Recent amendments to pension tax rules

Over the past five years, the Pensions (Tax Exemption) Rules have provided individuals aged 61 and over with a gradually increasing exemption on pension income, subject to prescribed caps. This exemption was introduced as part of a phased approach, starting with a 20% exemption from calendar year 2022 and progressively increasing to a full exemption by calendar year 2026. This gradual implementation was designed to encourage retirement savings while easing the tax burden on pensioners over time. In parallel, certain tax rebates on pension income were also available under the Tax Rebate (Pensioners) Rules.

Following the recent amendments, the maximum amount of pension income that may be exempt from tax as from calendar year 2026 has been increased from €16,636 to €37,104. Additionally, qualifying pensioners taxed at the married rates who derive other (non-pension) chargeable income may also benefit from a tax rebate of up to €540. This means that qualifying pensioners applying the married rates could have an additional €3,600 of their income (which would have otherwise been taxed at 15%) tax free i.e. effectively, up to €18,600 in tax free income (over and above the exempt pension income as per above). Previous tax rebates available on pension income are no longer applicable.

At first glance, these legislative changes do not introduce a new pension taxation framework, nor do they fundamentally overhaul the existing regime. However, their practical implications are more significant than they may initially appear.

Firstly, the maximum amount of pension income that may be exempt from tax for any qualifying individual has increased substantially (to €37,104). This will mean that qualifying pensioners who are chargeable to Maltese tax at the progressive tax rates and who derive pension income exceeding €37,104 and/or other chargeable income may benefit further, as a larger portion of their taxable income will effectively fall within the lower tax brackets, including the 0% band.

Also of significant importance is the fact that with the widened exemption, it becomes more likely that supplementary pension income sources may also be exempt from tax in Malta. The exemption should also extend to pension income derived from Personal Retirement Schemes (PRS) and Voluntary Occupational Pension Schemes (VOPS), among others. This helps address a common concern among savers: that personal contributions made into such pension schemes from already taxed income could ultimately be subject to tax again when pension benefits are drawn.

While these legislative amendments clearly improve the immediate financial position of pensioners, they should also be viewed as a further step towards encouraging long-term retirement planning. By widening the exemption, the changes may indirectly enhance the attractiveness of supplementary pension schemes and incentivise individuals to take a more proactive approach to securing income for their future retirement years. 

Prior to this important tax update, withdrawals from a PRS or a VOPS were generally taxable as pension income, except for a 30% commutation which the beneficiary is entitled to withdraw as a tax-free lump sum within a prescribed timeframe. Consequently, the remaining 70% of the accumulated savings (the pension fund) was subject to tax in the hands of the beneficiary, reducing the effective disposal income available to retirees.

The significantly broadened tax exemption on pension income will therefore mean that pensioners can access their retirement savings more fully, promoting well-being and financial security.

In addition to these tax benefits, the PRS and VOPS continue to offer certain tax and other advantages. These include tax credits for both employers and employees, the non-taxation of employer contributions at the employee level (as exempt fringe benefits), and tax deductions for employers on contributions made for the benefit of employees (subject to caps), among others. Collectively, these incentives position personal and occupational pension schemes as powerful tools for retirement planning.

How can we help?

Understanding how to maximise the benefits of these tax changes can be complex. Our dedicated Personal Tax Compliance Team and Pensions Team are available to provide tailored advice and assistance to individuals and businesses. 

Whether you need assistance in understanding how these changes will impact you and/or how you need to accurately report income in your income tax return, advice in relation to joining a personal retirement scheme or considering introducing an occupational pension plan for your employees, we can help you navigate the applicable rules and optimise the financial and tax benefits available. 

With expert guidance, you can make informed decisions that align with your retirement goals and corporate objectives, taking full advantage of the favourable legislative environment. 

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