Government sending pension reform bill to Riigikogu with confidence vote

Government press conference. Minister of Foreign Affairs Urmas Reinsalu (Isamaa) is wearing a sweatshirt that reads "Money is Free," a play on a sweatshirt once worn by President Kersti Kaljulaid reading "Word/Press is Free." January 27, 2020. Source: ERR

The Estonian government at its Monday meeting approved the funded pension reform bill, the second reading and final vote of which, along with the government's vote of confidence, will take place at the Riigikogu's plenary sitting on Wednesday.

Once the pension reform enters into force, joining or leaving the second pension pillar will become voluntary for everyone. By default, everything will remain as it is — if an individual wants to continue collecting their pension the same way, they will not have to do anything. Should they want to exit the pillar, join the pillar or simply stop contributing to it, they must submit an application either to their bank or to the Pension Center, spokespeople for the government said.

Current payment rates to the pillar will remain unchanged — 2 percent of an individual's gross salary and 4 percent of their social tax. As a new option, people will be able to reinvest the funds they have accrued in the second pillar themselves. In order to do so, they must submit a conversion application to cash out their second pillar funds and transfer them to the individual's pension investment account set up at a bank.

The pension investment account can be used to transfer both already accrued pension money as well as new second pillar contributions there — no other money can be transferred there. Withdrawal from the pension investment account will be carried out under the same conditions as for the pension fund. This means that people will generally have to wait until retirement, but, if necessary, they can exit the second pillar with the money sooner.

As with switching funds, an individual can move their money between a pension investment account and second pillar funds. For example, they can invest themselves for some time, reach the conclusion that this may not be the best solution for them, and then return to a fund.

The assets of a pension investment account can be invested in the same way as with a regular investment account ⁠— for example, in securities and other financial instruments.

Upon reaching retirement age, it is up to each individual to decide whether withdraw all of their money at once or as a fixed-term or lifetime pension. Should money from the second pillar be used as a lifetime pension or as a long-term pension, with the money distributed across at least the average years left for the person to live, then no income tax is payable on such payments.

With a shorter-term pension or when withdrawing all of one's money as a lump sum in retirement age, the individual will have to pay less income tax than when withdrawing the money earlier — 10 percent instead of the usual 20. These payments will not affect the calculation of a person's tax-exempt income.

Chance to leave, chance to return to pillar

Compared with the current procedure, once the pension reform bill enters into force, those who wish to may stop contributing to the second pillar. There are two ways to do so — suspend payments to the second pillar but leave already accrued money in the account to continue to grow, or withdraw the money, which will also stop payments to the second pillar.

Once someone has exited the second pillar, regardless of whether they only stopped contributing to it or withdrew already accrued money from it, they may rejoin the pillar after a period of ten years. After that, they will have the opportunity to exit the pillar again in another ten years' time — either by simply stopping payments to the second pillar or by withdrawing the money they have accrued there.

Once they have left the pillar a second time, they cannot rejoin it and will no longer be able to contribute to it. Thus, people will no longer accrue money in the second pillar, will be left with only the first pillar in retirement.

When withdrawing the money when exiting the pillar, it must be taken into account that the payment will be made in a lump sum and that all the money that the person has accrued in their second pillar will be paid out. The money will be subject to 20 percent tax, however the calculation of their tax-exempt income will not be affected by the second pillar payout.

People who voluntarily join the second pillar for the first time can withdraw money from the pillar for the first time or simply stop making payments at least ten years after they joined the pillar.

Current second pillar pensioners can also exit the second pillar if they wish. To do so, they must submit an application to their bank or the Pension Center for the termination of the fund pension and for a one-off payment or cancellation of the pension contract with the insurer. The payment to be made to retired second pillar pensioners will be subject to 10 percent income tax.

Payouts three times a year

Money will be paid out of the second pillar and payments can begin or end three times a year — in January, May and September. The submission of applications for joining the pillar voluntarily as well as exiting the pillar, including the withdrawal of accrued funds, will begin in January 2021. All applications filed by March 31, 2021 at the latest will be realized in September 2021.

Pension funds will have at least five months' notice about leaving the pillar. The longer notice of pension withdrawals will help people better manage their pension fund investments. In order to mitigate the risks involved for the pension fund in paying out money, the bill also raises the threshold for borrowing from the pension fund from the current 10 percent to 25 percent.

The submission of applications for transferring the funds collected from the pension fund to the pension investment account will begin on April 1, 2021. As with the conversion of units in a pension fund, the money will be credited to the pension investment account on September 1 if the application for conversion is submitted by July 31, 2021 at the latest. If the application is submitted during the next cycle, the conversion transaction will take place on January 3, 2022.

Second pillar payments can also be redirected to a pension investment account beginning in September 2021. To do so, people must submit a new choice application to their bank or the Pension Center. Payments will be redirected within a maximum of three business days.


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Editor: Aili Vahtla

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