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Pension

1. How are pensions taxed?

Everyone is entitled to tax-free income in the amount of EUR 2040 a year, i.e., EUR 170 a month. Pensioners receiving a pension are entitled to tax-free additional income of EUR 225 per month, i.e., EUR 2700 a year.

Meaning that you as a pensioner have the right to earn tax-free income totalling EUR 395 per month. If you do not have other income, your pension is tax free up to EUR 395. However, if pension is not your sole source of income, the pension is subject to taxation starting from EUR 225.

This rule applies both to the State retirement pension and the mandatory funded pension, i.e., payments from II pillar.

Payments from the third pension pillar may be either tax free or taxed at a rate of 10% or 20%. The lower tax rate is the very reason why it makes sense to also set aside for your pension through the third pillar.

2. What will the retirement age be in the future?

The average life expectancy of Estonian residents is 76 years. The retirement age is 63 for men and 62.5 for women. Actually, sometimes people retire even earlier, with the average age being 59.6. Unemployed persons retire before the official retirement age and their pension is reduced correspondingly.

In Estonia, there are about 300,000 old-age pensioners of whom 16.4% are working.

If at the moment people are choosing to work voluntarily, in the future working will be inevitable since the pension age is moving ever further away. Starting from 2016, both men and women may retire at the age of 63, from 2026 onwards – at 65. Researchers predict that in order for the pension system to continue to function, the retirement age should be raised to 69 by 2060.

Second pillar

1. How do you collect retirement money?

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2. What will happen to my pension contributions if I am temporarily not working or if I am unemployed?

Contributions to the second pension pillar are calculated on the income taxable in Estonia. If you do not have income taxable with social tax, no contributions are made to the second pillar and you will accrue no “debt”. It is not possible to make contributions to the second pillar at your own initiative.

3. What should I pay attention to if the yield of my chosen pension fund does not meet my expectations?

Pension collection is a long process that may cover several decades, depending on the age of the individual. Contributing towards your pension is just like a marathon: it does not matter how fast you were in the first could of hundred metres. With your pension, it is important to follow the long-term rate of return figures, for instance, over a period of 10 years or from the time the pension system was set up. Brief, temporary concessions in yields do not affect the end result much.

4. When can I switch pension funds?

As of 1 August 2011, pension contributions can be directed to a new pension fund on an ongoing basis and the money already accumulated can be moved from one fund to another three times each year. When the application to transfer the accumulated funds, i.e., the application to exchange units at the latest:

  • on 30 November, the exchange is effected on the workday following 1 January;
  • on 31 March, the exchange is effected on the workday following 1 May;
  • on 31 July, the exchange is effected on 1 September or the following working day.
5. How costly is it to swap pension funds?

Where second pillar payments are redirected to a new pension fund, no costs are involved.

When already accumulated funds are transferred from the old fund to a new fund, you have to bear in mind that there is a 1% exit fee deducted by the management company whose units you are giving up. By this amount, the sum for which you can acquire units of the new pension fund is reduced. Enrolment with the new pension fund does not incur extra costs to you. There is no exit fee charged if the pensionable age is less than five years away and also if you change funds while remaining with the same management company (for instance, switching from one LHV fund to another LHV fund).

6. Does the bank have the right to raise my loan interest rates, should I decide to change my pension fund?

No. In previous years, gifts were handed out for enrolment with a pension fund; however, the law now plainly states in black and white that the choice of a pension fund may not be influenced by any benefits. Likewise, the bank must not make loan interest dependable on the choice of the pension fund (subsection 14 (5-1) of the Funded Pensions Act). If this happens, you should stand up for your rights and notify the Financial Supervision Authority about the situation.

7. Will I be able to use the money collected at an earlier date?

The right to use second pillar money arises when you reach pensionable age. According to law, it is not possible to withdraw money earlier. Read more about the ages of old-age pension and eligibility on the Web site of the Social Insurance Board.

8. I have joined the second pillar; can I leave it?

Once you have joined second pillar, you cannot pull out.

Third pillar

1. What is the carrot offered by the State if I decide to contribute to the third pillar?

The State will refund the income tax on any sums invested in the third pillar pension fund in March of the subsequent year. For instance, if you invest EUR 100 in LHV Täiendav Pensionifond before the end of the year, you are entitled to an income tax refund of EUR 20 from the State in March of the subsequent year. In order to qualify for an income tax refund, the investment in the third pillar must be entered in your income tax declaration.

Income tax is returned on the amount that does not exceed 15% of your annual income before taxes or EUR 6000 per year.

2. How do you collect money in the third pillar pension fund?

Buying the units of LHV Täiendav Pensionifond is as simple as paying a phone bill. You can invest at your leisure and any amount you consider suitable. You can make a one-off payment or, for instance, a standing order that you can cancel at any time.

In order to invest, you need a CSD securities account, which you can open at LHV Pank without a charge.

You may collect funds in multiple third pillar pension funds at a time.

3. How do I get my money out of the third pillar?

The units of LHV Täiendav Pensionifond, LHV Intress Pluss and LHV Pensionifond 100 Pluss may be sold back on each banking day (to submit an application, please contact LHV’s customer support). The redemption fee for units is 1%.

