Three questions before deciding over
what you have saved in the second pillar of the pension system
How much have I saved on my own by today?
Do I have any investment experience?
Do I want the size of my pension to depend on future generations?
Five facts about saving
According to the analysis by the central bank of Estonia, the extraction of funds from the second pillar may reduce the retirement pension by a third.
The second pillar of the pension system is a unique way of saving whereby the state adds from social tax 4% to your own contribution of 2% and you can exit the system at the time of your choice. If you take out the money when you have reached the retirement age, it is subject to a tax rate of 0% or 10%, depending on how you will decide to withdraw the money from the second pillar.
As of 2021, anyone who has not done it yet can join the second pillar. If you take out the money from the fund before the retirement age, you must pay the state 20% of the sum and lose a chance to save in the second pillar for the next ten years.
According to the statistics of the European Commission, Eurostat and OECD, Estonian pensioners who are dependent merely on state pension have the highest poverty risk compared to rest of Europe, suffer the strongest decrease in their income once they retire and are able to spend the shortest time in retirement. To ensure a better retirement, they need to save additional funds with the help of the second pillar or on their own.
It is a very important decision that should be given thorough consideration. If you wish to enjoy as good living conditions as possible in the future, you should save for the old age and would be wise to postpone the extraction of funds from the second pillar until a time when you have a good plan for using it. In reality, you should use your pension funds once you reach the retirement age – then you will be able to enjoy the tax incentive granted by the state, too.
Your five options to save for pension
All of those who have not joined the second pillar can do it starting from 2021 and start saving for their own pension tax-effectively. Before taxes, 2% of your gross salary is reserved for your personal pension account and the state adds further 4% out of your social tax. You will be able to decide on the use of your pension savings in the future. Among other things, you will be able to take out the money in a lump sum at a tax rate of 10% in the future or if you divide the payments across your expected life, at a tax rate of 0%.
In that case you do not have to do anything and the pension fund will continue investing your money just like before. This option is suitable for a client who likes the current system and wishes to save for the future, leaving the task of growing the money to a professional management company.
To take advantage of this option, you need to conclude a contract to open a pension investment account. This option is suitable, above all, for those who wish to invest their pension funds or a portion thereof on their own and have the required knowledge and skills for it.
To use this option, an application can be filed as of 2021. It is meant for a person who for some reason no longer wishes to save money to the second pillar of the pension system over the next ten years but wishes to keep the savings for the retirement age. You should take into account that in such an event the state will direct the share of 4% of your social tax to the state budget, instead of your personal pension account and you will be able to return to the second pillar of the pension system only after ten years.
To use this option, an application can be filed as of 2021. It is meant for a person who has a clear plan to cope in the future and to invest money on their own or who has reached the retirement age or is close to it and wishes to get their savings right away. Take into account that you can withdraw the funds only in a lump sum, will have to pay income tax at the rate of 20% on it and will not be able to return to the system for a period of ten years. Your social tax will be directed to the state budget.
Withdrawal of the pension savings or investing them on your own is not an obligation but an option. Make decisions regarding your future once you have thoroughly considered all of the options. There is time.
If you consider withdrawing your funds
It is a very important decision that should be given thorough consideration.
Applications for the withdrawal of money from funds can be filed as of 1 January 2021 and money can be obtained from the fund as of September 2021. The entire savings are paid out in a lump sum and it is subject to income tax at the rate of 20%.
The money can be taken out later as well. There are fixed periods for making the disbursements: in the case of applications filed before 31 March, the money is made available in September, in the case of applications filed by 31 July, the disbursement is made in January and in the case of applications filed before 30 November, the disbursement is made in May. The sum that you will get from the sale of the saved fund units becomes clear on the disbursement date. The unit price is considerably affected by the economic cycles during the waiting period.
You can also withdraw an application for the disbursement of the funds. To do so, you need to make a cancellation application no later than a month before the disbursement of the money. If you file an application before the end of March, you can cancel it until 31 July. You can cancel an application filed by the end of July until 30 November and an application filed by the end of November until 31 March.
When you take money out of the fund, you will lose the opportunity to save money in the second pillar for ten years and 4% of the social tax paid on your salary will be directed to the state budget instead of your personal pension account.
Yes, you can. As of 1 January 2021, you are able to apply for the withdrawal of your second pillar savings at any time, but disbursements are made in fixed periods: in the case of applications filed before 31 March, the money is made available in September, in the case of applications filed by 31 July, the money is made available in January and in the case of applications filed before 30 November, the money is made available in May. The sum that you will get from the sale of the saved fund units becomes clear on the disbursement date.
