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The Pension System in Malta

05.01.2015

The reform of the Maltese pensions system has been the subject of extensive public debate over a number of years. The provisions relating to pensions and allowances under the Social Security Act (Chapter 318 of the laws of Malta) might be complex and sometimes not easily understood. An overview of some of the salient features when it comes to pensions are explained below.

The Pension Age

Prior to legislative changes, the pension age was set at 61 years in the case of a male individual and at 60 years for females. Under new provisions, the current pension age is set at 65 years for both males and females.

This change was introduced in a gradual manner as listed below:

  • Those born during calendar years 1952 to 1955 will retire at age 62, however those who have paid 1,820 contributions from age 19 to age 61, can opt to retire at age 61;
  • Those born during calendar years 1956 to 1958 will retire at age 63, however same opt out clause applies;
  • Those born during calendar years 1959 to 1961 will retire at age 64, however same opt out clause applies; and finally
  • Those born after 1961 will retire at age 65, however those who would have paid 40 years of contributions (2,080 contributions) may opt to retire at age 60.

Pension computation depends on the employment of the respective national insurance contributor.

Calculation of the Yearly Average Number of Contributions

If a person is in a managing directorship position, his/her pension will be computed as an employed person. Examples of this type of directorship is when directors are not shareholders in a company or have no majority of voting rights in an AGM, and partners in a partnership en nom collectif which are NOT related.

The pension will be computed as follows:

  • if retirement age is 62, the pension is computed on the average of the best three basic incomes earned consecutively in the last 11 years prior to retirement;
  • if retirement age is 63,the pension will be computed on the average of the best three basic incomes earned consecutively in the last 12 years prior to retirement;
  • if retirement age is 64, the pension will be computed on the average of the best three basic incomes earned consecutively in the last 13 years prior to retirement; and finally
  • if retirement age is 65, the pension will computed on the average of the best 10 basic incomes earned (not consecutively) out of a period of 40 years.

Each income will be updated with the statutory cost of living adjustments up to the year of retirement.

Calculation of the Pensionable Income

The pensionable income (PI) represents the income on which the Two-Thirds Pension is to be calculated. Therefore if the Yearly Average Number of Contributions test is satisfied in full, the Two-Thirds pension should amount to 2/3 of the PI.

The determination of self-occupied directors is derived from the fact that a person carries majority voting rights and/or is a majority shareholder according to the Memorandum and Articles of the company. As regards the partnership en nom collectif, the partners who are related are considered as self-occupied persons.

The pension will be computed on the average of the last 10 years incomes declared with the Inland Revenue Department prior to retirement. If for example the retirement year is during 2014, the average is calculated on incomes declared from 2004 to 2013. Such incomes will be updated with the cost of living adjustment ONLY if the difference between the net profit declared is equal or greater than the applicable cost of living for that year. The resultant average called the pensionable income (PI) is then multiplied by the contribution average divided by 50 (default) and multiplied again by the 2/3 ratio marking the two-thirds pension regulation.

Maximum annual pensionable income

In order to receive the maximum pension, currently €228 weekly, employed persons including the managing directors, should be in receipt of incomes exceeding the capping of €17,813 (in 2014).

For those paying class 2 contribution, who are considered as self-occupied the following must be adhered to:

  • incomes should exceed the capping of €17,813;
  • category of contributions paid according to incomes declared;
  • contribution average should be at least 50

Other related amendments

If a person opts out to retire at age 61 instead of the respective retirement age s/he should terminate the employment until the latter is reached. Thereafter s/he could re-commence the employment activity.

A person who is receiving passive income from interests, royalties, dividends or rental income (not from trading activity) is obliged to register with the IRD as self-employed person and paying national insurance contributions as such. Pension is assessed on similar grounds such as that of a self-occupied person.   

Alternatively, when a person is earning both active and passive income, only the income derived from the gainful occupation (active income) will be considered as the insurable income.

Download PDF The Pension System in Malta.