Retirement allowance

What it means

A retirement allowance is due on the first termination of employment after entitlement to an old-age or disability pension arises. It is a one-off payment of at least one month’s average earnings.

It has nothing to do with severance, which attaches to organisational or health grounds for termination. This one attaches to retirement and arises only once in a lifetime.

Entitlement is tied not to reaching pension age as such, but to employment ending after the right to an old-age or disability pension has arisen. An employee who keeps working past that age receives the allowance only when actually leaving.

How it works in practice

The employee must apply for the pension within the statutory period after leaving. The employer therefore files the proof of application in the personnel records.

A collective agreement or internal rule may increase it. For known retirements a provision is booked at the closing date so the cost does not land on a single month.

The allowance is paid with the final wage and taxed as employment income. In the payroll record we keep it apart from pay and bonuses, so that years later it can still be shown that the entitlement was settled and in what amount.

What to watch out for

Planning overlooks it although it can be foreseen years ahead. In a company with several older employees it is a predictable cost that belongs in the budget and in provisions.

A provision for retirement allowances reduces the accounting result, but for tax the cost counts only in the year it is paid. Creating the provision is therefore one of the add-back items in the return and using it is deducted; skip that and the tax is wrong in both years.