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What is the Individual Pension System (IPS)?

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What is the Individual Pension System (IPS)?

The Papel Blog contains everything you need to know about the Turkish Private Pension System (IPS) and the Automatic Enrollment System (AES), including updated information for 2024, investment details, and state contributions.

#Individual-Pension

10 min read

Last Updated: Haz 14, 2024

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Table of contents

What is the Individual Pension System (IPS)?

What Are the Advantages of IPS?

IPS State Contribution Limit for 2024

IPS and AES Investment Options

Canceling IPS

Innovations Introduced to the Individual Pension System in 2024

Frequently Asked Questions About IPS

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According to March 2024 data from TÜİK (Turkish Statistical Institute), 32 million 588 thousand people are employed in Turkey. According to the Pension Monitoring Center (Nowadays called EGM, formerly known as BEFAS) data for the same period, the number of participants registered in the IPS is approximately 9 million. The number reaches above 16 million with automatic enrollment contracts. Questions such as what the individual pension system is and what its advantages are for employees and business owners are answered on the Papel Blog.

What is the Individual Pension System (IPS)?

The individual pension system is an alternative investment system that aims to help employees achieve a higher level of welfare in retirement by increasing their savings and supporting the public social security system. Introduced into our lives in 2001 with Law No. 4632, the IPS remains in effect after the 2018 regulation with the "automatic enrollment" option.

IPS Conditions

In the individual pension system, a contract is signed between the individual pension company and the participant. The participant makes the committed payment to the company each month, which starts to be processed using the IPS funds chosen by the participant. Additionally:

State Contribution: Participants are entitled to receive a state contribution amounting to 30% of their paid premiums.

Retirement: Participants must stay in the IPS for at least 10 years and be at least 56 years old to retire from the IPS. If the contract is terminated in a shorter period or at a younger age, some deductions may apply.

Deductions: In case of early termination of the contract, fund management fees and tax/withholding deductions applied by the state are deducted, and the remaining amount is given to the participant. The entitlement to the state contribution is calculated based on the years the contract has been in effect.

Automatic Enrollment System: In 2018, a new regulation made participation in the IPS automatic for all Turkish-citizen employees.

What is the Automatic Enrollment System (AES) in IPS?

When starting a new job, the employer must arrange the automatic IPS contract for the employee and inform them about it. The IPS contract started by an employer is called Automatic Enrollment System or AES. A 3% deduction is made from the monthly gross salary payment of the employee included in the AES and is directly transferred to the pension company. The maximum amount for AES deduction cannot exceed 3% of the maximum monthly taxable wage determined by the Social Security Institution (SGK). For 2024, the SGK maximum wage is set at 150,018.90 TL per month, and based on this amount, the maximum monthly AES deduction can be considered 4,500.567 TL.

Employees who do not wish to continue their AES contract may cancel their contract within the first 2 months without any deductions by sending a cancellation request. For this process, it is necessary to contact the pension company where the contract was made.

Differences Between AES and IPS

In Turkey, there are several differences between AES and IPS:

Participation Method: While the individual starts the IPS contract by applying to the relevant institution independently, the AES contract is automatically started by the employer for the employee.

Investment Funds: The types of investment funds available may vary depending on the type of individual pension contract. AES participants can only invest in AES funds, while IPS participants have a wider variety of funds to choose from.

Premium Payment Method: In AES, premiums are paid by the employer through deductions from the gross salary. In IPS, payments are made by the participant through their chosen payment method, with any amount above the minimum premium.

Cancellation Process: In AES, the cancellation process must occur within the first two months after the contract starts. Otherwise, deductions may occur. In IPS, exiting is entirely flexible. However, the amount of state contribution entitlement depends on the duration of the contract.

State Contribution: Both systems have a 30% state contribution. Additionally, AES provides an extra 1,000 TL incentive.

What Are the Advantages of IPS?

The individual pension system offers many advantages to individuals. Firstly, it helps individuals develop saving and investment habits. Additionally, being able to choose between various funds and create the most profitable portfolio requires improving financial literacy.

Besides these, some of the advantages of individual pensions can be listed as:

State Contribution and Incentives
Additional Income in Retirement
Flexible Investment Opportunities

IPS State Contribution and Incentives

One of the most important advantages of IPS savings is the state contribution. An amount equal to 30% of the premiums paid is added to the accounts of IPS investors as a state contribution. In addition, an extra 1,000 TL incentive is provided in the automatic enrollment system.

In IPS and AES contracts, the state contribution increases gradually based on the duration of the contract. Accordingly:

Participants who terminate the contract within 0-3 years cannot receive the state contribution.
Those who remain in the system for 3-6 years are entitled to 15% of the state contribution, and those who stay for 6-10 years are entitled to 35% of the state contribution.
Participants who complete 10 years in the system are entitled to 60% of the state contribution.
To receive 100% of the state contribution, participants must remain in the system for at least 10 years and be at least 56 years old.
Participants who complete 10 years in the system but have to leave due to disability or death are also entitled to the full state contribution.

Additionally, in AES contracts, an incentive payment of 1,000 TL is made in the second month following the employee's entry into the system.

