Mandatory funded pension
The funded pension is based on preliminary financing – a working person himself or herself saves for his or her pension, paying 2% of the gross salary to the pension fund. The state adds 4% from the 33% social tax calculated on the salary of the employee.
If the 33% social tax is calculated from the salary of an employee who has not subscribed to the funded pension, 13% of it is directed to health insurance and 20% to state pension, which will be paid out to today’s pensioners. When subscribing to the funded pension, 4% of that state pension will be transferred to insure everyone’s personal future and that part will not be paid as state pension.
The state pension insurance component of the person who has subscribed to the funded pension, is also respectively smaller (for the years when 16% was received for state pension instead of 20%).
Subscribing to the funded pension is mandatory for the persons who were born in 1983 and later and. The right and obligation to pay the contributions arises on 1 January of the year following the year when a person becomes 18 years old and he is a tax-resident of Estonia.
Funded Pensions for Sole Proprietors
An obligated person who is a sole proprietor can accrue the funded pension since the year 2004. For the sole proprietors, the period for the payment of the contributions is one calendar year.
If a sole proprietor has subscribed to the funded pension, the Tax Board will calculate the 2% contribution on the basis of their income tax declaration and issues a tax notice on the payable sum by no later than 1 September. The sole proprietors are obliged to transfer the payable sum to the bank account of the Tax Board by 1 October. The Tax Board will calculate an additional 4% from the 33% social tax from the business income, which is to be added to the contribution.
Tax resident or non-resident?
Obligation to make contributions to the II pillar funded pension system depends on whether you are a tax resident of Estonia or not. You may ask more about the tax residency from your employer or from Tax Board.
- If you are not tax resident of Estonia and you will work in Estonia less than 6 month, you don’t have to join the II pillar funded pension program.
- If you are already a tax resident or if you will work in Estonia longer than 6 month, you’ll become a tax resident automatically. In this case, subscribing to the II pillar funded pension is mandatory for persons, who were born in 1983 or later.