What is a pension investment account and who is it intended for?

19. November 2020

In relation to the freshly implemented pension reform, many people are wondering how to proceed. One little-known possibility is to open a pension investment account (PIA) which makes every saver a manager of their own personal pension fund. It is likely that the arrival of the PIA will become the biggest event of the coming year in the Estonian investment market.

What is the PIA?

The pension investment account (PIA) is an alternative to a pension fund. This is a new opportunity to keep and grow one’s pension assets within the II pension pillar system.

The PIA is essentially a current account to which its owner directs his or her regular contributions for their future pension (2% + 4%). In addition, they are able to transfer the pension funds saved up so far in the II pillar to the PIA.

Directing the funds saved up in the II pension pillar to the PIA differs from the total withdrawal of funds, since income tax is not paid on the amount transferred to the PIA. However, those who withdraw funds from their pension fund and do not direct it to the PIA, i.e., they leave the II pillar, will pay income tax of 20% on the amount and will be unable to re-join the II pillar system for a period of 10 years.

What can you do with the PIA?

If your PIA already has funds, you are able to invest these, whether in listed securities with the best rate of return (such as stocks, bonds, index funds), investment funds or, for example, deposits (specific investment restrictions are provided in § 17¹ of the Income Tax Act). If you wish, you do not even have to invest the money – you can just collect it to your account. If you do so, you should consider that the rate of inflation will likely exceed the interest earned. Therefore, the PIA is an account that provides you with an opportunity to manage your pension assets yourself, investing them at your own discretion.

The biggest advantage of the PIA, which is also applicable when investing into a pension fund, is the 200% amplification provided by the State. This means that every month, you direct 2% of your gross salary to the PIA, and with the contribution of the State – 4% of your gross salary – your money automatically triples. For example, if your monthly contribution is EUR 50, then the State will add EUR 100 to it – not a bad way to grow your assets.

If you’d like, you can withdraw the collected money from the PIA at any moment (as with the II pillar pension fund). Take into account that this will require an advance notice of 5 months and that you will also have to leave the II pension pillar.

Who is the PIA intended for?

The PIA is intended for a bold, independent investor who can assess risks. This is the best solution specifically for those who have not found a suitable pension fund for themselves, but wish to continue increasing their pension assets in a way that they are able to use the amplification provided by the State.

The PIA is also an option for those who have decided to leave their pension fund, but have not yet decided whether to withdraw the collected money in full or continue collecting to the PIA. In any case, there is no point in leaving the II pillar – accept the 200% support of the State until you have calmly made a well-considered decision.

In conclusion, the PIA is primarily suitable for a person who is interested in investing and who wants to take control of and responsibility over their pension assets.

When will it be possible to use the PIA?

You can open your PIA for the first time in the first half of 2021. If you file an application to direct the pension assets collected so far from the II pillar pension fund to your PIA before the end of July 2021, it will be received in the PIA on 1 September. After that, you will be able to conduct transactions with your PIA. From September 2021, you will also be able to direct your monthly 2% + 4% pension contributions to the PIA.

The PIA is a bank product; therefore, you will be able to conclude a contract for opening a PIA at a bank that offers this product. LHV Pank will bring its PIA to its clients at the first available opportunity.

The arrival of the PIA is likely to become the biggest event of the coming year on the Estonian investment market. Just as the LHV Growth Account and the repeal of Baltic transaction fees have created tens of thousands of new investors in Estonia in recent years, we hope to take the next major development leap with the local investor community with the arrival of the PIA.