People tend to have the same questions about supplementary pension savings: What exactly is it, why should I do it, and what does it cost? The answer is simple - supplementary pension savings are optional savings deducted from your salary each month. If you contribute 4%, your employer will generally add a further 2% under a collective agreement or employment contract. This means that 6% of your salary is paid into your savings in total, while your take-home pay decreases by less than 4%, because your contribution is deducted before tax.
What does this mean in terms of króna?
Let’s say your monthly salary is ISK 700,000. You contribute 4% to supplementary pension savings and receive a 2% employer contribution. You contribute a total of ISK 42,000 towards your savings each month. The exciting part is that your take-home pay decreases by only ISK 17,363 per month, because your 4% contribution is deducted from your salary before tax. As the years pass, investment returns become an increasingly larger part of your savings because of compound interest.
Based on the assumptions in the example, your savings could amount to ISK 46.6 million by the time your turn 60, even though the combined contributions of you and your employer only totalled ISK 17.6 million. By age 65, your savings could amount to ISK 62.3 million, while total contributions would amount to ISK 20.2 million. Of that amount, you would have contributed ISK 13.4 million and your employer ISK 6.7 million.*
Time makes all the difference
As the example above shows, regular contributions, employer contributions and investment returns can build substantial savings over time. The earlier you start, the longer your savings have to grow. That does not mean it is too late to start later in your working life. Even a few years of supplementary pension savings can increase your financial flexibility when you retire.
Investment returns vary and depend on the investment option selected. Those with a long time until retirement can often tolerate greater fluctuations, but the choice depends on individual circumstances and risk tolerance.
Savings that largely take care of themselves
Once you have applied, contributions are deducted automatically from your salary and invested according to your chosen option. You don’t need to remember to make a transfer each month or repeatedly decide whether to set money aside. This can be particularly convenient for people taking their first steps in the labour market. Your salary is paid, savings are automatic and from the outset you get in the habit of allocating part of your income to the future, wherever you are in your working life.
Although the process is largely automatic, it is important to remember that supplementary pension savings do not always transfer automatically between employers. When you start a new job, make sure to register your new employer so that the contributions continue.
Savings that are useful at different stages of life
Supplementary pension savings are primarily intended to strengthen your finances after retirement. These savings are generally available for withdrawal from age 60 and can, for example, give you the flexibility to reduce work or retire earlier. Withdrawals due to age are taxed the same way as wages but, unlike conventional savings, no capital income tax is paid on investment returns.
How can the savings be used?
- Age - from age 60 onwards
To compliment disposable income, reduce work or retire early. Pension pay-outs are liable for income tax. - First apartment - Tax-free use
As a down payment or instalment on a mortgage, provided certain conditions are met. - Disability - Available for disbursement
If a disability reduces work capacity. Disbursement generally takes place over several years. - Death - fully inheritable
These are private savings and fully inheritable under the Inheritance Act.
The savings can also be used earlier, such as to buy first housing or in the case of disability. A private pension that is fully inheritable.
Your savings, your choice
When you start supplementary pension savings, you select an investment plan that suits your age, goals and risk tolerance. Landsbankinn and Íslenski lífeyrissjóðurinn offer a varied selection of investment plans, from deposits with low fluctuations to investments that may fluctuate more.
We advise you to review the selection regularly as the same investment plan may not suit the entirety of your working life.
View investment plans to see what suits your needs
In Landsbankinn’s app, you can apply for supplementary pension savings, register employers, alter contributions, selected investment plans and monitor your savings. It can be helpful to meet and get advice. We're always there for you.
