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What should we know about accumulated pension reform?

What should we know about accumulated pension reform?

From January 1, 2019, accumulated pension reform has been launched in Georgia. The elaboration of pension policy is the fundamental component of ongoing financial reform. The Ministry of Economy of Georgia has developed a new strategy regarding the ways of increasing the social pension and implementing the private pension model.

By offered program private pension model is based on the “defined contributions” principle. According to this principle the private pension model is based on following: contributions made to Pension fund, the money gained by the fund by reinvestment and the duration of the work (the longer the portfolio invested more financial result becomes). In addition, contribution between the employer, the employee and the government will be made equally. This system applies to the employed person with the following principle 2% + 2% + 2%. The state’s, employer’s and employee’s Monthly contribution on the employee’s personal pension account will ultimately mount 6%. It should be noted that the contribution transferred to pension fund are not taxable. As an example, if individual’s salary is 1000 GEL and he/she transfers 2% to the pension fund indiviual would not be taxed and instead of 16 GEL transferred amount will be 20 GEL, and another 20-20 GEL would be added by the state and employer, which means that, in total, 60 GEL would be transferred instead of 16 GEL, which is 275% as a profit.

In addition, its noteworthy to mention that the national treasury complements to participant’s pension account 2% of the accrued salary, before the total amount of the accrued salary of the employee will reach 24,000 GEL annually. Furthermore, the national treasury pays 1% of the accrued income on an individual’s pension account till the total amount of the paid salary will exceed 60000 GEL annually, after which the national treasury does not make any contributions to the employee’s pension account.

Accumulated pension amounts transferred to the individual’s pension account is the property of individual and the possibility of using only occurs when individual reaches pension age. If the person is permanently moving in another country, the amount of total money could be withdrawn. Such possibility would also be given when individual becomes a limited capabilities person. Pension assets apply the right of inheritance and by the decision of the inheritor, the amount should be transferred to inheritor’s pension account or should be withdrawn only after taxation. Furthermore, it is noteworthy that you could not mortgage, pledge property rights on pension assets, you could not transfer the property rights to third parties or to otherwise alienate them to any demands or secured obligations. Individual Pension assets are not subject of enforcement, could not be carried in the bankruptcy of the participant or by the pension agency and any kind of payments procedures should not be allowed on them.

From January 1, 2019, after the payment of first salary, each employee participates in the pension reform, except for the employee who passed 60 years (55 years in case of women) before the enactment of this Law (August 6, 2018), and those individuals who have passed the pension age might become participants voluntary. As regards the refusal of participation, the employee who is 40 years old until the enactment of this Law (until August 6, 2018) is entitled to apply to the Pension Agency and ask for leave from the accumulated pension scheme within 5 months of automatically participation in this scheme, but not earlier than 3 month. Otherwise the employee will be a member of the pension scheme. An employee who refuses to participate in accumulated pension scheme at any time might re-join by the application procedure set by the pension agency.

The registration of the employer’s in electronic system, should be done as follows: The Employer’s authorized representative should register in the administration electronic system of pension contributions, available on the website: www.pensions.ge. This obligation does not arise to the governmental (state) employer, because the national treasury service transfers pension contributions and submits the information to the pension agency without the filling Pension Declaration. Since the Treasury Service is obliged to provide the information about the employee to Pension agency, each State employer is obliged to submit the information requested in Pension Declaration to the Treasury Service about the employees.

As regards the joining of self-employed in the accumulated pension scheme, it will be voluntarily and may be made after the income tax returns on income generated after January 1, 2019. To accumulate a pension scheme, a person is required to register in the Pension Deposit Administration System, available from the website.

The accession of self-employer in accumulated pension scheme will be voluntarily after the submitting income declaration. Individual for accession in a pension scheme is obliged to register in the Administration System of pension contributions, available from the website.

Those employees who by the law are obliged to join the accumulated pension scheme, are employed by international organizations, the diplomatic mission or embassy and if the employer does not pay income taxes, such employees are obliged to perform those actions, which is done by the self-employed individuals, with the difference that the monthly pension contribution will calculate from the basic salary amount and be defined by the 4% of total amount, where 2% is the employee’s pension contribution, while 2% is the employer’s pension contribution in favor of the employee. The employer is also obliged to pay the employer’s share of pension contributions as a salary.

Finally, the employer is obliged to transfer to the pension agency’s relevant bank account as employee(s)’s as well as employer’s pension contribution. In case of the state employer, transfer is carried out on the account of the pension agency in the Treasury Service.

An example of filling detailed pension declaration:

Given Basis: The salary of the employee is 2000 GEL. The Employer adds additional 50 GEL for insurance, as well as 50 GEL for mobile services and funding the studies monthly 200 GEL. Based on the given basis, the amount of pension contribution is calculated as follows: 2000 GEL (salary) + 2 X 50 = 100 GEL (additional benefit) + 200 GEL (non-cash benefit) = 2300 GEL. Pension contribution of employee is 2% of 2300 GEL, which is 46 GEL. Pension contributions of Employer and State are also 46-46 GEL. In total 138 GEL= 46 + 46 + 46 will be placed on an employee’s pension account. The income tax shall be calculated from the salary of the employee only after deduction of pension contribution, which constitutes 20% of difference through calculating basis of pension contribution and pension contributions made on behalf the employee, which is expressed in Figure as (2300-46) * 20% = 450.8 GEL. Accordingly, the taxed salary of employee is calculated as follows: 2100-46-450.8 = 1603.2

For more information, please write to us: info@cll.ge

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