Until 2027, it is possible to retire under the II pillar if you are at least 60 years old. From 2027 onwards, the pensionable age will be determined by average life expectancy and retiring under the II pillar will be possible up to five years before reaching the pensionable age. Income tax incentives apply to II pillar payments in pensionable age. Tax incentives also apply to persons who have become completely and permanently incapacitated for work, regardless of their age.

There are several options for receiving II pillar pension, which you can also combine with each other:

• lifetime pension,
• fixed-term pension,
• lump-sum payment or partial lump-sum payment.

The payments of lifetime pensions and fixed-term pensions spread over a minimum average number of life years are exempt from income tax. The payments of shorter-term pensions as well as lump-sum or partial lump-sum payments are subject to 10% income tax. If you have been declared to have no work ability, all the payments are exempt from income tax.

II pillar retirement and continued investment

If you defer receiving II pillar pension, you can grow your pension assets through investment performance and additional contributions. Deferring retirement also increases the amount of your pension, as the period of retirement is reduced.

Payment options

I pillar pension is paid for life, but for II and III pillars, you can choose whether you want to receive this pension for life as well or not.

If you do not need the II pillar pension to be paid out to you for the rest of your life or if the amount accumulated does not allow for reasonable lifetime pension payments, you may want to consider a fixed-term pension.

Fixed-term pension with a term of at least the average life expectancy is exempt from income tax. You do not need to fear a long-term fixed pension because if you need a larger amount during this period, you can withdraw it and continue receiving your pension afterwards. You just have to keep in mind that the amount of your fixed-term pension will decrease by the amount you withdrew. It is also possible to terminate the fixed-term pension at any time and choose another payment method instead.

Lump-sum payment

If the amount you have accumulated is too small or you already have sufficient regular income from other sources, you can withdraw the accumulated amount as a lump-sum payment. However, such a payment is subject to 10% income tax.

Total loss of capacity for work

If you have been declared to have total incapacity for work, you can go on II pillar pension regardless of your age. If you receive pension with no work ability, the payments are exempt from income tax. Before submitting an application, you must register your loss of capacity for work in the pension register.

In the self-service portal of the Estonian Pension centre under My pension account, there is a special query for it: find the menu item My queries, choose Notification of no work ability and click the button Update.

Note! You have the right to payments under favourable conditions only if you have been declared to have total incapacity for work.

Please note that submitting an application for payment also ends your contributions to the II pillar, the end date of contributions depends on the date of submission of the application for payment.

II pillar lifetime pension is a pension payment that you will receive for the rest of your life from the pension assets you have accumulated in the II pillar. This means that once your retire, you will receive a monthly payment for the rest of your life. Lifetime pension offers financial security by offering a stable income in old age.

To receive lifetime pension, you must conclude a pension contract with an insurance undertaking.

Upon conclusion of a pension contract, the II pillar assets are transferred to the insurance undertaking. You can choose to transfer all or just part of the accumulated amount.

The insurance company calculates the pension amount using a specific annuity formula. The amount of your pension depends on your age, the amount allocated for the pension contract, your average life expectancy and the terms of the pension contract.

Insurance contract with a guarantee period

A pension contract can be concluded with a guarantee period, which ensures that, in the event of your death, payments continue to be made to the person named in the contract until the end of the guarantee period. This person is called the beneficiary.

In the case of a pension contract with a guarantee period, the payments are somewhat lower than in the case of a pension contract without a guarantee period. The longer the guarantee period you choose, the bigger the difference.

If the amount that you want to use to enter into a lifetime pension contract is too small, the insurance undertaking may refuse to conclude the contract.

The pension contract is offered by the following insurance undertaking:

Compensa Life Vienna Insurance Group SE

Lifetime pension is exempt from income tax.

Fixed-term pension is a pension payment that you receive for a fixed period after you retire. Unlike the lifetime pension, which ensures a monthly income for the rest of your life, a fixed-term pension provides income for a fixed period, such as 10, 15 or 20 years. Once this period ends, the payments stop.

When choosing the term, ie the period of receiving the pension, you can:

• select the recommended term, which is calculated based on your life expectancy at your current age;
• set the term yourself.

The term must be in full years, such as 20, 17 or 10 years. The longer the term, the longer your pension will be paid, but the smaller the amount of pension. The minimum term is one year.

If you choose the recommended term or a longer term, your pension will be exempt from income tax.

If you reach pensionable age or have up to five years until retirement, you can start receiving fixed-term pension:

• from pension funds (funded pension);
• by entering into a pension contract with an insurance undertaking.

Note! Regardless of your age, these pension options are available if you have been declared to have incapacity for work.

If you wish to receive pension for the rest of your life, you will need to enter into a lifetime pension contract with an insurance undertaking. In the case of fixed-term pension, it is likely that the payment of pension from the II pillar stops before the end of your life.

Funded pension is a fixed-term pension that is paid from pension funds. If you have units in several pension funds, units from all pension funds are redeemed upon payment. The pension is paid until the end of the funded pension term.

To receive funded pension, you must submit an application for opening a funded pension. You can submit the application in the self-service environment of the Estonian Pension Centre, at a bank or to a pension management company (provided that they have the status of an account administrator).

