The Minister of Finance's approval to reform Estonia's second pension pillar was approved in turn by the Estonian government at Thursday's Cabinet meeting. The pension reform will make it optional to both join or leave the second pension pillar.
"The coalition has reached an agreement regarding the principles of the second pension pillar reform," Prime Minister Jüri Ratas (Centre) said in a statement issued by the Government Office following Thursday's Cabinet meeting. The biggest change brought about by the planned reform will be the increased freedom of choice in making pension-related decisions, he added.
"People will be able to continue to accrue money in the second pension pillar as they have done thus far; they can also stop paying into it, but keep the accrued money in their pension fund; the third option will be to stop making payments as well as withdraw the accrued money," Ratas explained.
"By reforming the second pension pillar, we will significantly increase opportunities for flexibility in preparing for retirement," Minister of Finance Martin Helme (EKRE) said. "This means we can start to save for retirement right when it is most convenient for us, as well as leave the pillar and use the accrued funds. Someone who has decided to withdraw their money from the second pillar will be allowed to return to it once. While a young person who has just begun working is not yet thinking of retirement and would rather spend their money elsewhere, they may think differently in ten years."
Minister of Social Affairs Tanel Kiik (Centre) added that the coalition agreed that everyone will retain the possibility of continuing to use the second pension pillar to save money for retirement.
"More freedom of choice means that, if we want to, we can take more responsibility for how our retirement money is invested," Kiik said. "In any case, it is important to think about retirement in the early stages of our working life already, as unfortunately, the pension provided by the state is not enough to provide an income comparable to the average wage. We must all choose carefully and consider the options that are the most secure and reasonable for our retirement plans in the long run."
Everyone to have three options
Once the reform enters into force, joining or leaving the second pension pillar will become optional for everyone. Either can be done by submitting an application to the Pension Centre or a bank.
It will be possible to stop paying into the second pension pillar but leave already accrued funds in the pillar, where they will continue to be invested. It will also be possible to stop paying into the second pillar and also withdraw already accrued money from it. Those interested in investing their retirement funds themselves will also have the option to transfer the money from their second pension pillar to a personal investment account.
According to current plans, money accrued in the second pillar thus far will be disbursed in a lump sum for amounts of up to €10,000; for amounts exceeding €10,000, disbursements will be made in three parts. All disbursements will be subject to income tax, and will be made within one year, on the dates that pension fund shares are exchanged.
The currently planned €10,000 maximum limit of a single disbursement will be decided at a Cabinet meeting on Sept. 12, after the Ministry of Finance has conducted further analysis.
People who decide to exit their second pension pillar will have the option to return to it after 10 years. Should they decide to return to their second pillar, they can withdraw accrued money and leave the pillar again after another 10 years. After leaving the second pillar for a second time, they will no longer be able to rejoin the second pension pillar, and will only receive pension payments in the future from the first pillar, or the first and third, provided that they have joined the third pillar.
Those born in 1982 or earlier and voluntarily join the second pension pillar will be able to withdraw money from it beginning 10 years after the date they joined the pillar.
Individuals with money accrued in their second pension pillar will, upon reaching retirement age, be able to decide if they would like to receive their money as a lifetime pension, a fixed-term pension or in a lump sum.
The pension reform will enter into effect on 2020. The deadline for submitting applications to stop paying into the second pension pillar, to begin making payments next year or to withdraw funds from the pillar will be Aug. 31, 2020. Beginning in 2021, conventional deadlines for applications will apply: March 31, July 31 and November 30.
Editor: Aili Vahtla