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Pension

Everyone is entitled to tax-free income in the amount of EUR 2160 a year, i.e., EUR 180 a month. Pensioners receiving a pension are entitled to tax-free additional income of EUR 236 per month, i.e., EUR 2832 a year.

Meaning that you as a pensioner have the right to earn tax-free income totalling EUR 416 per month. If you do not have other income, your pension is tax free up to EUR 416. However, if pension is not your sole source of income, the pension is subject to taxation starting from EUR 236.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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