- Estonian pension system
- I pillar
- II pillar
- III pillar
As the name says, the state pension is a pension paid by the state, the aim of which is to ensure regular monthly income for the persons who have reached the retirement age, have become incapable for work or have lost their provider.
There are several different types of state pensions: old-age pension, pension for incapacity for work and the survivor’s pension, national pension and superannuated pension.
The first pillar is the state old-age pension, which is paid to a person who has reached the pensionable age and whose length of employment is at least 15 years.
The general pensionable age in Estonia is 63 years, the pensionable age for women is gradually increased to 63 by the year 2016. By the year 2026, the general pensionable age in Estonia will be 65.
The state pension is based on the principle of solidarity, which means that the pensions to the today’s pensioners are paid from the taxes of people who are currently working. The state pension is paid by the state from the funds collected to the state budget from the social tax. The direct payer of the social tax is the employer who withholds 33% social tax from the salary of the employee, which the state then pays for health insurance and pensions.
The aim of the second pillar is to direct a part of the salary of the people who are working towards their personal pension, so that people would have, in addition to the constantly financed state pension, an additional pension that they accrue themselves.
In case of the mandatory funded pension, an employee pays a monthly 2% of their gross salary to the pension fund they have selected and the state adds 4% out of the current social tax that is paid by the employee.
The money paid into the pension funds is managed by the fund management companies who invest the pension contributions paid by the employees into different assets with the aim of increase the value of the money contributed by the employees over the years.
In case of the mandatory funded pension, when a person reaches the retirement age (as a general rule), a contract has to be concluded with an insurance company when. The insurance company undertakes the obligation to pay to the person a pension, the sum of which depends on the volume of the assets accrued into the pension fund, until the death of the person.
The third pillar or the supplementary funded pension was established with the aim of providing people with an opportunity to insure their retirement years even better.
There are two options for subscribing to the supplementary funded pension:
1) conclude a pension insurance contract with a life insurance company or
2) make contributions to the voluntary pension fund.
There are also two options for receiving payments:
1) payments on the basis of the insurance contract or
2) payments from the voluntary pension fund.
The sums of the contributions made to the supplementary funded pension can be determined by the person and the amount of the contributions can be changed at any time. If the contributions to the supplementary funded pension are less than € 6,000 or 15% of the gross income per year, no income tax is charged on the contributions.