Pension System in Portugal

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In 2014 the retirement age increased to 66 from 65, and a new mechanism has been enshrined into legislation to increase the retirement age in the future. The retirement age will reach 67 in 2029

The public sector workers' pension contribution will increase from 2.25% to a minimum of 3% of salary
The pension system in Portugal consists of a dominating public pension pillar complemented by voluntary occupational pension plans and personal pension saving arrangements.


Pension System
The first pillar provides old-age benefits on an earnings-related basis. Pension benefits are linked to life expectancy and indexed to changes in the consumer price index.

Contributions amount to 11% of income for employees and 23.75% for employers. The net replacement ratio is estimated to be approximately 69%.

The statutory retirement age is 65. Early retirement is possible at 55 if one has 30 contribution years with the pension being reduced for every year the pension is drawn earlier. For every year that retirement is postponed, the pension amount will be increased.

Occupational Pensions

Company benefit plans are not widespread, with only about 3.7% of Portugal's 4 million workforce being included in occupational pension schemes. Only 1% of all Portuguese companies have a pension plan in operation.

The vast majority of employees with a pension promise receive their benefits under a pension fund arrangement. Insured schemes are less important and are mainly used by small and medium-sized companies. Unfunded schemes are rarely found nowadays.

1. Pension funds

Occupational pension provision is provided by either a closed or an open fund. Closed funds relate to one single employer's pension plan, groups of companies or by agreement between employers and trade unions. Open funds accept and invest money from any number of unrelated pension plans. 

Closed pension funds are the prevailing form providing benefits mostly of the defined benefit type.

Pension funds have to be managed by pension fund managing societies specifically created for this purpose, by mutual societies or insurance companies. Pension fund managing societies are prevailing and manage more than 95% of assets. The four biggest managing societies have a market share of nearly 70%.

Tax treatment of contributions and benefits

Employer contributions to a pension plan or an insured plan providing vested rights are tax-deductible up to 15% of salary. 25% of employee contributions attract tax relief up to an annual limit. The total amount of employer contributions will not be regarded as taxable income to the employee as long as:

- the plan is externally funded; 

- the plan provides vested rights; 

- the plan is non-discriminatory; 

- benefits are paid as annuities; 

- benefits are paid at the same time as social security benefits. 

Annuities paid from a pension fund or an insurance contract are considered taxable income if the contributions to such a scheme are tax-exempt. Otherwise, only the interest earned and not the original contribution is taxable as pension income. In the case of lump sum payments upon retirement, the interest portion will be taxed as investment income.

Investment regulation

Portugal applies detailed quantitative investment regulations, but offers a comparatively generous scope for investment in equities, with a maximum equity exposure of 55%. 

Quantitative investment restrictions:

- Max. 5% in equity or loans issued by the same company; 

- Max. 20% in equity or loans issued by the same group of companies; 

- Max. 25% in property investments being used by the pension fund sponsor; 

- Max. 10% in one single property investment; 

- Max. 30% in stocks denominated in a foreign currency; 

- Max. 55% in direct equity holdings; 

- Max. 20% in bank term deposits and deposit certificates; 

- Max. 60% in bonds and commercial papers other than those issued by a Euro country; 

- Max. 30% in open or closed-ended, unitised or pooled equity bonds and mixed funds. 

2. Group insurance contracts

Occupational pension schemes can also be funded by direct insurances. Small and medium-sized companies mainly use this funding vehicle.

Group annuity contracts are frequently used to fund benefits, but new insured plans now often choose the form of endowment plans.

The tax treatment for direct insurance schemes is the same as for pension funds.

The investment of assets by insurance companies is strictly regulated, imposing both minimum and maximum levels for investment in different asset categories.

Additional sources:
The Organisation for Economic Co-operation and Development (OECD) -