings and CZK 24 000 for life insurance. At the same, the threshold for applying the tax deduction for the products of the third pension pillar, which can be used for deposits exceeding the amount associated with the payout of the state contribution, has been shifted, so it will now be possible to apply tax deduction on deposits in the amount from CZK 1 700 per month. The exemption for employer contributions remains unchanged and the limit of CZK 50 000 per year will apply, but it shall apply for all four tax-efficient products.

The change will also affect the conditions for granting tax relief. The period after which the funds can be withdrawn without penalty, while meeting the other criteria, is changed from 5 to 10 years, but the condition of reaching the age of 60 will remain. The same conditions will also be applied to the LTIP.

In case that a taxpayer breaches the 10-year savings/60-year rule, the obligation to refund the applied tax relief equal to the aggregate of contributions deducted from the tax base for the 10 immediately preceding taxable periods remains, as it does today, while losing the right to exempt income paid from these products. Should there be employer contributions, these contributions will also have to be taxed as employment income for the 10 immediately preceding tax periods.

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Andrea Kleinová
Andrea Kleinová
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