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If you have both the I, II and III pillars, you do not have to manage them in the same way.

Having all three pillars provides you with different options for combining payments from funded pension pillars with state old-age pension, as the state pension and funded pension payments are not linked.

There are many combinations and possibilities, so it is important to carefully consider the following:

• when do you plan to retire?
• what are your long-term income sources and what are your expenses (food, medicinal products, housing and other expenses)?
• what is the balance of your II pillar and III pillar, and when did you join them (this determines, for example, the incentive applied to III pillar payments)?
• what is the risk level of your investments (II pillar and III pillar)?

Payments from state pension

When it comes to the I pillar, you can opt for a flexible old-age pension – you do not have to retire as soon as you become eligible. You can play around with different options in the pension calculator

Payments from funded pension pillars

The different options and combinations of II and III pillar payments provide you with the flexibility to use the money you have accumulated however you prefer.

Funded pension payments from both the II and III pillar can be:

• lifetime payments
• fixed-term payments
• lump-sum payment or partial lump-sum payment

You can initially choose to use one pillar and delay using the other pillar, or select one type of payment from the II pillar and a different one from the III pillar.

It is also important to note that, in the case of all three pillars, postponing your retirement will increase your pension.

The following steps explain how to withdraw money from your pillars when you retire.

Flexible old-age pension allows you to better manage your income and expenses, allowing you to adjust your pension according to your personal and financial needs. If you choose to retire later, your pension amount will increase. The percentages of reduction or increase are based on projections. The exact percentage of reduction or increase depends on your birth year, birth month and the time your pension is granted. The reduction or increase of the pension depends not only on the time of retirement but also on the life table of Statistics Estonia and the government bond yield of the European Central Bank. These figures are updated annually on .1 January The percentage applied at the time of granting the pension will not change in the future.

Flexible old-age pension
While receiving a flexible old-age pension, you can also continue working, meaning you can receive both your pension and wages simultaneously.

Early retirement pension
Early retirement pension is a type of pension that will be gradually phased out from 2021 onwards. Until 2025, those who wish to retire earlier will be able to choose whether they want to receive early retirement pension or flexible old-age pension.

Suspension and continuation of payments
As of 2021, you can withdraw only half of your pension each month or stop receiving it altogether, if you wish. This option is intended for those who are already receiving a pension but can manage without it or with only half of it for a certain period, allowing them to increase their future pension. The suspended part of your pension is not paid out in a lump sum later; instead, you will receive a slightly higher monthly pension for the rest of your life.

You can suspend or continue your pension once a month. To this end, you must submit an application for suspension/continuation of payment of old-age pension to the Social Insurance Board. The changes will take effect from the following calendar month. Suspension cannot be terminated retroactively.

If you retire later, your pension will be higher. The percentages of reduction or increase are based on projections. The exact percentage of reduction or increase depends on your birth year, birth month and the time your pension is granted. The reduction or increase of the pension depends not only on the time of retirement but also on the life table of Statistics Estonia and the government bond yield of the European Central Bank. These figures are updated annually on .1 January The percentage applied at the time of granting the pension will not change in the future.

If you retire later, the average pension increase in 2024 will be as follows:

• 1 year later +6.12%
• 2 years later +15.50%
• 3 years later +25.39%
• 4 years later +36.90%
• 5 years later +50.04%

The shown percentages of reduction or increase are based on projections. The exact percentage of reduction or increase depends on your birth year, birth month and the time your pension is granted.

The pension calculator is an excellent tool to help you understand how different retirement times can impact your future pension. Use the calculator to see what happens if you retire three months or three years later. The calculator provides accurate calculations and helps you make an informed decision.

Flexible old-age pension can be taken up to five years before the standard pensionable age or at any point after it. To this end, you must have earned an Estonian pension qualifying period of at least 15 years.

If you wish to retire early, a longer pension qualifying period is required and depends on when you want to retire:

• up to 1 year earlier – pension qualifying period of at least 20 years
• up to 2 years earlier – pension qualifying period of at least 25 years
• up to 3 years earlier – pension qualifying period of at least 30 years
• up to 4 years earlier – pension qualifying period of at least 35 years
• up to 5 years earlier – pension qualifying period of at least 40 years

Note! If you retire early, your pension will be smaller and it will not change when you reach pensionable age.

Carefully consider your pension withdrawal strategy, taking into account both your short- and long-term needs and risks. It is often wiser to withdraw pension money in regular payments, as it ensures a steady income and makes future planning easier. In addition, regular payments help maintain financial discipline and lower your income tax burden. Choose a payment strategy that offers you the highest level of financial security for the future.

