EXPLAINED: How your Italian pension works

According to the World Economic Forum, Italy is among the most generous countries in the world when it comes to what its state pension provides. But when it comes time to get yours, you’ll quickly learn that navigating Italy’s pension system can be complicated.

Generally speaking, Italy has three types of pension: the state or public pension, “closed” or professional pensions, and private pension funds. Of these, the first is the most common, and most important to know about.

State pension

Up until 1995, workers’ social security payments guaranteed them a defined pension benefit that increased with every year of work. Usually, it ended up at around 80 percent of your most recent salary.

But facing a rapidly aging population and shrinking base of contributors, Italy switched to what’s called a “notional defined contribution” system, where your state pension amount depends on how much you and your employer contributed to the pension system over your years of work. (Generally, your employer contributes €2 for every €1 you do.)

Given that 1995 is almost 30 years ago (gulp), we’ll assume for the sake of this article that few of you reading this were contributing to an Italian pension before the system changed. If this does describe you, your pension calculations will be more complex, and you might want to seek advice from a commercialista or another financial expert.

All residents of Italy are entitled to claim a state pension once they reach 67 years of age, provided they have made contributions for at least 20 years. (Anyone who has made less than 20 years of contributions may still receive a pension, but at a lower rate, depending on their circumstances.)

Italy's retirement age is not permanently fixed — it’s pegged to average life expectancy and re-evaluated every two years, so it may be different by the time you retire.

READ ALSO: Pensions in the EU: What you need to know if you're moving country

When you apply for your pension, your annual pension amount will be calculated based on your and your employers’ total contributions over the course of your working life, adjusted according to some other variables.

First, your total contributions are adjusted to match the country’s rate of growth in gross domestic product (GDP) since you started making contributions. In the last 10 years, that’s been an average of about one percent — still lagging quite far behind the average rate of inflation.

But that’s not all. Some of your pension — though, if you receive a substantial amount, not all — will also be adjusted to take into account changes to the cost of living.

Finally, your annual payout will also be adjusted by what’s called a “transformation coefficient”. This formula takes into account your likelihood of death, whether or not you will leave behind a spouse, and whether or not you have children.

The transformation coefficient means that what age you retire can have a big impact on your annual payout. If you retire relatively young — say, right at 67 — you will be assumed to be cashing your pension for about 18 years. That means you’ll be paid around 5.5 percent of your contributions each year. If you wait until you’re 71, that amount is more like 6.5 percent. Delaying retirement will increase your payout, and it’s possible to defer retirement as long as you like.

When you do receive your pension, it will be paid out, like your paycheck, 13 times per year. 

There is a certain minimum monthly entitlement established each year by the Italian government — for 2023, that’s €503.27. 

If your contributions put you below this amount, or if you are otherwise ineligible for a pension, there is such a thing as old age assistance (assegno sociale), which provides for this minimum amount (and a little extra if you’re over 70 years of age). Eligibility is means-tested, and you can only apply if you’ve resided in Italy for 10 years.

Whatever your pension amount, keep in mind it will be taxed according to normal tax rates — though you won’t need to make social security contributions off the top.

But what if you want to retire early? Italy’s state pension system allows for a number of exceptions to the retirement age through an ever-changing array of schemes.

Currently, if you’ve contributed enough that your monthly pension amount is calculated to be 2.8 times the government minimum, you can take retirement as much as three years early.

Alternatively, if you’ve already made contributions for 41 years and 10 months as a woman, or 42 years and 10 months as a man, or if you’ve been made redundant, work as a caregiver, or work in certain industries deemed arduous, you can retire even if you haven’t yet reached retirement age, under certain conditions.

READ ALSO: From visas to language: What Americans can expect when retiring in Italy

Another early retirement scheme, known as the Opzione Donna, allows working women to retire as early as 60, if they have made 35 years of contributions. If you have a child, you can retire even earlier, at 59. Two children, and you can retire at 58.

Because many of these schemes are temporary and the Italian state pension system is constantly being reformed, you may want to review the INPS website to be sure of what programs are available, and your eligibility for them.

Professional and private pensions

Much less common in Italy, but still occasionally a factor, are professional and private pension funds.

Professional pensions are pension funds organized by a union or professional association — if you are eligible for one, your employer should make this known to you and provide you the option of joining.

Generally, these funds allocate payments that would otherwise go towards a severance fund and invest it for retirement. Known in Italian as fondi pensione chiusi or “closed” pension funds, they are much less common in Italy than in countries like the US and Canada.

Private pensions are pension funds offered through banks, insurance companies, and other private providers, known in Italian as a piano individuale pensionistico (“individual pension plan”, PIP) or fondi pensione aperto (“open pension fund”, FPA). 

Though these schemes are often a necessary alternative for self-employed workers, some analysts say they frequently offer worse returns and flexibility than simply investing your retirement savings.

If you choose to pursue a private pension fund option, it may be a good idea to consult a commercialista or other financial expert to ensure you are getting your money’s worth.

What about my contributions in other countries?

If you’ve contributed to a public pension scheme in another country for part of your working life, the good news is that this money could still be of use to you.

Italy has signed a number of bilateral agreements and treaties that mean those contributions can more often than not count toward your Italian pension amount.

Any contributions made within the European Union are guaranteed to be included in your calculations, and Italy has bilateral agreements with Canada, the US, and Australia too.

READ ALSO: What to know about Italy's flat tax offer for pensioners

One glaring absence is the United Kingdom, which lost its agreement with Brexit. Instead, you may be able to consolidate your pension amounts using a British Qualified Recognized Overseas Pension Scheme (QROPS), which allows for the transfer of UK pension amounts abroad under different rules.

Keep in mind that pension payments are often taxed at higher rates if you are a non-resident — so consolidating your pension payments could help save you a lot of cash.

Please note that The Local cannot advise on individual cases. For more information about how Italy's pension rules may apply in your circumstances, consult an Italian commercialista or another qualified tax professional.