As retirement approaches, it is time to think about how to use the money saved in the second pillar. Especially since there are several options to choose from with different terms and tax obligations. Kaire Peik, Head of Pensions and Investments at Swedbank, talks about the different options for second pillar payments and what to expect when you retire. When planning your retirement, the first thing you need to do is find out the current retirement age. For example, this year it is 64 years and 9 months for someone born in 1960. By 2026, the retirement age will be 65, and from 2027 it will depend on average life expectancy. The amount of the second pillar, or mandatory funded pension, depends on the person’s own contributions and is paid at their choice. No one is forced to choose only one way to receive a pension, as there are different ways to receive a second pillar pension that can be combined. You can choose regular or lump sum payments, or both if you want. In fact, you don’t have to be a pensioner to use the money from the second pillar. You can also withdraw the accumulated amount before you reach retirement age, but you will have to pay income tax on it at 20% this year or 22% next year. Also, once you withdraw the money, you won’t be able to start saving again right away, as the contributions will stop and you will have to wait 10 years before you can resume saving. It’s a very risky option to withdraw all the money from the second pillar before you retire, as some of it cannot be withdrawn earlier, meaning you have to be sure that you can manage without this extra income in retirement, as Estonia’s three pension pillars, including the second pillar, are meant to complement each other so that people can cope better in retirement, but an analysis by Eesti Pank has shown that many people who withdraw pension money use it for current expenses rather than for investments. This means that retirement may become even more difficult in the future than it is today, especially since, according to Swedbank's survey on the financial situation of Estonian residents, 44% of pensioners are already in a vulnerable financial situation. Once the retirement age is reached or there are less than 5 years left until it, the money accumulated in the second pillar can be withdrawn immediately, but in this case, you will have to pay 10% income tax. In addition, since 2022, it has become possible to withdraw part of the money from the second pillar and leave the rest in the pension fund so that it continues to generate income. The conditions and procedure for withdrawing part of the money are the same as for a full withdrawal, i.e. you will also have to pay 10% income tax on this amount, and in both cases the money will be credited to your current account in the month following the month in which the application was submitted. But here too, if you continue to work, it is worth considering whether it makes sense to start using the second pillar money right away or to wait until the pension becomes your only income, especially since pensioners stop making contributions to the second pillar a few months after the first payment. For those who want to receive a stable monthly pension, one option is a term pension from a pension fund, or, more simply, a funded pension, which is paid regularly – monthly, quarterly or annually. After the payment, the remaining shares of the fund remain in the fund and continue to earn money. Thus, the money does not just sit in a bank account, but continues to generate income after retirement. The duration of such a term (fund) pension is determined by the average number of years a person has left to live – depending on age, this can be 20, 15 or less years. The longer the term, the longer the pension is paid, but the smaller the monthly amount. It is also possible to choose a shorter or longer period than the specified years, but it should be noted that a shorter period will be subject to income tax at a rate of 10%. However, if you choose the recommended period or a longer period, the payments will not be subject to income tax. In the case of a funded pension, it should be noted that when the so-called pension units run out, payments from the second pillar also stop. For example, if the maturity period is 20 years, the assets accumulated in the second pillar fund will be distributed over 20 years and the number of units to be withdrawn with each payment is determined. Since in this option the pension remains in the second pillar fund, the size of the fund unit may change during the pension period. If the fund does well and the unit price rises, the pension will increase, but it may also decrease if the unit price falls. After 20 years, the money in the second pillar will be spent and the fund pension will end. It is important to know that you can stop paying the funded pension and then agree to a new funded pension with new conditions, or choose another form of payment, such as a lump sum payment from the second pillar. There is also the option of receiving a lump sum payment in the meantime, which of course means that the amount of the regular payment will be recalculated and will be smaller. Choosing a lifetime pension means that the owner of the second pillar fund units concludes a life insurance contract with an insurance company. After the conclusion of the pension contract, all or part of the funds accumulated in the second pillar pension fund are transferred to Compensa Life Vienna Insurance Group SE, in accordance with the wishes of the owner. The insurance company undertakes to pay a monthly pension for the entire life of the person, and these payments are again not subject to income tax. This means that the pension will not decrease at any time, but will not increase either, since it will no longer depend on the yield of the second pillar fund units. If you choose a lifetime pension, you should remember that you will not be able to refuse it later, i.e. terminate the contract at your own request. You can also enter into a fixed-term pension contract with an insurance company. According to the contract, the money accumulated in the person’s second pillar will also be transferred to the insurance company, which will pay the pension until a certain date. The estimated repayment period is again based on the average “survival period” calculated by the Department of Statistics. The pension money will continue to grow at a fixed interest rate, which in 2024 is 1.1%. Such a fixed-term pension is not taxed, but if you choose a shorter period than recommended, income tax of 10% will be withheld from the payments. As with other payments, you can use the early retirement pension either to use up all your second pillar assets or to enter into a pension agreement for a smaller amount and withdraw your remaining second pillar assets in another way, such as a funded pension or a lump sum payment. In general, when planning your second pillar payments, it is important to consider the flexibility, security and regularity you expect from your pension. If possible, you can combine different payment options to ensure maximum security. It is worth remembering that even if retirement is still a long way off, it is wise to start preparing for the future. For example, from this year you can apply to increase your second pillar contributions from the current 2% to 4% or 6% without losing the 4% contribution that the state pays through social tax on your salary. Read RusDelfi wherever it is convenient for you. Follow us on Facebook, Telegram, Instagram and even TikTok.
