Early retirements and further tightening from October 2024

Most of the changes introduced by this amendment have already been effective from October 2023 and their common goal was to increase the financial stability of the Czech pension system and at the same time motivate citizens to have a longer working career and ensure that they contribute to the pension system for a longer period of time. The changes therefore generally disadvantage the drawing of early pensions. (For the sake of completeness, we would like to note that the discussed early retirement is not the same as pre-retirement, which is a product of supplementary pension savings.) 

Specifically, the tightening of early pensions concerns the possibility of early retirement, the penalty for calculating early retirement and the valorization of early retirement.

Possibility of early retirement 

In general, a person becomes entitled to an old-age pension after meeting two conditions: 

(i) obtaining an insurance period (including so-called substitutional periods, which are e.g. the period of studies, care of a child under 4 years of age or of a dependent person under legal conditions, period of military service or of registration at the labor office within the legal scope) of at least 35 years and at the same time 

(ii) reaching retirement age (which varies according to the year of birth and, for women, also according to the number of raised children).

Until October 1, 2023, it was possible to apply for early retirement 3-5 years (after meeting certain conditions) before reaching retirement age. From October 1, 2023, this period was unified and shortened to 3 years before reaching retirement age.

From October 2024, the requirement for the acquired insurance period will then increase further. From 1 October 2024, a person will only be able to apply for an early pension if he/she has a total insurance period of at least 40 years. (The insurance period required for regular retirement remains the same, i.e. 35 years.)

Increasing the penalty for early retirement

Each pension generally consists of a so-called basic amount and a percentage amount, where the percentage amount depends on the amount of a specific person's income. The percentage amount of the old-age pension is 1.5% of the calculation base per month for each full year of insurance period reached.

With early retirement, not only does a person not get additional years of insurance, and thus additional percentages of the calculation base, but the percentage amount calculated using the procedure described above is additionally reduced by 1.5% of the calculation base for every 90 calendar days that have begun from the date of early retirement until reaching retirement age. (Here again the parameters were tightened from October 2023 in the sense that until then the penalty was lower if a person took early retirement just 1 or 2 years before reaching retirement age.)

An early retiree thus has a permanently lower pension compared to a regular retiree due to a penalty depending on the length of time remaining until reaching the regular retirement age. The earlier he retires early, the more his pension is reduced. This reduction is permanent even after reaching the age for entitlement to a regular old-age pension.

Valorization of early retirements

In the case of early pensions, the percentage amount of the pension is not valued until the regular retirement age is reached. During the "prematurity" period, only the basic amount is valued.

Restriction of gainful activity

When retiring early, the possibility of gainful employment is assumed to be limited. People who receive an early old-age pension may not, until the date of reaching regular retirement age, perform a gainful activity that establishes participation in the pension insurance. (If such a gainful activity were to be carried out, the CSSA will stop the payment of the early retirement pension and, for the period when the beneficiary of the early retirement pension worked, but the pension was already paid to him, will report to him an overpayment on this pension.) During the receipt of an early pension, only such additional earnings are possible (income from gainful activity), which do not establish participation in pension insurance. Such additional earnings can be generated by the performance of an activity based on an agreement to perform work with limited income or a small-scale job or the performance of an independent activity where the income does not reach the so-called decisive amount.

After reaching regular retirement age, the same rules apply to recipients of an early pension as to regular pensioners. This means that after reaching the retirement age, the retirees can already carry out gainful activity establishing participation in the pension insurance, i.e. run a business or work without any limitations, even in a fixed-term or indefinite employment relationship. However, they continue to receive an early pension in a reduced amount, simply reaching regular retirement age does not result in a recalculation and increase of the pension.

Conclusion

Therefore, everyone should carefully plan his/her retirement and consider whether it is worthwhile to retire earlier or, on the contrary, to stay in the labor market longer.

A frequent reason for applying for early retirement is job loss, longer unemployment at pre-retirement age without the prospect of getting a new job, increasing health complications or caring for sick relatives. In this situation, the applicant for an early old-age pension solves his/her need to secure his living expenses, choosing this way even though his/her pension will be lower, permanently reduced, and he/she will have limited opportunities to work until he/she reaches retirement age.

Early retirement before October 2024 should be considered in particular by people who have a total insurance period of just under 40 years, are currently unemployed and have no longer entitlement to unemployment support benefits and, at the same time, cannot find any new job. The same applies for those who have health problems that may prevent them from properly performing their job, but are insufficient for grant of a disability pension. If these people have been insured in the pension system for at least 35 years but less than 40 years, they can apply for an early pension so that the date of granting of this pension is no later than September 30, 2024.

Authors:

Gabriela Ivanco, Tax Manager

Jana Nováková, Tax Manager