Still Illegal Reductions in Old-Age Pensions

   Jun 12, 2024     2 min read

In short and concise terms, the state pension is being illegally reduced by up to 80,000 ISK per month, after taxes. If we use a simple comparison example in the TR calculator of an individual with 400,000 ISK in employment income and another with 400,000 ISK in pension income, the person with employment income receives a total of 757,861 ISK from TR and employment combined. Disposable income according to the calculator after taxes and fees is 563,950 ISK.

It is necessary to point out that the purpose of this example is to highlight the difference between employment income and pension income. Therefore, relatively exaggerated figures are used that do not apply to many pensioners.

The other example is an individual with 400,000 ISK in pension income - and according to the TR calculator, this individual receives 629,722 ISK per month, or 484,478 ISK after taxes and fees. A whole 79,472 ISK less in disposable income per month simply because the additional income is from a pension fund and not employment income.

The reason for this is a special tax-free threshold for pensioners’ employment income of 2.4 million ISK per year - and according to the law, it should be that pension fund payments are not considered employment income. The flaw is that according to all other laws, pension fund payments are classified as employment income. Income tax is paid on them and all that follows.

What is special is that the Social Security Act specifically states that payments from employment-related pension funds are not considered employment income. This means that an exception is made to the general rule about pension fund payments - that in the context of social security law, these payments cannot be classified as employment income. But - and this is a big but. This exception is made for disability pensions but not for old-age pensions.

I have been pursuing this issue with various institutions, ministries, committees, and wherever I could since the last elections. Finally, my concerns about this significant flaw in the implementation of the Social Security Act were acknowledged by the Welfare Committee of the Althingi, which received a memorandum from the Althingi office on April 26th last year stating unequivocally that the law is unclear on this matter, or as it says: “It is reasonable to conclude, based on the interpretation of words, that payments based on contributions an individual has made to a pension fund should be considered employment income.”

This is a major issue of interest that, for some reason, has not received as much attention as an issue of this magnitude (hundreds of millions in reductions per month) should receive.