The III pillar is an effective way to save for the long term. However, money is not automatically transferred to it. After submitting a choice application, money must be transferred to the pension account. In the III pillar, you can determine the amount of your contributions and benefit from income tax relief. You can build up money either on the basis of an insurance contract or voluntary pension fund contributions.

Contributing to III pillar

The III pillar is one of the most effective ways to save for the long term. However, unlike the II pillar, money is not automatically transferred to the III pillar. Once you have submitted the choice application for a III pillar fund, you must transfer money to the pension account to buy units. You can make contributions one at a time or set up an automated payment. To make a contribution, log in to your pension account.

With the III pillar, you can:

• determine the amount of contributions and change it whenever you want. You can start saving with as little as 10 euros;
• receive 20% income tax relief on contributions made during the year that do not exceed 15% of your gross income or 6,000 euros;
• make contributions to several pension funds at once;
• change pension fund units for units of another pension fund, move from one pension fund to an insurance contract and vice versa;
• request grace periods or cancel the contract.

There are two ways to accumulate money in the III pillar:

• Concluding a supplementary funded pension insurance contract with a life insurance undertaking.
• Submitting a III pillar choice application and starting to make contributions to a voluntary pension fund.

When you pay money into the fund, you acquire pension fund units, which are registered on your pension account. It is also possible to purchase units of different voluntary pension funds on the same account. You can see the status of your pension account in the online environment of the Estonian Pension Centre under My pension account.

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.

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 III pillar pension funds are voluntary and allow 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 III 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.

Joining the III pillar is voluntary and you can chose how and what amounts you save. You can determine the amount of your contributions, use income tax relief and invest in different pension funds.

What is the III pillar?

The III pillar is a voluntary pension pillar that allows you to choose how and what amounts you want to save. It is one of the most effective ways to accumulate funds over the long term, allowing more flexibility compared to the mandatory II pillar.

How to join the III pillar?

Choose a pension fund or insurance contract

• Pension fund: submit a III pillar choice application and start making contributions to a voluntary pension fund.
• Insurance contract: conclude a supplementary funded pension insurance contract with a life insurance undertaking.

Make contributions

Transfer money to your pension account to purchase pension fund units. You can make contributions one at a time or set up an automated payment.

When you pay money into the fund, you acquire pension fund units, which are registered on your pension account. It is also possible to purchase units of different voluntary pension funds on the same account.

Monitor your account

You can see the status of your pension account in the online environment of the Estonian Pension Centre under My pension account.

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. As a result, your investment grows exponentially over time. 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.

The impact of compound interest on long-term pension accumulation is substantial. Compound interest works as follows:

• Interest on interest: when you invest money, you earn interest on it. With compound interest, the interest earned is added to the initial amount and subsequent interest is calculated on the higher amount.
• Exponential growth: as the interest earned in each period begins to accrue interest itself, the investment experiences exponential growth. Consequently, the value of the investment increases at an accelerating rate over time.
• Asset growth over time: for example, if you invest €1,000 at an interest rate of 5% per year, you will have €1,050 at the end of the year. In the following year, your interest will be calculated on €1,050, not just the initial €1,000. This means that the value of your assets will grow by an increasingly larger amount each year.

The sooner, the better

The impact of compound interest is greater of you start saving for retirement early. The longer the investment period, the more time compound interest has to grow. By starting early, you allow your investments more time to grow, resulting in a larger accumulation for retirement.

The III pillar is a great tool for accumulating money thanks to the tax relief – the 20% income tax is refunded. This tax relief applies if the contributions do not exceed 15% of annual gross income or 6,000 euros. Take full advantage of the tax relief by starting with small contributions and gradually increasing them over time.

III pillar tax relief

The III pillar is an excellent way to accumulate money as the state offers it a significant tax relief. Contributions are subject to a 20% income tax refund, offering a head start on your investment returns. This tax relief applies to III pillar contributions that do not exceed 15% of your annual gross income or 6,000 euros.

How does the tax relief work?

• Tax relief: 20% income tax refund on contributions.
• Maximum contributions: The tax relief applies to contributions that do not exceed 15% of your annual gross income or 6,000 euros.
• Income tax refund: You will receive an income tax refund on this year’s contributions next spring. Keep in mind that other deductions, such as those for children or training expenses, are also taken into account in the calculation of your total tax refund.

Maximising the tax incentive

Before exploring other investment options, it is wise to take full advantage of the III pillar tax incentive every year. For example, in December, you can add up how much you have contributed to the III pillar during the year and calculate how much more you could contribute to maximise the income tax relief.

