Do I save money on my own?
Three questions before deciding over
what you have saved in the second pillar of the pension system
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.
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.
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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