1 December is the final deadline for receiving payment of up to three weeks’ worth of frozen holiday allowance funds. Just over 600,000 employees have so far chosen to leave their holiday allowance in their new pension savings scheme with the Holiday Allowance Fund. But what does it mean that more than 2 million employees have chosen to have their holiday pay paid out? Is it even a good idea to be one of those who leave their holiday allowance funds in the account?
It is definitely still a very good idea to leave your holiday allowance funds in your account if you want to save up and do not need the money straight away. We can continue to offer individual employees the attractive additional pension savings that were always intended. Even though many employees have had a significant portion of the pension savings they hold with us paid out.
Holiday Allowance, like wages, is something you earn, and these funds belong to the individual. The right to holiday allowance cannot be removed by law, and frozen holiday allowance is well protected when it is in The Holiday Allowance Fund in LD Pensions.
A new pension savings scheme with significant benefits
The Holiday Allowance Fund has paid out half of the total of approximately 100 billion Danish kroner that employees have accrued during the transitional year to the new Holiday Act. In addition, political negotiations are underway as to whether the final two weeks of the five-week period during which the frozen holiday allowance was in effect should also be paid out.
“Even if there is political agreement to pay out the last two weeks as well, it is still an attractive pension scheme that we can offer individual citizens. And it seems that quite a few people actually see the sense in a supplement to their pension savings,” says Dorrit Vanglo, continuing “If you can wait to receive the money until the day you retire, Holiday Allowance funds offer the advantage that it is a sum you can manage yourself, and which is not offset against your state pension, etc. You can use it during the transition to retirement or leave it for later. Our experience with cost-of-living allowance funds is that many people are pleased to have a sum that can be used as and when they need or wish to.”
The original plan was for all employees to have their frozen holiday allowance for one year, so that they would have a lump sum to draw on upon retirement. The coronavirus pandemic changed these requirements, and the way was opened for payouts to be made. LD Pensions is required to generate a return on the holiday allowance funds that are not paid out, and this must be done with assets that are much smaller than originally envisaged.
“As things stand, the conditions for achieving good results are really good. We are prepared to invest holiday allowance funds paid in by employers, whilst the funds that remain with the employers are factored into the investment strategy and contribute positively to the results. Costs will remain at an attractively low level,” says Dorrit Vanglo.
As well as benefiting from the economies of scale offered by the same manager overseeing two funds within the same organisation through your savings in the Holiday Allowance Fund, there are also other significant advantages to having a pension savings scheme with the new fund. The fact that a large proportion of the holiday allowance funds is invested with employers provides a solid foundation for the fund’s future returns. The return on the funds held by employers provides a secure foundation for the fund’s performance, and the funds are even guaranteed – even in the event of bankruptcy.
In addition, it has proved to be of great importance to many that the payouts for Holiday Allowance as a pension will not result in an offset against the state pension supplement.
Payouts for holiday allowance funds reduce pension savings
All employees who accrued holiday pay during the transitional year from 1 September 2019 to 31 August 2020 have automatically had pension savings set up with the Holiday Allowance Fund. This represents an unexpected addition to one’s existing pension savings and, not least, means having the funds available as unrestricted savings in a bank, where interest rates are very low – and at times even negative. Conversely, if you have chosen to have the up to three weeks’ worth of frozen holiday allowance paid out, this means that your pension savings will be correspondingly lower on the day you leave the labour market.
The Holiday Allowance Fund expects to be able to generate a reasonably stable return on holiday allowance funds, comparable to that achieved on the 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 in each employee’s account have grown by approximately 4 percentage points more than inflation each year.