Investing additional income

The III pillar is an excellent tool for long-term savings. A particularly smart approach is to transfer the income tax refunded on contributions, or part of it, back to the III pillar. If you would like the income tax to go directly into your II pillar, ask your employer if they can deduct the III pillar contribution from your wages right away. This way, you do not have to wait until the tax refund next year and the income tax portion will be automatically deposited into your III pillar along with your contribution.

In the III pillar, you can use a supplementary funded pension insurance contract, available through a life insurance undertaking, to both accumulate savings and receive a pension. There are two types of contracts: pension insurance with guaranteed interest and pension insurance with investment risk. Insurance with guaranteed interest provides a fixed rate of return, while insurance with investment risk offers the potential for higher returns through investment funds, but comes with greater risk.

Pension insurance with guaranteed interest

• Classic capital insurance: a contract with a fixed rate of return is concluded between the client and the insurance undertaking.
• Insurance undertaking guarantee: the investment risk is borne by the insurance undertaking who guarantees the client a minimum return.
• Additional interest: in the case of good investment performance, the insurance undertaking may pay the client additional interest.
• Payments: the amount accumulated by the end of the accumulation period is paid out according to the option specified in the contract.

Pension insurance with investment risk

• Ideal for the investment-savvy: suitable for people who have a solid understanding of the basic principles of investing and who wish to select their own investment risk level.
• Linked to investment funds: contributions made under the contract are linked to investment funds.
• No guarantees: there are no guaranteed returns, but long-term accumulation can yield higher earnings with funds compared to pension insurance with guaranteed interest.
• Market-dependent returns: the performance of the product depends on the returns of the selected investment funds and the fluctuations in the securities markets.
• Total pension amount: the total amount of payments at the end of the contract depends on the number of fund units.

If the prospective spouses do not select a proprietary relationship by an application for marriage and do not enter into a marital property contract, their marriage is subject to jointness of property. In the case of jointness of property, the property acquired during the marriage transfers into the joint ownership of the spouses. In the case of divorce, the joint property is divided in half. In such a case, III pillar assets acquired during the marriage are also considered joint property.

III pillar units and insurance contracts are inheritable. The successors must contact a notary to initiate succession proceedings, after the completion of which they can transfer the inherited assets to their pension account or withdraw it in cash, paying the income tax accordingly.

Inheritance of III pillar units

III pillar units are inheritable, which means that you accumulate assets that can be passed on to others. When the unitholder dies, the successors must contact a notary for succession proceedings. Once the notary has issued a succession certificate, the application for succession of units can be submitted to the appropriate bank.

Rights of the successor

• The successor can transfer the inherited pension assets to their pension account.
• The successor can withdraw all or part of the inherited assets in cash and have the rest transferred to their own pension pillar. Cash withdrawals are subject to 20% income tax.
• If the inherited assets are transferred to the pension account of the successor, it is possible to withdraw the money upon retirement by paying income tax at a lower rate (10%) or even income tax-free.

Inheritance of III pillar insurance contract

To inherit a III pillar insurance contact, you must contact an insurance undertaking.

• Death prior to the start of payments: If the insured person dies before pension payments begin, it will be determined whether the contract includes death cover. In the event of death, the death benefit is paid to the beneficiary designated in the contract.
• Death during the period of payment: If the insured person dies during the period of payment, the pension determined under the insurance contract is paid to the beneficiary until the end of the guarantee period. To receive the payment, the beneficiary must contact an insurance undertaking.

What to consider?

• The successors must contact a notary to initiate succession proceedings.
• After receiving the succession certificate, the successor can submit an application for succession of units to the appropriate bank or insurance undertaking.
• Cash withdrawals are subject to 20% income tax. If the assets are transferred to a pension account, future withdrawals may be taxed at a lower rate (10%) or be exempt from income tax.

III pillar units and insurance contracts allow you to pass on the money you have accumulated to your loved ones, offering flexibility and different options for managing your assets.

There are no restrictions on withdrawals from the III pillar: you can withdraw your accumulated funds at any time and in any amount that suits you. To do this, you can either submit an application for payment or conclude a fixed-term of lifetime contract. Please note that if you withdraw the money before you become eligible to receive III pillar pension, you will have to pay 20% income tax on the withdrawal.

The amount of the payment depends on the size of the accumulated investments and the length of the chosen pension period. There is a wide range of options available, from a lump-sum payment to lifetime pension.

Taxation

The tax exemption or income tax rate on payments depends on several factors:

• your age
• the date you first acquired units in the voluntary pension fund and/or the time of conclusion of the pension contract
• the type of payment you choose: lump-sum payment, fixed-term or lifetime pension contract

Pension contracts

To receive III pillar payments, you can enter into a fixed-term or lifetime insurance contract. Additionally, when receiving lifetime pension payments under an insurance contract, you have the option to establish a guarantee period. This guarantees that payments are made to the successor for a specified period following the death of the policyholder.