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MONEY

Retirement in Denmark: The pensions system explained

Denmark has various different types of pension, including an obligatory state pension and private options.

If you plan to spend most of your working life in Denmark, it pays to plan your pension form an early stage.
If you plan to spend most of your working life in Denmark, it pays to plan your pension form an early stage. Photo by Katarzyna Grabowska on Unsplash

If you work for a company in Denmark, you may already be on a private plan provided by your employer. You could also be paying directly into a labour market pension – contributions for this are shown on your payslip.

Meanwhile, the Danish state provides a pension to its residents, which is not related to employment.

The Danish pension system is based around three main types. By logging into Pensionsinfo using your secure login (NemId at the time of writing, soon to be replaced by MitID), you can easily check the status of all you pensions.

State sponsored pension (folkepension)

The folkepension is state-provided and not related to your employment. 

To qualify for the basic state-sponsored folkepension, you must have a permanent address in Denmark, have live in Denmark for at least three years between your 15th birthday and retirement age, and be a Danish citizen.

If you are not a Danish citizen, however, you still qualify for this pension if you have lived in Denmark for at least 10 years between the age of 15 and retirement age. Citizens of EU and EEA countries and Switzerland, as well as the United Kingdom, qualify without Danish citizenship, as do some refugees.

If you have lived and worked abroad, you can still qualify for the Danish pension, but the amount you will receive is affected by factors including how many years you worked abroad and how many years you have lived in Denmark. If you are entitled to state pensions from other countries, the periods for which you qualify for the foreign pension will not be eligible for the Danish pension.

Because of a 2017 law change, the age at which you can retire and take out a folkepension depends on when you were born, with the retirement age scheduled to increase incrementally in coming years.

People born after 1966 will be able to retire when they are 69 years old, while those born before 1954 can retire aged 65.

You can see the relevant breakdown of retirement ages here.

Denmark also allows you to delay withdrawing your pension. This enables you to earn a venteprocent or ‘waiting percentage’, increasing the monthly payout when you do withdraw it. You apply for this via the borger.dk website.

The state pension consists of a basic element (grundbeløb), which everybody gets, and a supplement (pensionstillæg), which is adjusted according to whether you live alone or with a spouse or partner.

The state pension can also be adjusted downwards if income from the two other types of pension is higher.

ATP (Arbejdsmarkedets Tillægspension)

ATP pensions are a supplementary labour market pension scheme which nearly everyone in Denmark pays into. Deductions are automatically taken out of your paycheck – you can see them on your pay slips. 

You only pay a third of your ATP pension contribution while working – you employer pays the other two thirds.

You can read in detail (in Danish) about tariffs, deductions and other factors which determine the ATP pension payout here.

READ ALSO: EXPLAINED: How to understand your Danish payslip

Your ATP pension will be automatically paid into your current account or NemKonto when you reach retirement age. The amount you receive depends on how much you have paid in through the course of your working life, and also when you paid it – earlier deposits result in higher pension payouts.

You can check how much ATP pension you can expect to receive at any time by logging into to your account via borger.dk.

Private or individual pension

Anyone in Denmark can join a private pension scheme, and if your company offers a private pension programme, then you will also see line items on your pay slips for employer and employee contributions. 

There are a range of different companies and pension options which you can choose to pay into individually, and you should carefully consider which best suits you.

For those discussing private options with an employer, you and your advisor will consider personal and family situation and how comfortable you are with the various options before making a final decision.

If you think that you will leave Denmark before you retire, you should mention this to your pension advisor to discuss your options. You will generally be able to take the pension with you, but you will have to pay high taxes if you take the money before retirement age.

Source: borger.dk

READ ALSO: Feriepenge: Denmark’s vacation pay rules explained

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PROPERTY

EXPLAINED: How to restructure and reduce your mortgage in Denmark

Denmark's unique borrowing system has enabled thousands of people to restructure their mortgages this year, cashing in on high interest rates which have caused a drop in market value of covered bonds. We explain how it all works and how you can potentially pay off a sum of your mortgage.

EXPLAINED: How to restructure and reduce your mortgage in Denmark

How does the mortgage system work in Denmark?

Denmark has a unique mortgage model, which is regarded as one of the best in the world.

When you take out a loan to buy a house in Denmark, the bank finances the loan through a covered bond [Danish:realkreditobligation,ed.] What makes the model unique is that you as the borrower know exactly what covered bond is issued to finance the loan.

