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Funded pension

Funded pension is a pension paid to you from a pension fund over a fixed period. This is a unique payout method that became available only last year.
You will benefit from this type of pension in two ways: you will receive payments with 0% income tax while your remaining pension money will continue to grow in the fund.

Three good reasons to choose funded pension

Income tax free

If you are of retirement age and choose a period that is at least the recommended period (life expectancy at retirement) of pension payouts, you will not have to pay income tax on the payouts. If you decide to withdraw the entire pension at once or in lump sums, you will have to pay 10% income tax.

Investing continues

Your remaining money in the pension fund will continue to earn returns and compound interest while you receive the pension. The average pension period is 18 years. If you withdraw your entire pension at once and keep it in your account for 18 years, you will lose the potential return and suffer the effects of inflation.

Flexible and inheritable

You can withdraw the saved amount in any way you want: either in regular pension payments or in lump sums of varying amounts. You can do this if you need larger amounts in the meantime. In addition, the funded pension is inheritable.

What else you should know about the funded pension

  • If you are of retirement age and choose the recommended or longer period for receiving your pension, you will not have to pay income tax.
  • If you choose a shorter period during which you want to receive a pension, you will have to pay 10% income tax.
  • Statistics Estonia calculates the recommended period of pension payments based on the average life expectancy corresponding to your age. It will be calculated when signing the contract and rounded to the nearest whole year.
  • The calculation uses a detailed table showing the average life expectancy for each age. You can find the life expectancy table here.
  • You can also set a longer pension period than the recommended period. You can select a shorter-than-recommended period (the minimum is one year), in which case you will have to pay 10% income tax.
  • The calculation of funded pension is based on the number of pension fund units you own at the time of signing the contract.
  • The actual pension payment amount will be determined before each payout when the corresponding number of units are sold. As the value of a unit may change, each payout amount may be different.

Example. If you set the pension period at 18 years, your accumulated pension fund assets will be distributed over 18 years. This way, the number of units is found that will be redeemed at the time of each payout. After 18 years, there will be no more assets in your second pillar and your funded pension will end.

To apply for funded pension, submit an application at a bank branch or on the Pension Centre. The period must be in full years; the minimum period is one year. You can also set a longer-than-recommended period.

You can choose whether you want to receive a pension once a month or once a quarter.

The pension year begins in the calendar month following your funded pension application.

The pension will be paid between the 16th and 20th dates.

You can terminate your funded pension if you wish. You can then set new conditions for receiving your funded pension or choose another payout type: a lifetime or fixed-term pension (annuity) from an insurance company or a lump sum pension payout. However, if you have already chosen a life insurance (annuity) contract, you will no longer be able to choose funded pension, as the units are sold when signing an insurance contract.

Contributions to the second pillar of the pension cease according to the time of submission of the application as follows:

Submission of application

  • From 1 December to 31 March – the end of the commitment on 31 August;
  • From 1 April to 31 July – the end of the commitment on 31 December;
  • From 1 August to 30 November – end of commitment 30 April.

See the basics of funded pension

Third pillar funded pension

From 2022, you can apply for funded pension from third pillar pension funds (supplementary funded pension) if

  • you have reached or have less than five years left until retirement age
  • you have joined the third pension pillar in 2020 at the latest and are at least 55 years old, and
  • at least five years have passed since you joined the third pension pillar.

You will not have to pay income tax on funded pension if you choose at least the recommended pension period.

Read about the taxation of payouts here

Let us know if you have any questions.

Together we will find the right solution.

Reet Roos
Pension Consultant
Mon–Fri 8–17
680 2743
Sign up for a consultation


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