When choosing a pension fund, it is crucial to consider risk, fees and rates of return. Fund invest in shares and bonds, providing a varying balance between risk and return. Long-term performance is a key indicator to look at when choosing a fund. In addition, it is possible to save money in the II pillar through a pension investment account.

What is a pension fund?

A pension fund is an investment fund where money is accumulated with the aim of growing it over the long term and withdrawing it later during retirement. The II pillar pension funds are either mandatory or voluntary, allowing people to choose which fund they want to invest their money in.

Risks and fees

When choosing a pension fund, both risk and fees must be taken into account:

• Equity funds: Most of the money is invested in shares. While shares offer higher rates of return, they come with greater risk as the value of shares can fluctuate with changes in market conditions.
• Bond funds: Most of the money is invested in bonds, which carry lower risk but also offer lower returns compared to shares.

Different fees are charged for managing the funds, such as management and transaction fees. These fees impact the total rate of return of the fund, so it is important to compare and select funds with lower fees.

Rate of return of the fund

When assessing the rate of return of the fund, it is important to look at the long-term rate of return. Short-term performance can be volatile and may not accurately reflect the actual performance of the fund. Long-term rate of return offers a clearer picture of the stability and growth potential of the fund.

When choosing a II pillar pension fund, consider your risk tolerance, the associated fees and the fund’s long-term rate of return. This will allow you to make an informed decision that maximizes the growth of your pension assets.

Building up pension in the II pillar allows people to actively participate in growing their pension assets. Selecting the right fund can significantly impact the size of your future pension, so it is important to carefully consider your options and seek advice from a specialist if needed.

A pension investment account (hereinafter PIA) is a separate account into which the funded pension payments deducted from your wages are transferred and through which you can regularly invest your pension assets in the assets of your choice (eg shares, bonds or funds). This gives you greater control over your pension savings, allowing you to choose where and how to invest your money to help it grow for your retirement.

Opening an account

To open a pension investment account (PIA), you need to contact a bank. PIAs can be opened in the following banks:

• AS LHV Pank
• AS Luminor Bank
• AS SEB Pank
• Swedbank AS

You can see your PIA data in your pension account under personal data.

Moving to a PIA from a pension fund

If you have already started saving in a pension fund and wish to transfer some or all of the accumulated amount to a PIA, you must first open a PIA with a bank and then submit an application for change.

On the application for change, select the pension fund the units of which you wish to redeem (ie the source fund) and the percentage of units you wish to redeem to transfer to the PIA.

Directing payments

To direct your funded pension payments to the PIA, you need to submit a choice application specifying the PIA as the active option. If you open a PIA before joining the II pillar, you do not need to submit a separate choice application. When you open a PIA, a pension account is also opened for you and your contributions will automatically be paid into the PIA.

Moving from a PIA to a pension fund

If you no longer wish to use a PIA, you can continue building up your pension in a pension fund. To do this, you must withdraw from all investments made through the PIA and have the bank transfer the accumulated money to a pension fund. To transfer payments from the PIA to a pension fund, you must submit a choice application. When there are no remaining funds or investments in the PIA, it can be closed.

Note! The amounts transferred to the pension investment account remain as cash in the account until you direct them into investments!

Note! Consult the bank where you opened your pension investment account for information about investment opportunities and management options!

Choosing a pension fund or pension investment account is an important decision that affects your future. You can make the choice starting at age 18 or at 16 with the consent of a legal representative. You can submit the choice application in a variety of places and your new choice will take effect within a few days. If you do not make a choice, a pension fund will be drawn for you.

How to choose a pension fund or pension investment account?

To choose a pension fund or pension investment account, you must submit a choice application. This can be done at the following places:

• the self-service environment of the Estonian Pension Centre
• a bank
• a pension management company (if they have the status of an account administrator)

The right to submit a choice application arises at the age of 18, but a person aged 16 or older can do so with the written consent of a legal representative. A choice application can be submitted at any time and the new choice will take effect no later than the third working day after the receipt of the application. Keep in mind that you cannot withdraw a choice application.

What happens if you do not choose?

If you do not make a choice, a pension fund will be drawn for you. This applies to those who:

• joined the II pillar on a compulsory basis
• were born in 1983 or later and started working without submitting a choice application

The pension fund is determined by drawing of lots for persons who are 18 or older and have started working but have not submitted a choice application by the time they receive their first wage payment. Pension funds that charge lower fees and invest at least 75% of their assets in shares are included in the drawing of lots.

Important information about drawing of lots

The drawing of lots will only take place once you have incurred a tax liability and received your first wage payment. If you are not satisfied with the pension fund drawn for you, you can change it by submitting a choice application. You can also exchange the units acquired in the fund drawn by lots for the units of another pension fund or to transfer them to a pension investment account by submitting an application for change.