“This direct link is very special to Denmark,”  Peter Jayaswal, executive director at Finans Danmark told The Local.

“You can follow what the market price is for the bond that is funding your loan in the capital market. A German borrower for example has a mortgage by the German bank issuing a loan using a covered bond. But there is no link, so the homeowner doesn’t know what the bond is.

“In Denmark, you can see it exactly. You can go onto your bank website everyday and follow the market price. That means that we have this early repayment system where I as a borrower am allowed to prepay my loan by buying back at market price the bond that has funded my loan,” Jayaswal explained.

When interest rates are increasing, it means that the price on the bonds is decreasing and this is why thousands of homeowners in Denmark have bought out their bonds this year, at a low market value and paid off a portion of their mortgage. 

READ ALSO: Interest rates encourage Danes to restructure mortgages

So how can I make this early repayment on my mortgage?

The first thing to do is to set up a meeting with your bank so they can assess whether you will benefit from the drop in bond value.

The market price of covered bonds is well documented in Danish media but you can also follow them on your bank’s website or by asking for an appointment with your bank to assess your current mortgage.

“You may at some point in the past have taken out a mortgage of 1 million kroner with a one percent fixed interest rate. To keep it simple, let’s say the loan is without amortisation.  When you took out this mortgage, the bond was issued at 99 kroner meaning that the nominal debt will be around 1,010,100 kroner to give a 1 million kroner revenue.

“Today you can see the interest rates have increased and the price on the bond financing your loan is say 80 kroner. As a borrower you can buy the bond in the market at market price and prepay the mortgage loan. But you only need to take out a new loan of around 808,000 kroner to do this.

“So you can take a new loan out at 808,000 kroner and use this to repay your existing loan and reduce your debt by around 200,000 kroner. This transaction can be done simultaneously by your bank, so you won’t end up with two loans,” Jayaswal told The Local.

What about interest rates on my mortgage?

The interest rate you get for your mortgage can be fixed or variable and they mirror the prices investors pay for the bonds. 

Fixed rate mortgage

Today, the fixed interest rate is five percent. This means that if you decide to buy your bond at the lower market value, you will have to take out a new loan at a higher interest rate.

“Using the example of reducing your mortgage by 200,000 kroner by buying the bond at a low market value, every month you are now paying an interest rate of five percent fixed term, rather than your one percent you had before. So you are paying more each month for the benefit of paying off a portion of your mortgage early and the benefits will decrease over time. 

“You usually break even after around ten to fourteen years but the bank will calculate this for you,” Jayaswal said.

“If you know you’re moving in two to three years, it makes sense to get a new loan with a higher interest rate because you’ll have to repay the loan anyway when you move. But if you think you’ll be in your home a long time, keeping this loan, then you need the interest rate to decrease in ten to fourteen years.

“And that’s the problem because we must be frank and say we can do all the forecasts but in the end no one knows what future interest rates will be, so it has to be the decision of the borrower,” Jayaswal explained.

Variable rate mortgage 

The other option is to take out a variable interest rate mortgage to buy the bond, which today is around three percent. However this carries a risk, as the interest rates are adjusted on a regular basis. F3 loans, for example, are adjusted every three years, while F5 loans have adjustments every five years.

“Changing from a fixed to variable interest rate, to reduce your debt and avoid an increase in interest rate, comes with a risk that you don’t have a fixed rate for 30 years, so you are more exposed and that’s very important be aware of,” Jayaswal told The Local.

On Monday, the company Totalkredit, the largest provider of real estate loans for private homes, auctioned flexible loans with resulting interest rates exceeding 3 percent on the F1, F3 and F5 loan types. That means the interest on these types of mortgages will be at their highest for several years.

According to Finans Danmark, Danish home owners have repaid 337 billion kroner of their mortgages in the first three quarters of 2022. Many of these home owners have chosen to switch to variable interest rates. You can swap back to a fixed-rate mortgage at any time but you also have to be aware that these rates may have increased by then too. 

How do I decide which option to take?

“I always say to people, feel free to go to your bank, ask them to make the calculations for you, so you have the foundation to make a decision”, Jayaswal says.

“Some might think a 30-year mortgage at a fixed rate of one percent is great, especially because today interest rate is five percent. Others won’t mind paying a five percent interest rate for a few years, because they want to reduce their debt today and believe interest rates will decrease. It is up to the borrower to decide.

“It’s not that one option is better than the other, it’s that you have opportunities and this is unique in Denmark,” Jayaswal said.

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