Principles for the taxation of disbursements under the mandatory funded pension

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. The right to deduct tax-exempt income applies to all residents of Estonia, who receive taxable income, i.e. are employed, are pensioners, etc. General tax-exempt income can be deducted from pension payments only upon a written application of the pensioner. The respective application is submitted to the local pension office.

Upon taxation of the 1st and 2nd pension pillar payments, it is possible to use:

• additional tax-exempt limit (EUR 2700 euros in 2016, i.e. EUR 225 per month);
• general tax-exempt limit (EUR 2040 in 2016, i.e. EUR 170 per month).

The additional tax-exempt limit is only deducted when your main source of income is pension and not salary or wages.

Taxation principles of pensions

• The additional tax-exempt rate for pensioners is applied to the 1st and 2nd pillar jointly and in the calculation of the tax-exempt rate, first the state pension is considered and thereafter the mandatory funded pension.
• When in case of the 2nd pillar, disbursements are made both on the basis of a pension contract as well as from the pension fund, the tax-exempt rate is first applied to the sums paid on the basis of the pension contract and then to the sums paid from the pension fund.
• The part exceeding the tax-exempt rate is subject to income tax.
• The tax-exempt amount is calculated for the 1st and 2nd pillar on the current basis. Income tax is withheld by the payer, i.e. for a funded pension by the registrar and for a pension contract by the insurer.

Example:
The 1st pillar pension is EUR 225, the 2nd pillar pension is also EUR 225 per month.
If you decide to use for the 1st and 2nd pillar payments both the general as well as additional tax exemption, the monthly tax-exempt amount is EUR 395.

Firstly, the 1st pillar pension is paid out. As this is equal to the additional tax exemption, no income tax is withheld.
Thereafter, the 2nd pillar pension is paid out, whereas considering that the remaining tax-exempt amount is EUR 170. As the 2nd pillar pension is EUR 220, EUR 55 shall be taxable with the applicable income tax rate.

The excessively paid income tax can be reclaimed only by submitting an income tax return. If the pensioner wants to be sure that income tax has been withheld pursuant to the Income Tax Act, it is recommended to file an income tax return.