Old age pension

The effect of pension fund income on the old-age pension from TR

In Iceland, all employees and self-employed individuals aged 16-70 pay a mandatory contribution to a pension fund; this contribution goes into a mutual insurance system. The contribution is a minimum of 15.5% of total wages and is usually split between the employee and the employer.

Mutual insurance means that fund members jointly contribute to ensuring each other a lifelong pension. The aim is also to protect fund members and their families against loss of income that may occur due to disability or death.

It is also possible to choose for a portion of this contribution to go into private savings; the most common is what is known as specified private savings, but some pension funds also offer flexible or restricted private savings.

Pension payments that people receive from this system, i.e. both mutual insurance and private savings, reduce the amount of old-age pension allowance from TR.

A legislative change came into effect on 1 January 2023, stating that the withdrawal of private pension savings would have a reducing effect. However, those who started receiving an old-age pension from the Social Insurance Administration before 1 January 2023 are exempt from the effects of private pension withdrawals.

Payments that affect old-age pension allowance from TR:

Mutual insurance

Mutual insurance is part of the mandatory contribution and therefore affects the allowance from TR. You must apply for mutual insurance payments before applying for a pension from TR.

Flexible private savings, restricted private savings and specified private savings

Private pension is part of the mandatory contribution and therefore reduces the allowance from TR. However, there is no requirement to apply for voluntary and specified private pensions when applying for an old-age pension from TR, but there is a requirement to apply for a tied private pension.

Here are more detailed explanations of how private pension payouts generally work with pension funds, but please note that the names of the private pension savings may vary between funds:

Tied private pension
- Generally available for monthly payout from the age of 60 and is fully inheritable.
- Paid out monthly in equal instalments.
- Must be applied for at the same time as an old-age pension from TR.
Specified private pension
- Generally available for payout from the age of 62 and is fully inheritable.
- Not paid out monthly in equal instalments for life; there is flexibility in withdrawals.
- Does not need to be applied for at the same time as an old-age pension from TR.
Voluntary private pension
- Generally available for payout from the age of 60 and is fully inheritable.
- Not paid out monthly in equal instalments for life; there is flexibility in withdrawals.
- Does not need to be applied for at the same time as an old-age pension from TR.

Payments that do not affect old-age pension allowance from TR:

Additional pension savings

Additional pension savings, which some funds call private pension savings, also known as 4/2% savings, are voluntary savings in addition to mandatory contributions to a pension fund, where the employee pays 2% or 4% and the employer pays a 2% contribution. Withdrawing these savings has no effect on old-age pension allowance from TR, with one exception: those who receive supplementary payments for people with limited old-age pension rights must specify payments from additional pension savings in their income plan, because the amount of supplementary support is income-related and all income affects its calculation.