Should you withdraw your private pension?

Anyone can now withdraw their private pension regardless of age but should you?


The minimum age for withdrawals of Icelandic private pension (optional additional pension) is normally 60. However, as part of the government’s response to the economic effects of COVID-19, anyone can now withdraw their pension regardless of age. Maximum withdrawal amount is ISK 800.000 per month over a period of 15 months.

There are however a few things to consider:

  • Although presented as part of government efforts to help individuals through possible hardships, this is not government money. This is only a permission to access your private pension savings earlier than previously allowed.
  • You will need to pay taxes. The Icelandic tax system is quite complicated and if you exceed a certain salary amount per month your tax percentage will rise considerably. A maximum withdrawal in addition to your regular salary will likely result in you paying much higher taxes than should you withdraw less per month or wait until you retire.
  • Those moving from Iceland to within the European Economic Area (EEA) are normally not allowed to take their private pension with them but can do so this way.
  • The original reasoning for limiting withdrawals to those 60 years and older is still valid. The system was implemented so that you will have the opportunity of a financially more secure retirement. Withdrawing funds now can reduce your savings when you are older.

Private pension is optional but available to everyone working in Iceland. If you deposit 2-4% of your monthly salary into a private pension scheme your employer is obligated by law to give you an additional 2%. That alone probably makes it the best type of savings in Iceland but additionally it is fully inheritable, exempt from capital income tax as well as reduction of social insurance pension and cannot be accessed by creditors in case of bankruptcy. Your private pension is therefore a valuable asset that you should take very seriously and sign up for, if you haven’t already. 

So, is it a good idea?

Because of the importance of private pension to retirees in Iceland you should have good think about it before withdrawing. But there is a good reason the government has granted temporary access. In case of serious financial difficulty this can help. Like the rest of the world, the immediate future of the Icelandic economy is unclear at the moment and a record number of people have lost their jobs, at least in part. If you think your personal finances are in danger unless you withdraw your private pension it might be a good option. But remember that in case of bankruptcy, this could be one of the few assets you get to keep.

For those not in immediate financial danger it might be more prudent to stick to the original plan, leave the pension where it is and enjoy the fruit of your savings when you need it the most – in your retirement.

Author


Björn Berg Gunnarsson


Director of Research and financial education

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