TFR: The Italian Severance Payment Explained

What is TFR and What Does it Mean?  In Italy severance is Called TFR (Trattamento di Fine Rapporto) and it is mandatory for every employer…

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Written by federicopizzo

What is TFR and What Does it Mean? 

In Italy severance is Called TFR (Trattamento di Fine Rapporto) and it is mandatory for every employer whether they are in the private or public sector.  

TFR is a form of deferred social security remuneration, set aside monthly by the employer, which is usually received at the end of the employment. 

It is a social benefit first introduced in Italy in 1982 and destined for employees with both indefinite employment and fixed term employment but also part time employees. It is received by the employee when the employment comes to an end either because of resignation, dismissal or retirement. Note that TFR is not given to self-employed people.  

Where to Allocate TFR 

The TFR can be either kept within the company or allocated to a pension fund. The choice is made by the worker who must communicate a decision to the employer within six months of hiring. If the employee chooses to deposit it in the company, they can change the destination at any time by opting for a pension fund opened in their name. 

If the company has fewer than 50 employees, it is the employer who must set aside the TFR and return it to the worker when the relationship ends. In this way, the employee is exposed to the risk of the company going bankrupt. 

If the company has over 50 employees, and the employee has decided to leave the TFR in the company, the employer is obliged to deposit it to the INPS Treasury Fund. The sums deposited within INPS are not reinvested by the National Institute of Social Security but undergoes an automatic annual revaluation. If an employee terminates their employment relationship, the TFR can be requested by submitting a specific application and INPS will pay the sum within 30 days of accepting the request. 

How to Calculate TFR 

The calculation for determining the TFR is made up of the sum of all remuneration elements, including the equivalent of benefits in kind, excluding the amount paid as reimbursement of expenses. 

The calculation of TFR may differ based on the CCNL (national collective labor agreement) of the category to which the employee belongs. Usually, TFR pay is equal to the annual salary divided by 13.5. (Example 25,000 : 13.5 = 1,851) 

If the employment has lasted less than a year, the quota of the TFR will be prorated accordingly. If the employee has worked more than 15 days in a month the entire month will be included in the calculation.   

Annual Reevaluation of TFR 

The value of the severance pay is not fixed over time but undergoes a revaluation which varies based on where the TFR is deposited. 

If the employee works in a small company and decides to “leave” the severance pay in the company, the sum is revalued year by year based on precise parameters: 

  • fixed rate of 1.5% 
  • 75% of the increase in the consumer price index (inflation) certified by ISTAT (Italian National Statistic Agency) compared to December of the previous year. 

For example, an employee with 2 years of employment with a salary of 25,000EUR and with a yearly inflation of 5%. The calculation of TFR will be as follows: 

Annual TFR = 1,851 + 1851 = 3,702 

Revaluation first year = 1,851 * [1.5% + (0.75 * 5%)] = 97 

Total TFR = 3,702 + 97 = 3799 

The revaluation is carried out only for the first year, as it does not apply to the year just ended. 

The situation is different for those who deposit the TFR in a pension fund. In this case there is no annual reevaluation, but the amount of TFR varies based on the performance of the stock and bond markets (a lot depends on the level of risk chosen for the pension fund).  

How is TFR Taxed? 

The taxation applied to the TFR when it is received back from the employee varies based on where the employee has deposited it.  

If the TFR is paid by the employer or by the INPS Treasury Fund, an average rate is applied to the total sum. This is the average of the IRPEF (Income tax) taxation of the last five years. This rate applies only to the principal amount, while for the revaluation, there is a substitute tax equal to 17%, which is paid to the tax authorities every year. 

For the employees who hold the TFR in a pension fund, the taxation for the base varies from 9% to 15% based on the number of years it stayed in the fund (after 15 years it drops by 0.3% each year until reaching a minimum of 9%). With regards to capital gains, the taxation varies from 12.5% ​​up to 26% depending on whether the gain is produced by government bonds or other more profitable and higher risk financial instruments. 

Requesting TFR in Advance 

It is possible to request an advance payment of the TFR from the company, but it is necessary to comply with the requirements.  

The TFR advance can only be requested if one of these three cases occurs: 

  • purchase/renovation of the first home or for the employee’s children one. 
  • unexpected health expenses for therapies or extraordinary health interventions recognized by the ASL (local health authority). 
  • expenses to be paid in specific periods such as during parental and training leaves. 

There are other stringent rules to follow before requesting an advance on severance pay: 

  • the application cannot be submitted before eight years of service within the same company. 
  • the amount requested cannot be greater than 70% of the total TFR. 
  • the request can only be submitted once during the contract. 

To request an advance on TFR, the employee must submit a request to the employer using the appropriate form. Furthermore, the advance of the TFR cannot be requested if the company is in crisis or in other exceptional circumstances. 

For those who have opted for a pension fund, the regulations for requesting an advance on severance pay are similar. The reasons for requesting it are identical, but the differences are in the percentages and timing: 

  • to purchase the first home, it is necessary that at least 8 years must have passed since registration with the fund and the amount must not exceed 75% of the TFR amount. 
  • for healthcare expenses it can be requested at any time for a maximum value of 75%. 
  • for other expenses, it is necessary that at least 8 years must have passed since registration with the fund and the requested value must not exceed 30% of the settlement amount. 

The request for advanced TFR can be submitted several times but must never exceed the maximum limit of 75%. 

Job Changes: What Happens to TFR? 

If severance has been deposited in the company, the employer is obliged to pay it to the employee within 45 days of terminating the relationship. However, if TFR has been allocated to a pension fund, nothing happens: The accumulated TFR remains in the employee’s fund and is integrated by the amounts paid by the new employer. 

When is Severance paid? 

Severance pay is paid out to the employee within 45 days of the end of the employment relationship unless there is an agreement between the worker and the employer for the deferral of payment.