The 80% Rule

WHAT IS THE 80% RULE?

The 80% rule determines how much supplementary pension capital a company may build up for a given person (employee or salaried worker). If the 80% rule is exceeded, the excess portion of the premium that the company pays in a given financial year on behalf of the beneficiary is not deductible as an expense for the company. This part of the premium becomes what is called a disallowed expense. It is therefore a personal formula, but it is the company that in the first instance bears the consequences of not respecting the 80% rule.

But. In the case of gross violations of the 80% rule, we find that the excess pension premium can also be reclassified as remuneration, with tax consequences and consequences in terms of social security contributions. In other words: the beneficiary natural person can also be impacted by not respecting the 80% rule. Finally. To prevent abuse, we may assume, since the Wet. Verz. van 2014, that deliberately exceeding the 80% rule could also have criminal consequences for the parties involved. Indeed, that law incorporates a general prohibition on over-insurance.

It is therefore very important to respect the 80% rule at all times.

The 80% rule is a formula that determines how much pension premium a company can pay within a financial year for a given person.

DEFINITION 80% RULE

The benefits upon retirement, both statutory and extra-statutory, expressed as an annual annuity, may not exceed 80% of the last normal gross annual salary, taking into account a normal duration of the professional career (= 40 years). As you notice, the basic formula is expressed in annual annuities, that is to say: an amount that you receive annually after your retirement:

EPR ≤ [ (80% LNBJ - GWP) x N / 40 ] - EPRandere

Where:

EPR

extra-statutory pension expressed as annual annuity

LNBJ

= last normal gross annual salary

GWP (*)

= estimated statutory pension:

for a self-employed person, 25% of the annual gross professional income is calculated

for a salaried employee, 50% of the annual professional income is calculated

but taking into account maxima and minima

N

= number of years worked or still to be worked in the company (max. 40). N may be increased by a

maximum of 10 years for prior activities outside the company.

EPRandere

= other extra-statutory pensions already built up, expressed as annual annuity

Because most second pillar policies are based on a one-time lump sum payment, we will typically want to convert the 80% rule expressed in annuities into an 80% rule expressed in capital.

If we want to express the annuities in capital, we simply make use of fixed coefficients.

EPK ≤ [ (80% LNBJ - GWP) x N / 40 ] - EPRandere ] x COEF

Where:

EPK

extra-statutory pension expressed as capital

LNBJ

= last normal gross annual salary

GWP (*)

= estimated statutory pension:

for a self-employed person, 25% of the annual gross professional income is calculated

for a salaried employee, 50% of the annual professional income is calculated

but taking into account maxima and minima

N

= number of years worked or still to be worked in the company (max. 40). N may be increased by a

maximum of 10 years for prior activities outside the company.

EPRandere

= extra-statutory pensions already built up, expressed as annual annuity

COEF = conversion coefficient from annuity to capital

Important corrections:

1. In this formula, we also subsequently apply a flat rate correction for profit sharing. The profit sharing paid out by an insurer is an unknown factor, but we may estimate it at a flat rate of 20%. That 20% is included in the EPK calculated above, in other words: we divide the result expressed in capital by 1.2. The example below clarifies this.

2. We can also split this formula for the past and future career. We speak of backservice and futureservice. The backservice is a one-time payment that the company can make to correct and catch up, in one go, capital that should actually already have been built up. We will not elaborate on this further, but give an example below.

EXPLANATION

The premiums paid by a company under an individual pension commitment or group insurance are deductible as a business expense if a number of conditions are met. One of these conditions is that the 80% limit may not be exceeded. The 80% limit applies to the premiums paid into the pension building component of your policy and means that, at the time you are retired, your combined statutory pension and the benefits from your supplementary pension (IPT (an individual pension commitment funded by your company), VAPZ (the free supplementary pension for the self-employed), group insurance,...) may not be higher than 80% of your last salary. The benefits from an individual life insurance policy or from a pension savings policy are not included here.

In other words. Suppose you earn 50.000 euro the year before you retire, then the sum of your annual statutory pension and supplementary pension may not be higher than 40.000 euro. In itself this therefore seems a very simple rule. This rule must be translatable into "How much premium may my company now pay?". That translation is not all that difficult in itself. The 80% limit was introduced in 1985 and since 4 February 1987 a number of calculation rules have been further clarified via the Massart circular (Commentary art. 59 WIB/92).

