5,400 people joined voluntary third pension pillar in October

Euros. Source: Karin Koppel

Since October 20, when President Kersti Kaljulaid signed the controversial pension reform bill into law, 5,400 people joined the voluntary third pension pillar. People joining the voluntary pillar starting next year will be exempt from favourable withdrawal rates.

Starting next year, people who join the third pillar can withdraw the money at a more favourable income tax rate only 5 years before reaching retirement age. Provided they have been saving up as part of the third pillar for at least five years. People who have joined the third pension pillar before 2021 can withdraw their money fully at any time but have to pay a 20 percent income tax.

Ministry of Finance insurance policy adviser Kertu Fedotov said the income tax will be calculated from the entire sum withdrawn, not just the generated profit.

Fedotov said: "This for the reason that deposits are made off taxed income but they have the right for income tax refunds yearly. That is within certain limits, off incomes that are up to 15 percent of the person's yearly income and no more than €6,000. But making deposits like that is basically the untaxed money in the third pillar."

Retirement age in the third pillar's context begins at 55 years old. If the joined person has reached that age, they can withdraw the pillar's collected funds while paying 10 percent in income tax. At the same time, it is also possible to sign a life-time payout contract that requires no income tax be paid.

In both these terms, the condition is that the pillar has had to be active for at least five years.

Among other things, the pension reform will harmonize the retirement age for the second and third pillar. Therefore, third pillar pensions can be withdrawn with a favourable income tax rate only five years before retirement age, set to increase in the coming years.

Retirement age will be set at 64 years of life starting next year and will begin to depend on the average life expectancy going forward.

People who have joined the third pillar prior to 2021 however will maintain the current conditions which has led to a jump in people joining the third pillar system.

Kristi Sisa, board member of AS Pensionikeskus, in charge of the pension fund registry, said 5,400 people have joined the third pillar since the pension reform was put into force.

Sisa said: "As of today (Thursday - ed.), 85,000 have joined the third pillar. That number was 74,000 in the start of the year. We are noticing an active jump in opening accounts."

Pension reform and the voluntary second pillar

Membership of the second pillar had been mandatory for most wage earners in Estonia since 2010 and is distinct from the state pension (first pillar) and private pension schemes (third pillar).

The president had, in line with her constitutional role, twice declined to sign into assent the bill, which would make membership of the so-called second pillar of the scheme voluntary.

In February, the bill was returned to the Riigikogu and, when it came back to the President unamended the following month, she opted to send it to the Supreme Court for judgment.

The president's main concern with the bill, at least so far as her role goes, was that it treats, she argues, members of the second pillar, meaning employer/employee contributions, differently from those who opt out of it or were never members.

The bill, the brainchild of the Isamaa party, passed its third reading at the Riigikogu in late January, by 56 votes to 45, at the 101-seat chamber.

A recent survey conducted by pollster Kantar Emorshowed that 51 percent of people who joined the second pillar intend to continue but 21 percent of respondents plan to withdraw their money.


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Editor: Kristjan Kallaste

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