Joining the II pillar is either compulsory or voluntary, depending on age. If you were born in 1982 or earlier, joining the II pillar was voluntary. If you were born in 1983 or later, joining the II pillar was compulsory until 2022.

Young people and joining the II pillar

Young people are automatically added to the II pillar. Whether payments from your wages also go to the II pillar depends on your age. If you turned 18 this year, no funded pension payments are deducted from your wages until next year, as the compulsory joining date is 1 January of the year following the year you attain 18 years of age. To join the pillar, you must earn income taxable with social tax in Estonia. You can choose your own pension fund. However, if you have not chosen a pension fund before you receive your first wages, it will be drawn by lot. The pension fund is determined by drawing of lots for persons who have started working but have not submitted a choice application by the time they receive their first wage payment.

Pension account and submission of a choice application

When you join the II pillar, a pension account is opened for you with all the information about your II and III pillar pension funds. You can submit a choice application in the self-service environment of the Estonian Pension Centre or to an account administrator, which can be banks or pension management companies.

What is the deadline for joining the II pillar?

It is advisable to join the II pillar as long as you are working, paying social tax and are not subject to restrictions on rejoining the II pillar in relation to withdrawing all the money from the II pillar (ie you cannot rejoin the II pillar for 10 years).

Can persons who were born in 1982 or earlier join the II pillar?

If you were born in 1982 or earlier, joining the mandatory funded pension was voluntary for you. As of 2021, anyone who had not previously joined the II pillar can submit a choice application and join the II pillar. Note! If you left the II pillar, you can rejoin in 10 years.

If you were born in 1983 or later, joining the funded pension was compulsory for you. If you wish, you can submit an application for non-payment of contributions to stop II pillar contributions.

The impact of compound interest on long-term pension accumulation is that the interest earned is added to the initial amount, but future interest is already calculated on the higher amount. This means that, over time, your investment grows exponentially as the interest earned in each period starts to earn interest itself. The earlier you start saving for retirement, the more powerful the impact of compound interest, which results in a larger accumulated amount by the time you retire.

How does compound interest work?

Compound interest means that interest is calculated not only on your initial contribution but also on the interest previously earned. For example, if you invest €1,000 at a 5% annual interest rate, you will earn €50 in the first year. In the second year, interest is calculated on €1,050, so you will earn €52.50. This way, your investment grows more rapidly each year.

Why is it essential to start early?

The earlier you start saving for retirement, the greater the impact of compound interest. Each year your money earns interest will significantly increase the total amount you accumulate. For example, if you start investing at 25 and plan to retire at 65, you have 40 years for compound interest to take effect. In contrast, starting at 35 gives you only 30 years, resulting in a significantly smaller increase in the final amount.

Illustration of the impact of compound interest

Suppose you invest €1,000 annually and earn an average interest rate of 5% per year. If you begin at age 25, after 40 years, you will have accumulated approximately €120,000. However, if you start at age 35, after 30 years, you will have accumulated around €70,000. The difference arises from the impact of compound interest, highlighting the significant advantage of starting earlier.

You can contribute 2%, 4% or 6% of your wages to the II pillar. The state will always add an additional 4%. You can change the contribution rate every year by submitting an application by 30 November.

You can choose how much of your wages you wish to contribute to the II pillar: 2%, 4% or 6%. The state will always add an additional 4% to it. So in total, you can save either 6%, 8% or 10% of your gross wages for your pension.

You can change the rate of contribution each year.

The new rate will apply from the beginning of the next year. The applications for changing the rate of contribution can be submitted until 30 November in the self-service environment of the Estonian Pension Centre, at a bank or to a pension management company if they are the account administrator.

Open the calculator to see how much you would save for retirement with different contribution amounts.

Pension fund units can be changed and redeemed three times a year: in January, May and September. The corresponding application must be submitted at least one month in advance.

Deadlines for changing units

If you wish to change your II pillar pension fund units or redeem them to transfer the corresponding amount to your pension investment account, you can do so three times a year: in January, May and September. The application for change must be submitted at least one month in advance.

What do I need to do to change pension fund units?

Changing pension fund units, including redeeming and transferring the corresponding amount to a pension investment account, takes place on the basis of an application for change, which must be submitted at least one calendar month before the change. You can amend or cancel your submitted application up to the deadline for submission of the application for change of units (30 November, 31 March and 31 July). You can submit a choice application in the self-service environment of the Estonian Pension Centre or at a bank.

There is no restriction on transferring money from one pension investment account to another or from a pension investment account to a pension fund. Transfers can be made according the conditions and frequency specified in the pension investment account contract.

II pillar contributions can only be made to one pension fund or pension investment account at a time. To change your choice, you must submit a choice application, which will enter into force no later than within three working days.

II pillar contributions can only be made to one pension fund or pension investment account at a time.