Payments (not just the profit but the entire payment) are taxed with the current income tax rate, except in the following cases:

income tax rate of 10% applies to payments:

  • after the unit holder reaches the age of 55 but not before five years have passed from the first acquisition of units of a voluntary pension fund
  • in the case of the total and permanent incapacity for work of the unit holder.

Payments are not subject to tax if the money accumulated in the voluntary pension fund is used to enter into a lifelong regularly payable pension contract (annuity) with the life insurance company.

Passively managed funds

1. What distinguishes passive funds from actively managed pension funds?

Passively managed funds invest, irrespective of the market situation, in funds following certain indices, and there is no active management of assets. The composition of assets in a passively managed fund is stable, the fund does not adapt to changes (as do funds managed by a fund manager). Figuratively speaking, passive funds operate at full throttle at all times. There are bound to be periods when the yields of such funds are very much in the negative. Should the market collapse, the fund manager cannot do anything to reduce the risks. The client plays a much bigger role in assessing the suitability of the fund. Such funds suit customers with previous experiences in investing, who are capable of assessing the risks related to these funds.

Since the passive funds to be set up are not actively managed, i.e., no risks are actively being added or reduced as the market situation changes, it means that the administration fees are lower.

2. What does the administration fee for passive funds include?

We are able to provide the service for such a low fee since LHV’s fund business has reached a critical mass and all the functions related to the administration of funds have been constructed. From this fee, conventional third-party costs as well as LHV’s administrative costs are covered.

3. When, where and how can you join new funds?

It is possible to join LHV’s new passively managed pension funds in all our branches, over the Internet or with the help of LHV’s salesmen. When the application to transfer the accumulated funds, i.e., the application to exchange units at the latest:

  • on 30 November, the exchange is effected on the workday following 1 January;
  • on 31 March, the exchange is effected on the workday following 1 May;
  • on 31 July, the exchange is effected on 1 September or the following working day.

To Danske’s clients

1. Why did the management of Danske pension funds transfer to LHV?

Due to a change in strategy, Danske Bank sold their local asset management company, Danske Capital, to LHV in May 2016. Two months later, Danske Capital merged with LHV Varahaldus, after which LHV also took over the management of the one-time Danske funds. Since September, the names of the funds refer to just LHV. LHV plans to merge pension funds with similar strategies in the future.

2. How does the administration fee for my pension fund change?

The administration fee of second pillar funds depends on the total size of second pillar funds managed by the asset management company. The larger the total size of the funds, the more effective their management and the lower their administration fees. The merger of Danske and LHV’s asset management companies brings with it a more rapid decrease in administrative fees than would be the case if the asset management companies were to continue to operate independently. As a result of the merger of the asset management companies and funds with similar strategies, the administration fee for the clients of the pension funds formerly called Danske Pension 50 and Danske Pension 25 is reduced by roughly 20% more than it would have been without the merger. For LHV pension fund clients, the fee will be by nearly 10% less than it would have been without the merger. The rates of administration fees depend on the size of the funds at the time when fees are reviewed. The amount of the administration fee is subject to change once a year as of February.

LHV LLHV Pensionifond 50
before mergerno effect of the purchase transaction
2016–2017 February1.59%1.72%1.72%
2017 February1.33%1.23%1.69%
after merger
2017 May1.33%1.33%1.69%
2018 February1.25%1.25%1.66%
3. Can I see the current status of my second and third pension pillar assets now and in future?

The clients of the second pension pillar can currently view the current status of their assets in the Internet banks of all banks. It means that if the client has viewed the current status of their pension assets in the Danske internet bank, they continue to see it there. The current position of your pension assets can also be viewed on the Web page pensionikeskus.ee, if you have logged in using either your ID card or mobile ID.

Everybody who has enrolled with the mandatory pension fund can see their pension account in the LHV pension portal irrespective of their chosen core bank. The client may use the passwords of any Internet bank, their ID card or Mobile ID to log in. The proper means of identification should be selected from the list. Having logged in, the window “Pension account overview” opens, showing the active pension fund of the client and the funds in which the client is a unit holder.

The client sees the assets of the third or voluntary pension pillar in the Internet bank of the bank in which they have opened a CSD (Estonian Central Securities Depository) securities account. If the client is used to checking their third pension pillar asset status in the internet bank of Danske, they may continue to use the same venue. The units of the third pillar may be also transferred to a CDS account opened with LHV Pank. To this end, you are asked to contact customer support at LHV.

4. If I want to change the pension fund, what should I keep in mind?

If the client, at their own initiative, wishes to transfer the accumulated pensions assets to the fund of another management company, they need to consider costs which are often not reasonable. According to rules, when pension assets are transferred to a fund of another management company, a redemption fee of 1% applied. If you are less than five years away from retirement, the redemption fee does not apply. No exit fee is applied when units are transferred from one fund to another pension fund if the management company remains the same. Likewise, the exit fee is not applied when pension payments are redirected to another management company.

If the client still wishes to swap funds, it would be sensible to wait with the transaction so as to avoid costs. Namely, before funds with similar investment strategies are merged, it is possible to exit the fund without charge, if so desired. Clients are notified about the merger of funds in due time.

Road to retirement

1. What was your road to retirement like?

raasukenestortuisk

ivanovvitsur

Good retirement means, first of all, good health and happy children...

Katrin Karisma

People who retire often need to discover themselves again. They may think everything is now over, but in reality it is not. For me, a good retirement means, first of all, good health and happy children.

Read more ...

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