Maximising talent retention and tax efficiency:

The power of occupational pension schemes

March 29, 2024

Talent retention

In the dynamic landscape of modern employment, attracting and retaining top talent has become a paramount concern for businesses. Among the many factors that influence an employee's decision to join or remain with a company, the presence of a robust occupational pension scheme may stand out as a crucial incentive.

A well-structured pension scheme not only provides additional income for employees during retirement but may also serve as a powerful tool for attracting employees and fostering loyalty within the workforce. By offering employees the opportunity to accumulate a financial safety net for their future, companies demonstrate a genuine commitment to their well-being and long-term financial stability.

This enhances a business’ reputation as an employer of choice and helps increase employee attraction and retention.

Tax incentives

Besides the intrinsic value vis-a-vis employee wellbeing, having an occupational pension scheme in place will also result in tax incentives being enjoyed both by the employer and employees.

The main tax incentives for occupational pension schemes under Maltese law emanate from the Voluntary Occupational Pension Scheme Rules (S.L. 123.175), which broadly set out the following incentives:

One of the key benefits for employers is the entitlement to a tax credit amounting to 25% of the amount contributed to the pension scheme, capped at an annual tax credit of €750 per employee.

Another benefit relates to the tax deductibility of employer contributions to approved pension schemes as a business expense, up to an annual deduction of €2,000 per employee. By contributing to their employees’ pension funds, employers not only invest in their workforce’s future but also enjoy tax relief on these contributions, reducing their overall tax liability on their income.

For employees, contributions made by their employers to an occupational pension scheme for their benefit do not constitute taxable fringe benefits. This is distinct from other employee benefits which very often would trigger tax implications for the employees.

Investment income generated within approved pension schemes is exempt from Maltese income tax (except for income derived from Maltese immovable property), providing a tax-efficient environment for growing retirement funds. This favourable tax treatment ensures that pension savings can accumulate and compound over time, maximising the long-term benefits for employees.

Employees who also make contributions to the occupational pension scheme will benefit from an annual tax credit of 25% of the amount contributed, up to a maximum annual tax credit of €750.

Certain tax benefits are also available to employees when withdrawing income from the pension scheme, upon retiring.

Final thoughts

In conclusion, occupational pension schemes play a pivotal role not only in enhancing employee retention and attraction but also in providing tax incentives for both employers and employees. They should therefore serve as a win-win solution for employers and employees alike.

In this context, the announcement in the 2024 Budget Speech regarding a consultation for an auto-enrolment pension system is a significant development. Such an initiative would have the potential to redefine retirement savings, ensuring that all employees have access to a pension plan, regardless of their employment status or sector.

One will need to await developments on the implementation of an auto-enrolment system in Malta, however, in the interim, employers should not pause on the dialogue surrounding occupational pension schemes. Keep the conversation going!

How can we help?

At PwC Malta, our Pensions team have the expertise to guide your organisation on workforce pensions. For more information, please reach out to our sector leaders below.