Don’t worry – if you acquire new pension fund units after submitting your application, you do not need to take any further action. The new units will automatically be included in the calculation of the amount of the next payment.

In the case of funded pension, you can choose whether you want to receive your pension:

• once a month,
• once a quarter, or
• once a year.

Termination of funded pension payments

You can also terminate your funded pension. After termination, you can renegotiate the terms of your funded pension or choose another payment: lifetime or fixed-term pension from an insurance undertaking or a lump-sump or partial lump-sum payment.

Receipt of first funded pension payment

The first payment is made in the calendar month following the month in which the application was submitted, provided that you opted for monthly payments on the application.

If you use a pension investment account and wish to receive the payments as funded pension, you must first transfer the financial assets acquired through the pension investment account to one or several suitable mandatory pension funds.

To receive a fixed-term pension from an insurance undertaking, you must enter into an insurance contract. Once you have concluded a fixed-term pension contract, the Estonian Pension Centre will transfer the assets accumulated in your II pillar to the insurance undertaking. The insurance undertaking will pay you the pension until the maturity date.

When entering into an insurance contract, you may:

• use all the assets accumulated in your II pillar, or
• conclude a fixed-term pension contract for a smaller amount.

The remaining II pillar assets can be withdrawn in other ways:

• in the form of funded pension from pension funds;
• as a lump sum;
• as a partial lump sum.

If you only used part of your accumulated II pillar assets to conclude the fixed-term pension contract, you can use the remaining assets in the pension fund as well as the assets added to the II pillar to:

• conclude a new pension contract,
• choose funded pension, or
• withdraw the remaining money as lump-sum payment(s).

If you wish, you can also transfer the assets to the previously chosen insurance undertaking and thus increase the amount of your payments. To specify the terms of the fixed-term pension contact and enter into it, you need to contact the insurance undertaking.

You can conclude a fixed-term pension contract with the following insurance undertaking:

Compensa Life Vienna Insurance Group SE

You can withdraw money from your pension investment account (PIA) under favourable conditions up to five years before going on old-age pension. To receive payments, you must first sell the securities held in your PIA.

You can then choose from three options:

• Regular payments or funded pension: to this end, you must transfer the funds in your PIA to a pension fund. If you set a payment period that corresponds to your life expectancy, you can use the money with a 0% income tax rate. In the case of a shorter period, a 10% income tax will apply.
• Lump-sump payment, subject to a 10% income tax.
• Lifetime or fixed.term insurance contract.

Note! In the case of incapacity for work, you can withdraw the money income tax-free.

When your reach pensionable age or are within five years of reaching pensionable age, you can withdraw the accumulated money at once by submitting an application for lump-sum payment.

You can submit the application in:

• the internet bank
• the ‘My pension account’ section of the website of the Estonian Pension Centre

Partial lump-sum payment

Instead of withdrawing all your money at once, you can choose to withdraw it in instalments. If you prefer not to receive regular payments, ie fixed-term or lifetime pension, you can submit an application for partial lump-sum payment.

The remaining pension fund units will stay in your pension account, allowing them to be invested and withdrawn at a later date. This way, you can withdraw your money in instalments as needed. Of course, you can also use the remaining funds in your II pillar to receive lifetime or fixed-term pension later.

Note! You can submit one application for partial lump-sump payment each calendar month.

You can also use lump-sum payments if you have a pension investment account.

Lump-sum and partial lump-sum payments are subject to 10% income tax.

Read more: Why is it unwise to withdraw money from the II pillar during the accumulation phase?

• You can only withdraw all your accumulated funds in a lump sum.
• The withdrawal will be subject to 22% income tax.
• You will be subject to a 10-year restriction on rejoining the II pillar.
• You can only withdraw money from the II pillar as a lump sum only twice in your lifetime.
• There is a minimum delay of five months between submitting your withdrawal application and receiving the money.

Lifetime pension is exempt from income tax.

Fixed-term pensions are exempt from income tax if they are set for the recommended term, ie for a period equal to or longer than the average life expectancy.

Tax rate 10%

Pensions that are set for a shorter than the recommended term as well as lump-sum and partial lump-sum payments made at pensionable age or up to five years before reaching the pensionable age are subject to income tax. In such a case, the tax rate is 10%.

The basic exemption for pensioners which is not used under I pillar, can be applied to II pillar payments taxed at the 10% rate.

Tax rate 22%

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.

In the case of inheritance, if the inherited pension fund units are redeemed from the pension fund and the successor receives the payment in cash, the payment is subject to 22% income tax.

Note! Payments made from the II pillar, which are subject to 22% or 10% income tax, and payments made to the successor do not reduce basic exemption (up to 6,000 euros per year).

If you have been declared to have total incapacity for work, you can go on II pillar pension from 1 January 2021, regardless of your age.

If you receive pension with no work ability, the payments are exempt from income tax.

Options for retirement:

• lifetime pension,
• fixed-term pension,
• lump-sum payment.

Notification of no work ability

Before submitting an application, you must register your loss of capacity for work in the pension register.

In the self-service portal of the Estonian Pension centre under My pension account, there is a special query for it: find the menu item My queries, choose Notification of no work ability and click the button Update.

Note! You have the right to payments under favourable conditions only if you have been declared to have total incapacity for work.