Pension

The purpose of the 2nd pillar is to grant an additional income to the recipient of the pension until the end of their life; however, if the sum accumulated in the pension fund is up to 10 the national pension rate, it is possible to withdraw the whole sum in the form of a one-time payment to your bank account. As pension is a form of taxed income, income tax is withheld from the disbursement. More information on taxation is available here

If you do not wish to withdraw the whole sum at once, a fund pension arrangement can be made to receive regular disbursements until the whole sum has been depleted.

While a pension contract can also be concluded in the case of a sum that is 10 times or less than the national pension rate, the sum of regular disbursements made for the duration of your life would be unreasonably small. This why ERGO does not advise its clients whose pension account is valued at up to 10 times the national pension rate to conclude a pension contract.

2nd pillar disbursement applications can be filed at ERGO’s offices across Estonia.

The value of pension assets is compared against a coefficient of the national pension rate. The national pension rate is established by the state and subject to change annually on 1 April (EUR 221.63 from 01.04.2020).

If the value of your pension account is less than 50 times the national pension rate, you have the option to receive regular disbursements directly from your pension fund. For this, a fund pension contract has to be concluded. On the basis of a fund pension contract, pension is usually paid until the assets on the pension account are depleted. As the disbursements are coming directly from the fund, the assets of which are still reinvested, investment risk is still covered by the shareholder. This means that the value of your pension account can both increase and decrease during the fund pension period.

When concluding a fund pension contract you can decide on the duration of the contract, the method of calculating the disbursement and the frequency of the disbursements. Based on the age of the recipient, the Funded Pension Act provides a minimum duration for the contract.

Minimum accounted total duration of fund pension.
Age	Duration
60	12 years
61–62	11 years
63–64	10 years
65–66	9 years
67–68	8 years
69–70	7 years
71–72	6 years
73–74	5 years
75–76	4 years
77–78	3 years
79 or more	2 years

There is also still the option of concluding a pension contract with a life insurance company, on the basis of which ERGO will pay an agreed sum until the end of your life.

2nd pillar disbursement applications can be filed at ERGO’s offices across Estonia.

The value of pension assets is compared against a coefficient of the national pension rate. The national pension rate is established by the state and subject to change annually on 1 April (EUR 221.63 from 01.04.2020).

We recommend concluding a pension contract in the event that the value of your pension exceeds the amount of 50 national pension rate. By doing so, you will ensure that the payments made from the 2nd pillar are a considerable addition to the state pension.

When calculating pension contributions we take into account the guaranteed interest rate, contract costs and the average life expectancy of the pension recipient. The guaranteed interest rate currently being offered is 0.3%, the fee for concluding the contract is 0.8% of the payment received by the insurance undertaking + EUR 46, and the administrative fee is 3.5% of the annual pension. We estimate the average life expectancy of a person who is 65 years old to be 18.1 years.

The following is established in the pension contract:

• frequency of disbursements (monthly or quarterly);
  
• regular disbursement amount;
  
• guaranteed period.
  

In the case of a pension contract with a guaranteed period, ERGO will pay the pension until the end of your life, while simultaneously assuming the obligation to pay the pension until the end of the guaranteed period, in any case. This means that if the recipient of the pension dies during the guaranteed period, ERGO will continue making disbursements to their beneficiaries until the end of the guaranteed period. In addition to the regular disbursements, the insurance company has the obligation to pay out at least 50% of their underwriting revenue collected on their 2nd pillar pension contracts.

A pension contract can be concluded at ERGO’s offices across Estonia.

The value of pension assets is compared against a coefficient of the national pension rate. The national pension rate is established by the state and subject to change annually on 1 April (EUR 221.63 from 01.04.2020).

As of 2018 the basic exemption for all incomes will be EUR 500 per month. The increased basic exemption on pensions will no longer apply. This means that the part of the state pension (1st pillar) as well as mandatory funded pension (2nd pillar) exceeding the income tax free limit is subject to income tax.

Principles governing the taxation of pensions

• The additional tax-free amount intended for pensions is applied to all incomes equally, whereas the state pension is taken into consideration first, followed thereafter by the mandatory funded pension when calculating the tax-free amount. 
  
• If in the case of the 2nd pillar disbursements are made to people on the basis of the pension contract as well as the pension fund, then when it comes to using the tax-free amount, the insurer has an advantage over the pension fund. 
  
• Income tax must be paid on the amount exceeding the tax-free amount. 
  
• The tax-free amount is calculated for the 1st and 2nd pillar on the current basis. Income tax is withheld by the payer, i.e. by the registrar in the case of a funded pension and by the insurer in the case of a pension contract. Additional information is available at Social Insurance Board website.