- Estonian pension system
- I pillar
- II pillar
- III pillar
The voluntary funded pension or the so-called third pillar is not tied to the state pension (first pillar) or funded pension (second pillar).
Employers have no direct obligations when making the supplementary funded pension contributions, because the supplementary funded pension is based on a person’s voluntary decision. Making supplementary funded pension contributions is voluntary, the sum of contributions is not established by the state but the employee.
However, employers can direct their employees into thinking about saving and insuring their future. The employer can recommend that their employees subscribe to all three pension pillars, which ensure the employees with comforts that they are used to also during their pension years.
A number of companies have started to make supplementary funded pension contributions on behalf of their employees. Such bonus is an excellent opportunity to value and motivate employees.
Income tax incentives for making supplementary funded pension contributions are also applicable for employers.
The amendments of the Income Tax Act that entered into force on 1 January 2012, allow the employer making supplementary funded pension contributions and/or acquire units of voluntary pension on behalf of the employee. The aim of the amendment was to grant the employers a possibility to make contributions to the employee’s III pillar by using income tax incentives, thereby allowing natural persons to receive income tax incentives to their III pillar contributions already in the middle of the year.
Pursuant to the Income Tax Act, income tax is not charged on insurance premiums of supplementary funded pension paid for an official, an employee or a member of the management or controlling body of a legal person and amounts paid for acquisition of units of voluntary pension funds. Such sums shall not exceed neither 15 per cent of payments made to them during a calendar year and subject to income tax nor €6,000.
Before the calculation of the withheld income tax for a natural person who is a resident, the income tax free part of the III pillar contribution paid for him or her is deducted from the abovementioned sum. Account on the tax free limit is kept by the employer in a summarized manner from the beginning of the calendar year.