Three questions before deciding over
what you have saved in the second pillar of the pension system
Do I save money on my own?
Do I have any investment experience?
Do I want the size of my pension to depend on future generations?
If you answered no to one question, it is safer to continue collecting in II pension pillar. However, if you want to try investing on your own, start with pension investment account (PIK).
Your five ways to save for your retirement
Only make decisions that directly affect your future after you have thoroughly considered all of the options.
There is plenty of time to do this.
1.
Join the II pension pillar
- If you have not yet joined the II pension pillar, you can do so from 2021 and benefit from tax credits in the future.
- If you accumulate funds in the II pillar, 2% of your gross salary will be deposited in this account, with the state then adding 4% (deducted from your social tax, which accounts for 33% of your salary).
- How and when you use the pension funds collected in the II pillar, you decide for yourself.
- It is most advantageous to start using your pension funds when you reach retirement age:
- you have the option of spreading the benefits out over the rest of your life (calculated on the basis of your life expectancy) – in which case the tax rate is 0%; or
- you can withdraw the entire amount at once – in which case you pay 10% income tax.
2.
Continue to collect in the II pillar in your current pension fund
In this case you do not have to do anything and the pension fund will continue investing your money just like before. This is a good option if the current system is to your liking and you want to save money for your retirement by leaving your money in the hands of a professional fund manager.
3.
Continue to collect in the II pillar by starting to invest in your pension using a pension investment account
- A pension investment account is the right choice for those who want to invest their pension assets or part of them themselves and who have the skills and knowledge to do so. The funds also offer an automatic investment option.
- You can transfer to the pension investment account all or part of the assets accumulated in your II pension pillar and/or future contributions (once a month 6% of your gross salary).
- You can keep the assets in the pension investment account in cash or as a deposit or invest in securities yourself.
- If you wish to, you can transfer your money back from your pension investment account to your II pillar pension fund or withdraw the funds from the II pillar system instead (giving at least five months' notice of this, the obligation to pay income tax on the funds arises).
4.
Stop making contributions to the II pillar but leave in it what has already been collected
This is an option for those who for some reason do not want to save more money in the II pillar over the next 10 years but who want to leave in the pension fund what has already been collected there for their retirement.
Remember!
If you suspend contributions to the II pillar, the state will transfer 4% of your social tax to the state budget (not to your pension account as before) and you will not be able to collect pension funds in the II pillar system again until 10 years has passed.
5.
Stop making contributions to the II pillar and withdraw the pension funds accumulated so far
Remember!
If you withdraw money collected in the II pillar before reaching retirement age:
- you have to withdraw the entire amount at once;
- you have to pay 22% income tax on the amount;
- your social tax will be transferred to the state budget (not to your pension account); and
- you will not be able to start raising money in the II pillar again until 10 years has passed.
If you are already of retirement age
or have up to five years left until you start receiving your old-age pension and you want to withdraw the money collected in the II pillar, you will be entitled to a tax credit.
You have two options:
- pay 10% income tax if you withdraw the entire amount at once; or
- do not pay income tax at all if you are of retirement age and enter into a lifetime pension agreement or a long-term pension agreement to use the money saved (i.e. the benefits are spread out over at least the average number of years you have left to live based on life expectancy figures).
Why continue collecting in the II pillar?
The II pension pillar is a unique way of accumulating funds
The II pension pillar is a unique way of accumulating funds: the state adds 4% from your social tax to your monthly 2% contribution.
You can withdraw the collected amount at a time convenient to you
The state favours the use of pension funds during retirement. It is therefore wise to postpone withdrawing money from the II pillar until you have a good plan on how to use it.
It is most useful to only start using the money collected in the II pillar once you have reached retirement age. Then you will not have to pay any income tax. Otherwise, the applicable tax rate will be 10%.
The assets amassed there are inheritable
Heirs can choose to withdraw the accumulated money at once or prefer to inherit fund units.
If you withdraw the money collected in the II pillar
before reaching retirement age, then ...
You have to withdraw the entire amount at once.
You have to pay 22% income tax (10% or 0% if you are of retirement age).
You will not be able to start collecting in the II pillar again until 10 years has passed.
You lose the opportunity to accumulate up to 10,000 euros (based on the average salary) in your pension pillar from the 4% payments made by the state during this 10-year period. However, if you continue to accumulate funds in the II pillar, the state will pay 4% into your pension account, these funds providing an average return of 4.5% per annum.*
According to an analysis of the Bank of Estonia, your pension will be up to 30% lower in the future.
Estonian pensioners who depend solely on the old-age pension provided by the state and who have not accumulated money in the II pillar are at the highest risk of poverty among European pensioners. According to European Commission, Eurostat and OECD statistics, this means that their income will decrease the most when they retire and that they can be retired for the shortest time.
If you withdraw money from your II pension pillar before reaching retirement age, your social tax (4%) will be transferred to the state budget and you will only receive a state pension (I pillar) when you reach retirement age. This option is intended for those who have a clear plan on how to cope financially during their retirement and how to raise money independently to this end.
Remember that withdrawing money from the II pillar before reaching retirement age is not an obligation, but an option. Almost everyone should continue to save for their retirement.
* Taking into consideration the long-term return of pension funds with diferent investment strategies, LHV Varahaldus assesses the annual average lõng-term return for Estonia´s mandatory pension funds to be 4,5%.
II pillar pension disbursements and inheritance
The method of payment of pension funds depends on how old you are and how you want to use the money you have saved. When you reach retirement age, a number of disbursement methods are added. If you wish to, you can combine options.
Comparison: money from II pillar or a loan
Do you wish to compare what would be more useful: to cover existing loans and important expenses at the expense of Pillar II, or to borrow money from a bank for this purpose? Use the pension money calculator.
Let us know if you have any questions
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