Publication date 24 October 2013
As part of the Tax Plan 2014, the annuity exemption and the requirement that existing annuity entitlements must be disbursed in installments will no longer apply as from January 1, 2014. Rebate rules will apply to existing annuity entitlements that are fully surrendered in 2014; in that case only 80% of the surrendered amount will be taxed. The rebate rules will only apply if the employer transfers the severance pay to the annuity's administrator before November 15, 2013.
Employees often receive severance pay when they are made redundant. This can consist of an entitlement to periodic payments that are deposited in an annuity, from which, at a later date, the employee will receive periodic payments. These payments can be disbursed through an annuity savings account at a bank, an annuity private limited liability company, or a life insurance policy with an insurance company. If the annuity meets all the tax conditions laid down by law, the employer can transfer the severance pay without having to withhold payroll tax and social security contributions, which will only become payable by the employee at the time the periodic payments are made.
Based on the Tax Plan 2014, it has been proposed to cancel the annuity exemption as from January 1, 2014. It will then no longer be possible to have severance pay disbursed in installments. Severance payments will be subject to a direct and progressive tax rate of up to 52%.
On January 1, 2014, the requirement that existing annuity entitlements must be disbursed in installments will no longer apply (i.e. ‘unlocking’; ontklemming). As a result, taxpayers with existing annuity entitlements can opt to have the balance of the annuity entitlements paid out as a lump sum without deemed interest being levied (full surrender). Based on the bill on the Tax Plan 2014, only 80% of the surrendered amount will be taxed if the annuity is fully surrendered in 2014.
The Cabinet does, however, wish to limit employers and employees taking anticipatory actions in reaction to the cancellation of the annuity exemption, whereby the redundancy date is brought forward so that an annuity can still be claimed in 2013. To this end, the Cabinet has amended the bill on the Tax Plan 2014 and proposed that the rebate rules only be applied if the employer transfers the severance pay to the annuity’s administrator before November 15, 2013. Annuities that are to be self-administered by the employer will be subject to the condition that the employer must have agreed to act as administrator before November 15, 2013.
If the conditions are met, then employees made redundant in 2014 will be able to apply the rebate rules. This means that the annuity entitlement can be fully surrendered in 2014, if so desired, with only 80% of the value of the annuity being subject to tax.
Please note that the annuity entitlement must, nevertheless, meet all legal requirements (as well as being sufficiently determinable). This is important not only for the application of the annuity exemption, but also for the application of the rebate rules in 2014. The date on which the redundancy takes effect is thereby not the deciding factor.
If an exempt annuity entitlement that was correctly allocated in 2013 is paid out after November 14, 2013, the exemption can still be applied, but the rebate rules for surrender in 2014 cannot.