15.11.2024
41% of Estonian people do not believe that their current financial decisions guarantee the desired quality of life in retirement, according to a Norstat survey commissioned by LHV.
According to Vahur Vallistu, Chairman of the Management Board at LHV Varahaldus, the pressure on the Estonian pension system is strong. The number of pensioners is increasing, but that of working age is decreasing. „Even today’s average state pension is difficult to maintain at the current level of social tax. At the same time, the state pension helps to cover basic needs, but the question arises: is this the future we want for ourselves? The main levers for increasing financial security are in the hands of each person, and in Estonia, there are effective opportunities for this in the form of pension pillars,“ Vallistu explained.
The Norstat survey also revealed that 33% of Estonian people cannot say whether their current financial decisions ensure their ability to cope in retirement or not. Vallistu highlighted that people often do not think about their capital needs until retirement age is already knocking strongly at the door. „The rule of thumb is that in retirement, about 75% of current income is spent on a comfortable living. The Estonian state pension, on the other hand, will reach barely a third of the average salary in the future, based on analyses,“ noted Vallistu when explaining why it is important to have savings in the future.
Many Estonian pensioners cannot afford to stay at home because there is a high risk of falling into poverty. Today, every second Estonian pensioner faces poverty or social exclusion. „The state pension is not sufficient for a dignified old age, and the average savings of households are small. Therefore, many people work as long as their health allows. Saving in pension pillars is an unobtrusive opportunity to grow your buffer for the future and create flexibility for yourself,“ Vallistu noted.
Even if a 45-year-old person earning an average Estonian gross salary, i.e., 2,000 euros, is just starting to invest in the second pillar and directs 6% of their gross salary there, they will be able to accumulate 66,000 euros by retirement age. Adding the average annual nominal rate of return of the second pillar funds in Estonia since 2002 (3.9%) to this, the value of the accumulated assets will increase to nearly 95,000 euros. „It is difficult to set aside the money received in one’s account on a monthly basis, especially in the case of rising prices. However, automating your savings helps to ensure that the entire salary is not spent on daily consumption,“ Vallistu said.
Interest in one’s own financial future and shaping it is the foundation of a dignified old age. It is precisely ignorance and indifference that are the roots of the risk of poverty, which are easily preventable by following the basic recommendations with regard to financial wisdom. „It is worth starting to invest in order to receive tax incentives, and making savings automatic is a good idea, too. Saving in pension pillars is one of the most effective decisions for increasing financial security over a long period of time. All the more so, as for many people in Estonia, the second pillar is their main financial asset,“ Vallistu commented. He added that when Estonian men reach retirement age, they have an average of 15 years left to live, and women, 20 years. Time is an investor’s best friend, so it’s worth getting acquainted with the various options well in advance. „For example, it is now possible to increase the personal contribution in the second pillar to 4% or 6%, which gives even greater leverage to the growth of the value of the asset,“ Vallistu said.
You can increase the second 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. An application to change the payment rate can also be made after 30 November, but then the new rate will only apply 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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