The Polish pension system is organised into three pillars. The first pillar is managed by the Social Security Agency, the second pillar by the open pension funds, and the third pillar is covered by collective employer sponsored retirement arrangements. Participation in the first two pillars is obligatory, while participation in the third is voluntary.
Mr Krzysztof Pater said that the Ministry of Labour and Social Policy has worked on two possible variants for reform to the third pillar.
The first variant was to introduce a 19 per cent tax allowance on employees' contributions to employee pension schemes. The second was to introduce a new system in relation to individual retirement arrangements and exempt the payments from those arrangements from tax under certain circumstances. The government accepted the second variant, as it not only costs the budget less, but is also probably more effective.
Mr Krzysztof Pater informed the audience that the individual retirement arrangements will only be covered by tax incentives, if they are made through individual retirement accounts (indywidualne konta emerytalne - IKE) run by investment funds, brokerage offices and life insurance companies. Secondly, those individual retirement arrangements will have to meet some additional conditions set out by the law. The conditions include:
(i) the maximum amount of the annual investment (no more than 150 per cent of an average monthly salary); and
(ii) minimum age of 60 at which the holder of an IKE will be able to withdraw the collected assets.
The new method of collecting money for retirement will be open to anyone residing in Poland. Although, each person will be allowed to have only one IKE, it will be possible to transfer assets from one IKE to another one run by a different entity, or between an employee pension scheme and an IKE.
The main advantage of an IKE in comparison to other individual savings arrangements consists in the special tax regime, which is very similar to that enjoyed by employee pension schemes. The assets collected on an IKE will not be subject to capital gains tax and payments made from an IKE will be tax-free. However, contributions made to an IKE will be subject to income tax.
It remains to be seen whether the optimism of the government as to the popularity of such schemes is justified. The tax relief for employee pension schemes has not proved popular and there are doubts as to whether individuals will pay tax on income for which they may receive no benefit for several decades.
The individual retirement arrangements should be introduced at the beginning of 2004.
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