LD Pensions expects that frozen holiday allowance funds totalling just over DKK 20 billion will remain in The Holiday Allowance Fund, The Holiday Allowance Fund. This means that around 600,000 employees will have a new retirement savings scheme, as they are expected to leave their holiday allowance funds in the fund.
We can offer a very sensible alternative to those employees who do not need the money straight away. More than half a million employees seem to think it makes sense to leave their Holiday Allowance in their accounts. And in doing so, they build up supplementary savings for their retirement.
By 10 May 2021, requests had been made for the payouts of holiday allowance funds totalling just under 34 billion Danish kroner. To this can be added the 52 billion Danish kroner that were paid out last autumn. In total, 2.3 million employees have withdrawn DKK 86 billion, which, after tax, amounts to just over DKK 51 billion available for spending.
There is a financial benefit to leaving your holiday allowance funds untouched
There is less than a month left of the second round of early Holiday Allowance payouts, and LD Pensions has so far observed that the payout pattern from the first round in autumn 2020 is repeating itself in the second round.
The average age of the group that chooses to leave their holiday pay in the scheme is high. Around a quarter of all employees aged 50–59 choose to leave their holiday allowance funds in their accounts, and almost half of employees over the age of 60 do the same. This suggests that, to a large extent, this is a group that is focused on their finances during retirement.
“If you don’t need the money right now, it may be advantageous to keep the funds frozen. The funds are invested in such a way that they will grow over time. If they are left as uninvested funds in the bank, they will – given the negative interest rates all banks are currently offering – actually decrease in value over time. From our experience with the Cost-of-Living Allowance funds, we know that those who leave their money in for the longest period are a group who use the freeze as a supplementary savings scheme, which they can effectively ‘unfreeze’ themselves whenever it suits them,” explains Dorrit Vanglo.
There are other ways to save money apart from freezing the funds, but freezing them results in an attractively low tax rate on the returns, which is a financial advantage. The fact that part of the holiday allowance funds also remains with the employers provides another clear financial advantage. This is because a scheme linked to wage growth applies to this portion of the funds, providing a secure foundation for the savings, which at the same time flows into the fund as a tax-free Return.
An investment strategy that changes gear
To date, the employees' holiday allowance funds have increased by 1.7%. You can keep track of the return – which is a net return after pension return tax – on the LD Pensions website. View the return here.
“Up to now, we have invested with very low risk. This has been done with a view to the large payouts. But as employers have now paid in a significant proportion of the employees' holiday allowance funds, we have something to work with, and at the same time it is becoming clearer what the age profile of our employees is. This means that, in the coming period, we will be stepping up our investment strategy,” says Dorrit Vanglo.
Approximately 30 per cent of the holiday allowance funds have currently been paid into the fund, whilst the remainder is held by employers. Payments are made on an ongoing basis as employers assess their need to retain holiday allowance funds as liquidity within their organisations. It is not free for employers to retain holiday allowance funds as liquidity, as they must pay interest corresponding to wage growth until the funds are paid into the fund.
Key facts – figures as at 10 May 2021
- Total holiday allowance funds: DKK 108.5 billion
- Total paid out early: DKK 85.6 billion (DKK 52 billion in 2020 and DKK 33.4 billion in 2021, plus DKK 0.131 billion in payouts for fund holiday days)
- Taxed holiday allowance funds paid in via FerieKonto and holiday funds: DKK 10.7 billion
- Untaxed holiday allowance funds contributed by employers: DKK 22 billion
- Holiday allowance due from employers: DKK 75.8 billion
Age profile of Holiday Allowance funds
|
Age |
Holiday Allowance that have been paid out |
Holiday Allowance carried forward as a new age-based savings scheme |
|
0–29 years |
95% |
5% |
|
30–39 years |
87% |
13% |
|
40–49 years |
81% |
19% |
|
50–59 years |
75 |
25% |
|
60+ years |
56% |
44% |
|
Age unknown |
9% |
91% |
|
All |
79% |
21 % |
