State to provide option of increasing second pension pillar deposits

The second pillar (II sammas) refers to employer/employee pension contributions.
The second pillar (II sammas) refers to employer/employee pension contributions. Source: Priit Mürk/ERR

The Ministry of Finance has drawn up an intention to allow people to voluntarily increase their second pension pillar deposits to 4 percent or 6 percent from the current 2 percent. The draft is currently on a coordination round.

Since the creation of the mandatory funded pension system, the rate of payment for the second pillar has always been 2 percent of a working person's gross salary, but the finance ministry is planning amendments to the Funded Pensions Act, which would allow people to increase that rate to 4 or 6 percent.

"Instead of the current 2 percent rate, people that have joined the second pillar will be allowed to increase their rate to 4 or 6 percent. On the one hand, the goal is to keep that choice as simple as possible, which is why only two new rates have been offered. A higher rate allows people to save up more for their pension, but for the decision to be voluntary, the rates must remain realistic," the draft's explanatory memorandum reads.

The explanation also states that deposits into the voluntary third pension pillar in 2019 were 3.5 percent of all taxable income, which is why the ministry provided an option to increase second pillar deposits to 4 percent. "Those capable of contributing more can choose 6 percent," the ministry wrote.

To increase the second pillar deposit rate, a respective application must be filled and the applications would be available similar to other second pillar applications. The chosen rate would remain valid until changed.

The ministry said the chosen deposit rate could also offset the impact of previous withdrawals from the second pillar, which was made available after the pension reform last year. If a person has elected to withdraw their second pillar funds and want to rejoin the system at a later date, they can choose a higher deposit rate in order to offset their earlier decision to withdraw the collected money.

The amendments would not affect the first pillar nor the 4 percent rate added by the state. The target group of the reform is all people who have joined the second pillar and have not retired yet, including those that have decided to withdraw their pension funds, but will potentially rejoin the pension system at a later date.

Around 665,000 have joined the second pillar, which is mandatory for all persons born in 1983 and later. 177,000 people decided to withdraw their second pillar funds, but can rejoin in 10 years.


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Editor: Kristjan Kallaste

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