If you take out the money before reaching the retirement age, you have to pay income tax (20%) on the amount saved. Once you reach the retirement age, you will get money from the second pillar on more favourable conditions: 10% income tax in the event of a lump sum or zero tax rate if you conclude a lifelong pension or long fixed-term pension contract whereby the money is divided between years left to live based on the average life expectancy.
The assets of the second pillar can be bequeathed. The funds saved into the second pillar over the course of your life will transfer to your heirs. The estimated first pillar pension calculated on the basis of the social tax paid to the state budget is not bequeathable.
A person who leaves the second pillar (or joins it) can return (or leave) in ten years. During your life you can leave the second pillar no more than twice. The 10-year ‘ban’ also concerns applications for the suspension and continuance of the second pillar payments whereby the saved money is kept in the second pillar but further contributions are either suspended or restored.
If you leave the second pillar before the compensation, the state will pay the amount to be compensated at the moment of leaving, based on the contributions made during the period (as of July 2020) by the person themselves. The loss of return will not be compensated in this case.
If you wish to withdraw money from the second pillar before the retirement age, you can do it only to the full extent. Thereby please note that the 10-year ban is imposed during which you will be unable to continue saving into the second pillar. The partial withdrawal of the funds is possible only at the retirement age.
If you take money out of the second pillar, you will have to pay the state income tax at the rate of 20% and you will be out of the second pillar for 10 years. Upon investing in the third pillar, you should keep in mind that income tax is refunded on the amount that does not exceed 15% of your annual gross income or 6,000 euros a year. You cannot buy third pillar funds using a second pillar investment account.
If you prefer continuing saving
If you put money into the second pillar, a portion of the social tax paid for you (4 per cent) will go to your second pillar. As a result thereof your imaginary rights under the first pillar will be smaller. However, keep in mind that the size of the first pillar is considerably affected by the demographics of the Estonian population, i.e. the ratio of employed people and people of the retirement age as well as the economic situation of the state. The second pillar savings are a person’s personal pension savings and these depend on the long-term yield of the chosen pension fund and on the contributions made, but not on how many pensioners will be in Estonia in the future.
Yes, the ordinary 2%+4% system will continue once the state’s contributions have been restored starting from September 2021.
The management companies have taken into account various scenarios and keep sufficient liquidity to be able to make all those who wish disbursements from the funds so that it does not affect the size of the assets of those people who continue saving for their pension.
If you consider investing on your own
In September 2021, you will for the first time be able to invest your pension funds on your own by transferring the funds saved into the second pillar by then to your personal pension investment account (PIA). Thereby you can choose whether you wish to transfer to the PIA all of the money gathered into the second pillar or merely a portion thereof. You can submit applications for the transfer of your pension fund savings to the PIA as of 1 April 2021.
If you decide to stop investing on your own via the PIA, you can transfer the funds there back to second pillar funds.
Upon transfer of pension assets out of a fund to the PIA and vice versa, you are not subject to the income tax obligation because you never leave the second pillar system. Investing via the PIA should be considered only by those who have the required knowledge and prior experience with investing on their own.
A pension investment account is a personal account with a bank in the mandatory funded pension system (the so-called second pillar of the pension system) where a person can transfer their pension assets, current contributions to the pension system and from which the person can invest the funds saved in the securities markets as well as in deposits. Furthermore, the person can simply keep their pension assets on the pension investment account. The pension investment account is an option equivalent to a pension fund to keep one’s assets in the second pillar system. People will be able to conclude LHV pension account contracts in the first half of 2021 and the first investments on the account can be made as of September 2021. The development of the pension investment account is in progress and we will introduce the detailed functions thereof as soon as possible.
Enforcement agents will not be able to access the assets saved into the second pillar but if you take out your savings you will have to pay income tax at 20% and an enforcement agent will be able to withdraw the debt amount from the sum accruing to your account. Enforcement agents and collection agencies do not have the right to demand that funds be transferred out of the second pillar to settle debts.
Once you reach the retirement age, you can decide whether to take out the money as lifelong pension or fixed-term pension or in a lump sum. If you opt for a long-term pension plan (lifelong pension or a fixed-term pension spread out across the life expectancy), you do not have to pay income tax on the withdrawn funds. However, if you take out the assets in a lump sum or as shorter fixed-term pension, you have to pay income tax at the rate of 10%.
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