From October, as an employee, you can have up to three weeks’ worth of frozen holiday allowance paid out if you have accrued holiday allowance during the period from 1 September 2019 to 31 March 2020. If you do not choose to have them paid out, your frozen holiday allowance will be in The Holiday Allowance Fund, together with any other frozen holiday allowance amounting to up to two weeks’ holiday allowance that you have had frozen. This means that you already have pension savings in the new fund.
If you need the money straight away, you should have it paid out and go and spend it. If you don’t need it straight away, but would rather save it for later use, you should consider whether it is best to leave the money in The Holiday Allowance Fund, or whether it is better to have it paid out and, if necessary, move it elsewhere. Once it has been paid out, you cannot put it back into the Employees' Holiday Allowance Fund.
Do you have to pay top-rate tax?
If you choose to have your frozen holiday allowance (up to three weeks’ worth) paid out, you will have to pay income tax on the payouts, unless your employer has paid your holiday allowance funds into a FerieKonto account or a holiday fund, in which case tax has already been paid on the holiday allowance funds. If your income, including the holiday allowance funds paid out, exceeds the top-rate tax threshold, you will have to pay top-rate tax on the portion of your income that exceeds the threshold. In 2020, the threshold is DKK 531,000, after deduction of the labour market contribution. If you delay the payment of your holiday allowance funds, you will only be able to receive them when you leave the labour market, by which time your tax situation may have changed, meaning, for example, that you will no longer have to pay top-rate tax on the payouts.
Would you like to save up that money?
If you already know that you would like to save this money, you need to decide whether it is easiest to leave the money in The Holiday Allowance Fund, or whether it would be better for you to have it paid out and transferred to another pension scheme.
When considering other pension schemes, you might want to look at, amongst other things, the tax you’ll pay now and the tax you’ll pay when the pension is paid out. If there are payouts in autumn 2020, your holiday allowance funds will be subject to income tax. It is the after-tax amount that you have available to contribute to a pension scheme, but at the same time you can claim a tax deduction if you choose a pension scheme with regular payouts (life annuity or instalment pension).
You also have the option of choosing a pension product known as a retirement savings scheme. You do not receive any tax relief on your payments, but you do not have to pay tax when the money is eventually paid out.
As well as the Danish Tax Agency, it may also be worth checking whether you have reached a contribution limit and are therefore unable to make further contributions in 2020 to an instalment pension or a retirement savings scheme.
You save money by leaving it in your account
If you already know that you would like to save this money, you don’t actually need to do anything. The money is safely invested in the Employees' Holiday Allowance Fund, which is managed by LD Pensions, the organisation that also manages the Cost-of-Living Allowance Fund. It is held as a pension sum that grows over time, as you share in the fund’s returns. The fund’s returns consist of the return on the fund’s investments as well as interest income on the holiday pay that employers leave within their companies. The interest earned on the funds held by employers follows wage trends and thus provides a secure foundation for the fund’s returns. Furthermore, the holiday pay held by employers is guaranteed – even in the event of bankruptcy.
LD Pensions expects to be able to generate a reasonably stable return on holiday allowance funds, similar to that achieved on cost-of-living allowance funds. Here, the value of the savings has increased by just over 5 per cent a year over the last 10 years – after costs and capital gains tax, it should be noted. This means that the savings have grown by approximately 4 percentage points more than inflation each year. The return on investments is subject to PAL tax, as in other pension schemes, whilst the return on holiday allowance funds held by employers is not taxed.
In addition, part of the administrative costs is covered by employers. This means that, if you choose to leave your holiday pay in The Holiday Allowance Fund, the total costs will be low compared with the rest of the pension sector.
Should your holiday pay be kept as disposable income, or would you prefer to invest it?
If you do not wish to tie up your holiday pay until you reach retirement age, you can choose to have it paid out and keep it as disposable funds. You should bear in mind that interest rates at banks are very low and often negative, so if you want your holiday pay to retain its value, you should consider investing the money. If you choose to invest the money, you should be aware of both the costs and the risks associated with where you invest it, and the return will, as a general rule, be taxed more heavily than the tax on a pension sum with LD Pensions.
Will your holiday pay be offset against state benefits during payouts?
Finally, please note that any holiday pay you choose to have paid out in 2020 will not be offset against state benefits. The payouts will be shown as a new income category. This income category allows you to set aside holiday allowance funds that are not to be included in the calculation of means-tested benefits. In the case of means-tested benefits, however, holiday allowance funds are not automatically disregarded. It may therefore be a good idea to keep the letter from the Holiday Allowance Fund documenting the payouts. However, the rule that no offset may take place only applies up to and including 2022. After 2022, paid-out holiday allowance funds that have been saved up may therefore affect the calculation of state benefits.
If your holiday pay is in The Holiday Allowance Fund, the payouts will not be offset against either the state pension supplement or early retirement pension. If you save your holiday pay in other pension schemes, it will be offset in accordance with the rules applicable to those pension schemes.
