The Ministry of Finance has said the second pillar pension reform will enter into force according to the previously established plan after the Supreme Court of Estonia said on Tuesday that it did not find any conflicts with the Constitution.
"Today's decision of the Supreme Court confirmed what we already knew. It is important to bring additional freedom and new choices to the second pillar to diversify collection opportunities," Minister of Finance Martin Helme (EKRE) said, adding that some technical amendments to the law are still needed, but they do not affect the original reform plan.
With the entry into force of the second pillar reform, leaving the second pillar and joining it will become voluntary next year. All those who wish can continue collecting in the second pillar as before without the need to do anything extra to continue to do so.
While in the current second pillar system, investment decisions are made by the pension fund manager, then as a new option, a person can decide for themselves where to invest their second pillar money. To do this, people need to create a pension investment account and transfer new contributions there, or monetize their existing fund units and transfer money to the pension investment account in order to continue investing themselves.
It is always possible to give it up and redirect new contributions to the pension fund or exchange the money collected through the pension investment account for pension fund units. The investment account can be used from September 2021.
While until now, there was no possibility to interrupt the collection in the second pillar, then in the new year, this possibility will also arise and an application to leave the second pillar must be submitted for this purpose. When leaving, it is possible to withdraw the money collected so far by paying 20 percent income tax, or leave the money in the fund to collect interest. When the person reaches a certain age, the money can be used tax-free or with payment of less income tax.
From 2021, all those who do not have it can join the second pillar. Even after leaving the pillar, it will be possible to return there after ten years and start collecting again.
While most of the innovations will enter into force in 2021, the reform law will also change the rules related to retirement and many of the changes will now take effect immediately.
Namely, starting from the entry into force of the law, everyone will have the choice of how to withdraw their collected money from the second pillar -- either as a life-time or term pension or simply as a lump sum payment.
What is important, however, is that income tax rates will change from January 1, 2021. The lifetime and long-term pensions then become tax-free, and the income tax rate for the lump sum and shorter-term pensions will be 10 percent.
The choices given by the second pillar reform do not in any way affect the temporary suspension of second pillar payments. The state suspended 4 percent additional payments to the second pillar from July this year until September 2021. Payments of 2 percent from gross salary to the second pillar will continue automatically.
Those who also want to suspend their 2 percent payments can submit a relevant application in October this year. In September next year, contributions will automatically resume both for those who also gave up their 2 percent payments and for those who continued with them.
About 760,000 people have joined the second pillar. There are up to 100,000 potential new entrants -- these are people of working age who have not joined the second pillar.
Editor: Helen Wright