07.11.2024
Nearly 60% of Estonian people are positive about the possibility of directing 4% or 6% of their gross salary to the II pension pillar instead of 2%. However, only 11% of the population are planning to increase their contributions this year, according to a Norstat survey commissioned by LHV.
„Automating saving and making consistent contributions to the II pillar is one of the most effective ways to increase economic security. Raising your personal contribution to 4% or 6% gives even more leverage to the growth in the value of the asset,” Vahur Vallistu, the Chairman of the Management Board at LHV Varahaldus, said. To date, more than 56,000 people have made the choice to increase their II pillar contribution, most of whom have decided on 6%, i.e. the solution that will increase their future pension the most. The Norstat survey also revealed that people in Estonia see the change as a good opportunity to increase their savings rate. In addition, the opportunity to contribute more than before when saving for retirement is highly valued. “Changes are often accompanied by a paradox between attitudes and behaviours. People in Estonia are positive about the innovation, but according to the survey, one in ten plans to increase their contribution to the II pillar and 30% have not yet made a decision. It takes time to get acquainted with the opportunity that has arisen, and it is important to make a carefully considered choice, as financial decisions related to the II pillar have a long-term impact,” Vallistu said.
Vallistu noted that saving in the II pillar helps to imperceptibly grow your buffer for the future. At the same time, larger contributions may mean tens of thousands of euros of additional income for retirement. While a 25-year-old person currently earning an average gross salary in Estonia, i.e. 2,000 euros, saves EUR 112,000 for retirement age with 2% contributions, the figure for 6% contributions would be EUR 186,000. Adding to this, the average annual nominal return of the II pillar funds in Estonia since 2002 (i.e. 3.9%) means that with 2% contributions, the value of the accumulated assets by retirement age will grow to EUR 223,800, and with 6% contributions, it will reach as much as EUR 372,900.
The survey revealed that the main factor inhibiting the increase of the II pillar contributions is the additional cost of the decision. At the same time, nearly a quarter of the respondents believe that they are already saving and investing enough for retirement. According to Vallistu, research shows that people’s expectation of the amount of their future pension tends to transcend reality. In addition, according to analyses, the average state pension in Estonia will reach just under a third of the average gross salary in the future. “So, it is worth asking yourself if you are ready for a nearly 70% drop in your income? In Estonia, pensions are low, and the most that can be done to increase future security is by each individual themselves. Increasing the payments for the II pillar offers a simple, automatic, and affordable option in the long term,” Vallistu said.
He stressed that the II pillar is the most important safety net for many Estonian people to provide security for the future. “Increasing contributions is one of the most effective decisions to make to increase the peace of mind of yourself and your loved ones,” Vallistu emphasises. All the more so since the average amount of pension assets accumulated in the II pillar today is less than EUR 10,000. ‘Whether this is a little or a lot in a situation where, on average, people still live at retirement age for almost 18 years is up to each individual’s decision. However, it is clear that every additional euro you have saved and invested will help in the future. It is recommended to plan your retirement in such a way that when you retire, you spend 70–80% of your current income. Last year, the average state pension accounted for 38% of the average gross salary in Estonia, i.e. the gap is double. This gap can only be narrowed by contributing to independent savings,’ Vallistu said.
You can increase your II pillar contributions until 30 November in your home bank or on the page at www.pensionikeskus.ee. Payments will start moving according to the new request from January 2025. Most certainly, an application to change the payment rate can also be made after 30 November, but then the new rate will apply only from 2026.
LHV Group is the largest domestic financial group and capital provider in Estonia. The LHV Group’s key subsidiaries are LHV Pank, LHV Varahaldus, LHV Kindlustus, and LHV Bank Limited. The Group employs approximately 1,200 people. As at the end of September, LHV’s banking services are being used by 445,000 clients, the pension funds managed by LHV have 116,000 active clients, and LHV Kindlustus protects a total of 169,000 clients. LHV Bank Limited, a subsidiary of the Group, holds a banking licence in the United Kingdom and provides banking services to international financial technology companies, as well as loans to small and medium-sized enterprises.
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