In the case of a lump-sum payment, be sure to take the following into account:

• impact of inflation: if you withdraw all of your pension money at once, inflation can reduce its purchasing power over time. Holding money over the long term may result in you being able to buy fewer goods and services in the future than you can afford today;
• loss of investment options: continuous and regular payments would allow you to continue investing and growing the rest of your money. If you withdraw all your money at once, you lose the opportunity to earn additional income from your investments;
• lack of long-term security: regular payments (particularly in the case of lifetime pension) ensure that you have a steady income throughout your retirement or at least for an extended period (in the case of a fixed-term pension). If you choose to take all your pension money out at once, you lose this sense of security;
• unexpected expenses: having a long-term pension plan helps you better cope with unexpected expenses, such as healthcare or home repair costs. Withdrawing all your money at once may hinder your ability to manage such expenses in the future. However, if you choose a fixed-term pension, you can also withdraw a larger amount of money when necessary;
• your financial discipline: receiving a larger lump-sum payment may tempt you to make impulsive or unnecessary purchases, as well as increase your risk of falling victim to fraud;
• income tax liability: lump-sum payments are subject to income tax (at a rate of 10% if withdrawn at retirement or five years before it), whereas lifetime pension and fixed-term pension that is spread over at least the average life expectancy are exempt from income tax.

There is considerable flexibility and options when it comes to withdrawing accumulated pension funds from both pillars. Therefore, think carefully before deciding to withdraw all your accumulated pension money at once. You can withdraw the accumulated amount either as regular pension payments or as lump sums of varying sizes if larger amounts are needed. At the same time, the money in your pension fund continues to earn returns and compound interest.

The average retirement period is 18 years, but it can be even longer if you retire five years early. However, if you just keep the money withdrawn from the pillar in your account for 18 years or more, you will miss out on potential returns and be negatively affected by inflation.

Reasons why it is not wise to keep your pension money in your bank account

• Rate or return and compound interest: the money in your pension fund continues to earn returns and compound interest. The average retirement period is 18 years, but it can be even longer if you retire five years early. However, if you just keep the money withdrawn from the pillar in your account for 18 years or more, you will miss out on potential returns and be negatively affected by inflation.
• Impact of inflation: keeping money in a bank account over a longer period can lead to a decrease in purchasing power due to inflation. Having your money invested in a pension fund helps to reduce the impact of inflation because it may yield higher returns.
• Long-term security: Regular pension payments ensure a stable income throughout your retirement. If you withdraw all the money at once and hold it in your bank account, you could lose your sense of security and financial stability.
• Investment opportunities: continuous regular payments allow you to continue investing and growing your remaining funds. If you withdraw all your money at once and keep it in your bank account, you lose the opportunity to earn additional income from your investments.

Funded pension options

The funded pension option is available for both II pillar and III pillar. This allows you to withdraw money regularly while continuing to invest the remainder in a pension fund, which helps to maintain and grow your pension savings.

EXAMPLE:
Scenario A: I leave €10,000 invested in a fund with a 5% annual return. After 10 years, the amount grows to approximately €16,289. After accounting for the assumed impact of inflation (3% per year) and the income tax applied when withdrawing the money, the real value of the money in the fund is approximately €12,000.

Scenario B: I withdraw the money as a lump sum. I immediately lose 10% to income tax, and in addition the purchasing power of the money simply sitting in a deposit decreases due to 3% inflation, reducing its value by about €2,000 over 10 years. The real value of the money after 10 years is approximately €6,700.

Joining a pension pillar at any time is beneficial, but starting earlier maximises the advantages of compound interest and tax incentives. Contributing to both the II pillar and III pillar offers a tax-efficient way to prepare for retirement. Tax incentives make it an appealing option for anyone looking to increase their income. While accumulating over the long term leads to a larger pension, even short-term contributions can be beneficial, offering additional income during retirement. However, compared to long-term accumulation, compound interest does not have enough time to work effectively in your favour with short-term contributions.

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).

Joining the III pillar is voluntary and can be done at any time.

It is important to note that the earlier you join, the more time you have to grow your pension assets and use the tax incentives.

As of 1 January 2023, all pensions, including the I, II and III pillars, are subject to seizure. This means that payments made to a debtor from both the state pension and mandatory and voluntary pension funds may be seized to cover debts. It is important to understand that your pension assets can be subject to seizure and that this can affect your financial situation if you have outstanding commitments.

I pillar

This means that if a debtor is granted old-age pension or another I pillar pension, it may be subject to seizure to cover debts.

II and III pillar

This means that payments from the mandatory pension fund (II pillar) and voluntary pension fund (III pillar) may also be subject to seizure if the debtor has outstanding commitments.