Before payment of an annuity pension scheme begins, the account holder must choose whether the annuity pension scheme should be paid in accordance with a series principal (increasing instalment payments for the period) or an annuity principal (equally large instalment amounts at a fixed rate of interest).
If the account holder chooses to have the annuity pension scheme paid out according to an annuity principle, the annual annuity payment is set based on the value of the pension scheme at the beginning of the year and a specified annual rate of interest - the so-called amortization interest rate.
Every year in December, Finance Denmark calculates the amortization interest rate for the coming year, as the aim of the amortization interest rate is to ensure roughly equal annual annuity payments.
Banks pay annuity pension schemes through a joint pension payment system and all banks will, therefore, in practice use the same amortization interest rate.
The amortization interest rate for 2016:
The amortization interest rate for the payment year 2016 has been calculated at 1.45 pct.
Model for calculating the annual amortization interest rate
To ensure that an artificially high amortization interest rate, which would quickly empty an annuity pension scheme contrary to the aim of pension accounts, is not used, the Danish law on pension taxation, pensionsbeskatningsloven, contains rules on the maximum allowed amortization interest rate. See Section 11A, paragraph 3, point 2 of the Danish law on pension taxation.
However, banks have the option of using a lower amortization interest rate, if the market-related return on pension schemes is expected to have a lower level.
Finance Denmark’s amortization interest rate is fixed on the basis of the Nasdaq OMX interest rate Standard mortgage credit, term to maturity 5-15 years, which builds on an average rate of interest from hundreds of bonds. The amortization interest rate is fixed as a simple average of this average rate of interest on the first day of trading each month of the year prior to the payment year. The rate for pension savings return tax is deducted from this (15.3 pct.)
See Average Bond Yield - Nasdaq.com
This calculation method has been chosen, based on objective criteria, in order to ensure a market consistent amortization interest rate, which best reflects that payment according to the annuity principal will result in equal annual interest rates. There will, however, always be the option for individual fluctuations depending on how the pension scheme is invested.