Shall we walk through this together?

1. Your statutory pension is paid out monthly, and your supplementary pension as a one-time lump sum. This supplementary capital must therefore be converted into an annuity. We do this on the basis of conversion coefficients that are set by law.

2. In addition, we also need to estimate your statutory pension on the basis of your known career and current salary. For this too we use a simple rule of thumb. (*)

3. Next, your supplementary pension is still rarely truly guaranteed. The final capital amounts you find on your policies or in MyPension are usually also estimates. We do not make this more complicated than it is either: we use the capital amounts as found in myPension.

4. Then we come to your last normal gross annual salary. This would be your salary just before you retire. Naturally, nobody knows that amount. That is why we pragmatically start from your current salary. We do not make this more complicated than it is either: Life Experts uses a handy information form to determine the last normal gross annual salary.

5. Finally, the length of your career also plays an important role, whereby for supplementary pensions we take into account a maximum career of 40 years. We can easily find that career data in your myCareer file.

As you can see: once those 5 elements have been mapped out, we can calculate the 80% rule. It is, as you will realize, a considerable undertaking to map everything out again each financial year, calculate the margin, and based on that provide the correct advice each time.

AN EXAMPLE

Life Experts sometimes uses an internal calculation model so that we can check the insurers' calculations or so that we can quickly give advice to the client and their accountant. Attached you will find such an indicative example of this calculation model.

We assume a 41-year-old self-employed director. His last normal gross annual salary in his company is 45.000 euro. The gentleman is married, he has worked in the company since 2012, and his supplementary pensions file in myPension indicates that he has already built up or is building up 2 supplementary pension capital amounts:

- a group insurance policy dating from the period when he was a salaried employee, which is estimated to yield 75.000 euro in capital without profit sharing at age 65

- a VAPZ") that will yield 5.000 euro in capital at age 67 if he no longer continues contributing, and 40.000 euro at age 67 if he continues to pay annually.

The company wishes to start an IPT up to retirement age 67 so that a tax-friendly supplementary pension is built up via the company. However, the company wants to know the maximum premium for such a policy. For that we need to calculate the 80% rule. As follows:

maximum pension capital to be formed via company =

( 80% x normal salary 45.000,00

- estimated statutory pension 15.911,04) (*)

x career duration 100% (40j / 40j)

- capital already insured, expressed as annuity (group insurance 5.589,92 + VAPZ 2981.29)

x conversion coefficient for a married person with policy running to age 67 16.1004

/ correction for profit sharing 1,2

154.533,58

In other words: the company may pay a premium that leads to an estimated final capital at age 67 without profit sharing of 154.533,58 euro. If we then calculate the corresponding premium, we obtain these possibilities.

• Either the company pays a maximum of 6.373,62 euro / year
• Or the company pays a maximum of 19.594,64 euro as a one-time payment (the so-called backservice) and then a maximum of 5.573,87 euro / year
• Or any other option that respects the above maximum premiums.

For example, the company could decide to pay 3.000 euro in pension premium per year into an IPT and, on top of that amount, also pay an additional backservice of 7.000 euro in pension premium into the same IPT this year. As a result, the deductible cost for the company via an IPT comes to 10.000 euro for this financial year. Under unchanged circumstances (legislation, pension ceilings, salary, marital status,...) the company can continue to use the rest of the available margin in the coming financial years. That margin will vary from year to year and will need to be recalculated, but is for example expected to be approximately 18.000 euro next year (being the unused backservice, which was a maximum of 19.594, minus the backservice of 7.000 already paid, increased by the not yet used annual premium of this year and that of next year 2 x (6.373 - 3.000)). The premiums in the example are indicative, calculated using a fictitious interest rate of 0,25%, are for illustration purposes, and no rights can be derived from them.

Important note: do not use such a tax calculation to assess the financial profitability of an IPT, other models are suitable for this.

(*) Note 23/05/2022. This article has not yet been updated to reflect the latest circular from FOD Financiën, although Life Experts already takes the provisions of this circular into account. More text and explanation can be found here").

Example of an 80% rule according to the internal calculation model.

Example of the conversion of existing capital amounts into annuities.