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International Internet Magazine. Baltic States news & analytics Saturday, 23.10.2021, 19:23

Average salary earner in Estonia to lose EUR 10,000 in 10 yrs upon giving up 2nd pillar

BC, Tallinn, 13.11.2020.Print version
Endriko Vorklaev, fund manager at SEB Varahaldus, said that exiting the second pension pillar will mean a loss of approximately 10,000 euros over a period of 10 years for an average salary earner, informs LETA/BNS.

"From fall next year, those who wish can withdraw the pension money collected in the second pillar or invest it themselves. There is time to decide and it is worth thinking about how to handle one's pension savings," Vorklaev said in a press release.

The fund manager pointed out that, as is known, all the money of the second pillar that has accumulated there will be paid out to those who want it. "All of them are deducted 20% income tax, so that instead of, for example, 6,000 euros in the pillar, 4,800 euros will go to the bank account, and so on," Vorklaev said, adding that withdrawing money also means that it will not be possible to rejoin the second pillar until ten years have passed.

"However, in addition to income tax, there is another aspect to giving up the second pillar. Currently, 2 percent of a second-pillar client's salary goes to the pension fund, and the state pays an additional 4%. The state's contribution will not be received upon leaving the pillar," Vorklaev said.

The fund manager explained that the 60 euros added per month from the average salary -- which currently is slightly over 1,400 euros -- is seemingly not a big sum, but over a period of 10 years makes up altogether 7,200 euros.

"Considering the expected wage growth and the return of this amount in the pension pillar, the former second-pillar collector will lose almost 10,000 euros in 10 years. The loss of twice the average wage earner is around 20,000 euros respectively," he said.

Vorklaev admitted that it is up to everyone to decide whether leaving the second pillar is worth paying a 20 percent income tax and giving up around 10,000 euros.

"Even if the promise received in exchange is that the first pillar pension will be greater in the future. Nevertheless, the formula for the first pillar has changed so that the money is distributed more in solidarity than before, and leaving the social tax in the state budget, the grain from the first pillar may be very small due to redistribution," he added.

While applications for leaving the pension pillar can be submitted from Jan. 1, 2021, then payments will be made to applicants from Sept. 1 of the same year.

Applications for leaving the pillar will first be accepted until the end of March and then can be submitted from April to July, in which case the second pillar money will be paid out from Jan. 1, 2022.

In the future, payments will be made three times a year and the application must be submitted at least five months in advance. The application can still be withdrawn up to one month before the payment.

The fund manager noted that the pension reform offers the second-pillar collector a number of useful alternatives that are wise to familiarize oneself with. "As not all investment opportunities are known right at the beginning of 2021, it is not worth rushing or making ill-considered decisions," Vorklaev said.

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