Taxation of pensions
A pensioner’s final amount of income is the income in hand after taxation. Pensions are taxed according to the income tax rate. The differences to taxation of wages are the various tax deductions and social insurance contributions.
Pensions are taxable earnings
Earnings-related pensions, the national pension and the guarantee pension are taxable income in Finland. However, pensioners’ housing allowance, care allowance, front-veteran’s supplements and the child increase of the national pension are exempt from tax.
Pensions paid under workers’ compensation, motor liability and patient injury insurance are treated as pension income and taxed as earned income. However, daily allowances paid under these insurances or compensation received based on disability for less than one year are not treated as pension income.
Collective occupational pensions and lump-sum pensions provided by the employer are both taxed as earned income. They are taxed in the same way as statutory pension income.
Pension tax and deductions
As a rule, statutory pensions are taxed in the same way as other earned income. However, the tax and contribution burden of pensions differ from those of wages due to different tax deductions and social insurance contributions.
State income tax is payable on taxable earned income in accordance with the progressive income tax scale. Municipal tax is paid on earned income to the taxpayer’s municipality of residence based on the local income tax rate. A member of a congregation pays church tax at the congregation’s income tax rate.
Pensioners also pay public broadcasting tax, and those with higher pension income, an additional tax for pension recipients. A health insurance contribution is deducted from pension and benefit income, but pensioners do not pay the daily allowance contribution for health insurance.
A pension income allowance and a basic allowance are granted on pension income both in municipal and state taxation. A person receiving a small pension (for example, only a national pension and the guarantee pension) pays no tax at all on their pension due to the deductions.
No unemployment insurance contributions or earnings-related pension contributions are deducted from pension income.
Taxation of pensioner’s wages
Pensioners’ wage income is taxed as any other wage income. Other earned income reduces the pension income allowance: a decreased allowance will increase the tax rate. On the other hand, the expenses for the production of income, the income allowance and the earned income credit are deducted from the actual wage income of a pensioner. The earned income credit is higher for persons who have turned 60. Taken together, these deductions mean that the tax and contribution rate for a combination of pension and wage income is generally lower than the same amount of income consisting of only a pension income or a wage income.
No unemployment insurance contribution is deducted from the wages of a person who has turned 65. The pension contribution is paid until the age when the insurance obligation ends, determined separately for each age cohort. No health insurance contribution is deducted from the wage of persons who have turned 68.
As of the beginning of 2005, after a brief transition period, voluntary individual pension has been taxed as capital rather than earned income.
Contributions to long-term savings accounts are deductible in the capital income taxation in the same way as are the contributions to voluntary pension insurance policies. The return for invested assets is not taxed during the savings period.
Payments paid by the service provider to the saver or other person entitled to the assets according to the savings contract when the person in question has reached the retirement age are considered capital income for the recipient. Taxable capital income is subject to a capital income tax of 30 per cent.
Contributions to a voluntary pension insurance or a long-term savings account can be deducted from the capital income to an annual amount 5,000 euros per year. If the employer has taken out such insurance for the taxpayer, the contributions for an insurance or long-term savings account taken out privately can be deducted to a maximum annual amount of 2,500 euros.
The retirement age entitling to tax deductions in individual pension insurance has been raised on several occasions (see table below). As of the beginning of 2013, the retirement age is 68 years for new insurance policies and long-terms savings accounts.
The retirement age at the time of taking out the insurance
|Insurance taken out||Age at which pension starts, years|
|–30 Sept. 1992||55|
|1 Oct 1992–23 June 1999||58|
|24 June 1999–5 May 2004||60|
|6 May 2004–17 Sept. 2009||62|
|18 Sept. 2009–31 Dec. 2012||63 (in most cases; the retirement age under the Employees Pensions Act)|
|1 Jan. 2013–||68|
As of 2006, the Finnish pensions of persons who live abroad permanently, that is, who have a limited tax-paying liability, are taxed in the same way as the pensions of persons who live in Finland. The tax rate, deductions and tax return procedure are the same as for persons who live in Finland.
Earlier, persons who lived abroad had to pay a tax at source of 35 per cent. All taxes of retirees who live abroad, including the calculated municipal tax according to the average municipal tax rate, go to the State.
In some cases, based on a tax treaty between Finland and the country in which the person lives, the pension is not taxed in Finland at all but only in the country in which the pensioner lives.
A pension from abroad has often been taxed in the country from which it is paid. In that case, no income tax is deducted in Finland, but the pension increases the tax rate on income from Finland. Pensions from certain countries are not taxed in the foreign country. In such cases, Finland taxes the pensions as pensions paid in Finland.
The tax treatment of the pension from a specific country is determined by the tax treaty between Finland and the country in question to prevent double taxation. Finland has concluded such treaties with more than 60 countries. Foreign pensions are often subject to the insured’s contribution for medical care insurance in Finland.