Additional Income in Retirement

Participants who meet the duration, age, and premium payment conditions without canceling their IPS and AES contracts gain the right to retire at the end of the contract. The accumulated amount in the account is paid to the participant either in a lump sum or at regular intervals, such as monthly or quarterly, during the retirement period. This provides additional income alongside the social security retirement pension.

Flexible Investment Opportunities

Participants who sign an individual pension contract can create a broad investment portfolio by selecting different funds offered throughout the contract. Although the funds vary depending on the type of contract, participants are offered many options that cater to different investment habits, such as variable funds, commodity funds, index funds, and participation funds.

IPS State Contribution Limit for 2024

The 30% state contribution provided in IPS and AES contracts is limited to the annual gross minimum wage. Accordingly, the maximum state contribution amount for 2024 is 72,009.00 TL. This amount gets updated based on the minimum wage determined each year.

IPS and AES Investment Options

Investments in individual pensions can be made in funds that include the term “pension investment fund” in their names. The funds available for investment are categorized as IPS funds and AES funds, depending on the type of contract. In both systems, the contract holder has the opportunity to select the types of funds they will invest in to maximize their profit. The funds are kept in an account opened in the participant's name at Takasbank throughout the contract.

Participants are limited to making 12 fund changes per year. This allows for better management of the cash flows of the funds and healthier monitoring of the long-term yield curves of the selected funds.

AES Funds

Automatic enrollment system investors can only invest in variable funds that include the term "AES" in their names. There are various variable AES funds offered by different investment companies, and the types of funds are categorized based on their risk levels as follows:

Risk Level 0-2: These are pension investment funds that primarily prefer guaranteed return methods such as government domestic borrowing instruments and TL time deposits. Pension investment companies offer them under names such as cautious variable or conservative variable.

Risk Level 2-4: These are variable AES pension investment funds that include different investment instruments. They can be found in the market under names such as standard variable and balanced variable. The aim is to protect the capital and earn profit by preferring low-risk investments.

Risk Level 4-7: These are funds established to achieve higher returns than other fund groups for investors with a higher risk appetite. Pension investment funds with names such as aggressive variable, dynamic variable, and attack variable are included in this group.

IPS Funds

These are pension investment funds offered to participants who voluntarily sign an IPS contract. Unlike AES participants, those who voluntarily participate in IPS can invest in pension investment funds in various groups such as equity, precious metals, life cycle, index, and participation funds.

A detailed list of IPS and AES funds can be accessed on the Pension Monitoring Center website.

Canceling IPS

Individual pension investments are long-term investments that require patience. However, some participants may want to use the money accumulated in IPS earlier than the termination date or prefer to opt out of their employer's AES contract. In such cases, the cancellation process needs to be initiated.

How to Cancel IPS?

A participant with a voluntary IPS contract can cancel their contract at any time. To do so, they need to contact the pension investment company with which they made the contract. In IPS cancellation processes, fund management fees and withholding taxes are deducted from the accumulated amount. The entitlement to the state contribution is determined within the above-mentioned timeframes and limits.

How to Cancel AES?

The AES cancellation process requires almost the same procedures. An application for cancellation is made by contacting the individual pension company where the contract was made. If the participant exits AES within the first 2 months, no deductions are applied.

The time it takes for the money to be transferred to the participant in IPS and AES cancellations may vary depending on the company with which the contract was made. The contract terms should be reviewed for detailed information.

Innovations Introduced to the Individual Pension System in 2024

With the innovations introduced in 2024, some advantages were provided to IPS participants. This aims to extend the duration of staying in the system, increase the number of participants, and increase the amount of savings.

Update on the State Contribution Upper Limit

As known, the IPS state contribution amount is limited to the gross minimum wage. In other words, a participant who invests 240,030.00 TL in IPS in 2024 can receive a maximum state contribution of 72,009.00 TL, and the contribution amount would remain fixed even if a higher investment is made. However, with the update made in 2024, if the mentioned investment amount is exceeded, the excess amount will be used in the calculation of the state contribution for the following year.

IPS Savings as Collateral

With the new regulation that came into effect on June 3, IPS savings can be used as collateral for personal loans. Thus, it will be possible for participants to meet their urgent cash needs by obtaining financing from banks instead of terminating the contract.

Frequently Asked Questions About IPS

What is IPS?

IPS, the abbreviation for Individual Pension System, is an alternative pension system to the public social security system, created to provide an additional source of income and contribute to future welfare levels.

How is IPS investment made?

IPS investment is made through pension investment funds. In voluntary IPS contracts, investments are made in IPS funds, while in automatic enrollment contracts, investments are made in AES variable funds.

How to cancel IPS?

To cancel IPS and AES, you must contact the pension company where the contract was made through the appropriate communication channels. The cancellation process and the transfer of the accumulated funds to the participant may vary by company.

How much is the IPS state contribution?

The maximum IPS state contribution is equal to the annual gross minimum wage. This amount is 72,009.00 TL for the year 2024.

Where can individual pension inquiries be made?

Contract terms, remaining time until retirement, and the entitled state contribution amount can be accessed through the mobile and web channels of the institution where the contract was made. All IPS and AES contracts can be monitored by logging into the e-Government and Pension Monitoring Center systems.

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