If you wish to change the pension fund or pension investment account where the contributions are made, you must submit a choice application. The application will enter into force no later than three working days after the date of its receipt. The next contribution will then be made into the new pension fund or pension investment account that you indicated in the choice application.

Submitting a choice application

The choice application can be submitted in the self-service environment of the Estonian Pension Centre, at a bank or to a pension management company if they are the account administrator.

Changing the pension fund units

II pillar contributions can only be made to one pension fund or pension investment account at a time. However, pension fund units can be held in and changed between different funds. The accumulated money can also be divided between pension funds and the pension investment account. When submitting an application for contributions, only the new contributions will be transferred to the fund of your choice; if you also wish to transfer your existing pension fund units, you must submit an application for change of units.

You can go on II pillar pension up to five years before reaching pensionable age or at any time in the case of loss of work ability. There are several options for receiving your pension: lifetime pension, fixed-term pension or lump-sum payment. You can also withdraw the money before reaching pensionable age; however, this will halt contributions for 10 years and the amount is subject to 20% income tax.

Before submitting an application for payment, it is important to carefully consider your long-term income sources and determine the value of your II pillar assets. You can find this information from the Estonian Pension Centre under My pension account, the bank or insurance undertaking. The taxation of payments depends on your chosen payment option.

Receipt of II pillar pension

You can begin receiving II pillar pension up to five years before reaching pensionable age. The pensionable age depends on your year of birth. If you have no work ability, you can retire regardless of your age.

II pillar pension payment options

• Lifetime pension: you receive monthly pension for the rest of your life.
• Fixed-term pension: you receive pension for a specified term.
• Lump-sum payment: you receive all the accumulated money at once.

Withdrawal of money before reaching pensionable age

If you are not yet of pensionable age and have work ability, you can submit an application to withdraw the money you have accumulated in the II pillar. In this case, the withdrawn amount will be subject to 20% income tax and the money will then be transferred to your bank account. Withdrawing the money will halt your contributions to the II pillar for at least 10 years.

If you no longer wish to contribute to the II pillar, you can choose to stop making contributions. In this case, the money accumulated will continue to be invested and you will be able to withdraw it at a later stage, such as at pensionable age, when withdrawals will be exempt from tax or taxed at a lower rate (10%).

Note! When you leave the pillar or suspend payments, contributions to the II pillar will stop. The money is paid out in January, May or September, depending on when the application was submitted. The application must be submitted at least five months in advance.

Note! If you withdraw your funded pension before reaching pensionable age and there are more than five years left until pensionable age, the withdrawal is subject to 20% income tax.

Withdrawing the money will halt contributions to the II pillar for 10 years.

Since early withdrawal halts II pillar contributions for at least 10 years, you can start, continue or increase your contributions to III pillar during this period. After 10 years, you can rejoin the II pillar and opt for a higher contribution rate. Early withdrawals from the II pillar are limited to a maximum of two times in your lifetime, subject to specific conditions.

If you withdraw your money from the II pillar before retirement, contributions to it will be halted for at least 10 years. At the same time, you will still have the option to join the III pillar or, if you have already joined, to increase your monthly contributions to the III pillar.

Once 10 years have passed since the withdrawal of money, you can resume contributions to the II pillar. To do this, you need to submit an application for making contributions. Upon rejoining, you have the option to choose a higher contribution rate (4% or 6%) to increase your pension assets.

The II pillar is designed for accumulating pension savings and withdrawing funds at pensionable age. Early withdrawals from the II pillar are limited to a maximum of two times in your lifetime. You can withdraw money a second time if you meet the following conditions:

• At least 10 years have passed since the first withdrawal and you have resumed making contributions.
• You have been contributing to the II pillar for at least 10 years after the first withdrawal.

If, in the meantime, you have obtained the right to go on II pillar pension, these restrictions do not apply.

The assets of the II pillar and pension investment account (PIA) can be inherited. The successors must contact a notary for succession proceedings. A successor that is a natural person can transfer the inherited assets to their pension account or withdraw the money, paying the income tax accordingly. Legal persons can withdraw the inherited assets only in cash.

You accumulate assets that can be passed on to others. If the unitholder or PIA user dies, their pension assets are passed on to successors.

The successors must contact a notary for succession proceedings. Once the notary has issued a succession certificate, the successors can submit an application for succession of units to the appropriate bank.

Where successors are both natural and legal persons, they will have to comply with their respective conditions.

A successor that is a natural person can transfer the inherited assets to their pension account or withdraw the money. It is also possible to withdraw only a part of the pension assets in cash and have the rest transferred to their pension pillar. Cash withdrawals are subject to 20% income tax. If the inherited pension assets are transferred to the pension account of the successor, they can be withdrawn at retirement with a lower income tax rate (10%) or income tax-free.

A successor that is a legal person can inherit II pillar pension assets, but only withdraw the inherited assets in cash.