Kiri

Topic: Pension system

Pension system 

Moving to a new country often means focusing on immediate needs like work, housing, healthcare and schools. But it’s equally important to understand how people in Estonia save for the future and the pension system works. Estonia uses a three-pillar system to help people save for their retirement years. Each pillar provides a different way to grow your income throughout your working career. So let’s quickly take a look.

I pillar - the state old-age pension

The first pillar is the state old-age pension, which you receive when you reach your retirement age. This age is currently 65 years, though it may increase in the future based on life expectancy. Your birth year determines exactly when you can start receiving these benefits.

The state pension is funded by the social tax that employers pay for their employees. If you work in Estonia, a portion of the tax paid on your salary goes directly into the pension system. This is a simple and automatic way to contribute to your future retirement.

Your state pension grows based on how many years you work and pay social tax in Estonia. You usually need 15 years of pensionable service to be eligible. European Union rules and international agreements also help by combining your pension rights from different countries where you’ve worked.

If you reach retirement age without enough years of work, you may receive a national pension. This modest pension is available if you have lived in Estonia for at least five years before applying. The Social Insurance Board manages all pension details, and you can find more information on their website.

II pillar - the mandatory funded pension

The second pillar is the mandatory funded pension that works like a personal savings system for your retirement. Every month, money is collected and invested to provide you with extra income later.

Two monthly contributions go into your second pillar:

• You give 2%, 4%, or 6% of your gross salary, you can choose yourself which of these contribution rates you want to collect into your mandatory second pillar

• 4% more is added by the state from the social tax that your employer pays on behalf of you

This means 6%, 8%, or 10% of your salary is saved in your personal pension fund every month!

This money is invested by expert fund managers to increase your retirement savings over the years. Your funds are kept in a personal account that is always accessible online. You can log into the Estonian Pension Centre portal with your ID-card, Smart-ID  or Mobile-ID to see your progress.

Pension funds are managed by banks and financial institutions. People often choose a fund based on its investment strategy, historical results, and fees. You can pick a conservative fund for more stability or a higher-risk fund to aim for better growth over time.

If you don't pick a fund yourself when you start working, one is assigned to you automatically through a lottery system. But you can always review your options and change your fund later if you find a better fit. You can compare different mandatory pension funds on the Estonian Pension Centre website, and we have also included a direct link for you at the end of this video.

Oh, and it’s also possible to access your second pillar pension five years early if you wish. Just keep in mind that starting your pension sooner will result in a lower payment amount.

Who is obliged to join the II pillar funded pension programme?

As a newcomer, the obligation to make contributions to the II pillar funded pension programme depends on whether you are considered a tax resident of Estonia. 

If you are not a tax resident of Estonia and you will live and work in Estonia for less than 6 months, you don’t have to join the  pillar mandatory funded pension programme. But if you are a tax resident of Estonia and born in 1983 or later, the second pillar is a compulsory part of your pension savings.  

III pillar - the supplementary funded pension 

You can decide to save more for your retirement through the third pillar, which is a voluntary and flexible system. Since the state provides tempting tax benefits, it’s a popular and rewarding way to save for the future. These funds are also easily available through investment firms and banks, allowing you to choose the plan that fits you best.

What if you will receive pension from multiple countries? 

And just in case if you’ve worked in different countries, your future pension can be made up of contributions from all the countries you’ve lived and worked in. Thanks to EU regulations, your work history across different member states is combined to help you reach your pension and retirement goals. You can contact the Social Insurance Board anytime for a helpful consultation on how this works for you.

The Estonian pension system may seem complex at first, understanding the basics helps you plan a secure future. By working in Estonia, paying your taxes and contributing to your pension, you are steadily building financial security for your retirement years.