From January, the state plans to encourage new forms of saving for old age through a new long-term investment product (abbreviation in Czech = DIP), which will be another tax-supported form of retirement security. The law is then proposed to take effect from the 1st of January 2024. It aims to encourage investment for retirement through the purchase of shares, bonds and other assets. The tax benefit for this new product is up to an extra 48 000 CZK per year. Today, there is a limit of 24 000 CZK for pension funds and 24 000 CZK for life insurance. From the new year, this limit will be merged and can be used according to the individual’s preferences. Therefore, everyone will be able to choose which of the three deductible items will be suitable for them. The state allowance will still only be available for supplementary pension savings (abbreviation in Czech DPS). Tax relief will continue to be available in the third pillar for contributions in excess of the amount associated with the state contribution.
One of the main advantages that DIP brings with it is the ability to invest in a wider range of assets. Under the new product, it will be possible to invest in cash, securities (stocks, ETFs, …), mutual funds, bonds or derivatives, for example. Another advantage is the aforementioned tax discount for both employees and self-employed persons up to 48 000 CZK per year. The amount of the limit of deduction from the tax base is basically unchanged, the novelty is that this limit will be common for all three deductible items and will not be so restrictive. Only a maximum of 48 000 CZK per year will be deductible and at a 15% rate it will be possible to reduce the tax itself by a maximum of 7 200 CZK. Furthermore, the main advantages also include the employer’s contribution, where the common limit (again for all three deductible items) is 50 000 CZK per 1 employee. All income, including employer contributions, will be tax exempt. Of course, the DIP also has its shortcomings and in this case it is without state support. However, this is replaced by the possibility of higher appreciation and a higher tax credit. For pension savings, only a portion of the deposit above 1 000 CZK can now be claimed for tax relief, whereas here the entire amount up to 48 000 CZK will be included. The main objective is to improve the provision for old age and greater freedom in the use of the deduction.
However, some argue that the DIP is a long overdue solution to make self-saving for retirement more attractive, given the unsatisfactory demographics and inadequate state pensions. Some economists point out that people with lower financial literacy might take up this financial product primarily because of the possibility of additional tax deductions, but this should not be the main deciding factor. The DIP primarily aims to support people with higher incomes. The Ministry of Finance estimates that DIP support could have a negative impact on public tax revenues, but the specific effects are difficult to estimate due to a lack of data and various circumstances such as unemployment, wage trends, or economic recession.
Still wondering whether to arrange a DIP? Don’t hesitate to contact us for a one-on-one consultation, where we can discuss and explain everything related to your finances.