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Restructuring of the second pillar of the funded pension

You should think about your future pension today! 

 

The government is planning to make the second pillar that until now was mandatory voluntary.


 

  • It is not necessary to do anything immediately when the changes takes effect – everyone who wants, can continue to make contributions to the second pillar in peace.
  • There will be a number of additional new options: contributions can be continued on the pension investment account, membership is also open to those born before 1983. 
  • If necessary, contributions to the pillar may be suspended and you may leave the pillar.
  • The greater freedom places more responsibility on people, to think through how to secure a decent income for their retirement.    

 

 


Hereafter everyone can decide for themselves:

 

  • Whether to continue to collect money for retirement through pension funds, or to collect and invest independently.

  • Whether to stop payments in to the second pillar, but to leave the already contributed assets to grow or even withdraw completely for saving for retirement through the second pillar.

  • To join the second pillar if I was born prior to 1983.

Continue contributing

Stop contributing

I will continue contributions into the pension fund as I have done
 

To do that nothing has to be done.

My chosen pension fund is dealing with growing my money by investing it in corporate shares, bonds and other instruments.

I will create a pension investment account and I will invest through it myself

 

I can transfer all or part of the second pillar assets to the pension investment account.

New payments from my salary (2 per cent) and 4 per cent paid by the state can be contributed to the pension investment account, where there are only retirement assets.

The extent of my assets depends on my investment decisions and my activity.

No income tax is payable. If I no longer want to invest myself, I can direct new contributions to the pension fund and I can also exchange the money collected through the pension investment account, for the pension fund units.

I suspend contributions to the second pillar
 

I present an application.

My previous investments into the second pillar will remain and grow there.

I can rejoin the second pillar in 10 years..

I withdraw the collected funds
 

 

I present an application. I must take out all funds at once. I pay income tax at 20 percent on the withdrawn amount.

I have the choice whether I will continue to invest this money myself (for example through a regular investment account) or spend it.

If I want to start collecting money again into the second pillar, I can do it in 10 years.

As a person with an average salary, as a retired person I can expect as income together with the pension from the first pillar, to be about 40 per cent of the average salary.

I can get additional income from the third pillar if I have contributed to it

 

I receive a pension from the first pillar and from what has been contributed into the second pillar before the suspension of payments.

I can get additional income from the third pillar if I have contributed to it

As a person with an average salary, as a retired person I can expect an income from the first pillar, which is up to 30% less than if I had contributed to the first and second pillars to the end.

If the money taken out of the second pillar has not been spent, but invested or saved, I can use it.

I can get additional income from the third pillar if I have contributed to it

When I have reached the age of retirement, I can decide whether to withdraw funds, in the form of a lifetime or fixed-term pension or all at once. If I choose a long pension plan (pension for life or fixed-term pension divided by life expectancy), then the amounts withdrawn are not subject to income tax. If I take out all the funds at once or as a shorter term pension, I pay 10 percent income tax.

As of September 2019, close to 740 000 persons are making contributions into the second pillar.

  • The total volume of pension funds amounted to 4.5 billion Euros in September 2019.
  • The average value of the assets collected in the second pillar is slightly over 6 000 Euros.
  • The planned period of investments into the second pillar, for persons starting work, is at least 40 years. The funded pension system has been in place for 17 years and in reality contributions have been made for even shorter periods.
  • It is also worth considering that solidarity is quite high in the first pillar and irrespective of the income of the person, he or she will receive less from the same money in the I pillar than from the II pillar. The higher the income of a person, the greater the benefit of the second pillar.

Timetable for the amendments

  • The amendments approved by the government are intended to enter into force as a general rule, but applications to join or leave the second pillar can be submitted in January 2021, when the law enters into force.
  • The prerequisite for the application of the intended changes is that they will be passed as legislation.  

Your pension currently has three possible sources:

The first pillar or the
state retirement pension


The state pays the first pillar pensions every year from its income for the same year. The funds for the first pillar pensions have not been collected anywhere in advance. The current senior citizens receive a part of the social tax paid on the wages of the currently employed.

If necessary, additional funds must be taken from other state revenues. For example, in the year 2020, there will be a shortfall in the pension funding part of the social tax of 114 million Euros, which will be covered by other state revenues.

The normal annual increase in pensions, depends mostly on the increase in the collection of social tax in the previous year: 80% of the pension index is formed by the pension funding part of the social tax and 20% by changes in the consumer price index. If for example, in the future the growth in social tax revenue slows down, due to the decrease in the number of people working and an increase in senior citizens that do not work, a smaller increase than currently can be anticipated annually for the first pillar pension.

At least 15 years of contributions into pensions ensures the base part of the pension in the year 2019 close to 192 Euros and additionally for every year of pension worthy work relationships 6 627 Euros in 2019, which amounts to 298 Euros, in the case of 45 years of work relationships, together with the base amount totals 490 Euros). Senior citizens with less than 15 years of contributions receive a national pension, which in the year 2019 was 205 Euros.

Read more: 

The second pillar or
mandatory funded pension
 

A working person contributes funds for his/her own future by paying 2 per cent of his/her gross salary into the pension fund. The employer withholds it from the salary and it is channelled through the pension centre to the pension fund chosen by the person. Of the social tax paid, on behalf of the employee, 4 percent is added to the second pillar instead of the first pillar.

Five management companies offer a total of 24 second pillar funds, from which everyone can choose the one that matches their aims and risk tolerance. It is worth considering whether the contributions go to a suitable fund, as consideration must be given for the cost of exchanging shares.

Read more:

 

The third pillar or supplementary funded pension


A person chooses him/herself how much more funds he/she wants to collect for retirement. A person can apply for the refund of the income tax on contributions to the third pillar, getting a 20% tax rebate on annual contributions, which do not exceed 15 percent of the gross income. It is possible to pay up to 6 000 Euros annually into the third pillar.

Contributions to supplementary funded pension contracts are flexible. It is possible to determine the payment amounts oneself, the savings amount can be increased or decreased according to possibilities and needs, payments can temporarily be suspended and it is possible to withdraw a part of the funds prior to retirement.

You can join an additional funded pension by entering into a pension insurance contract with a life insurance company or making payments to a voluntary pension fund. Third pillar insurance contracts are offered by five insurance companies and five management companies offer a total of nine third pillar pension funds.

Read more about supplementary funded pension. 

 

Last updated: 20 February 2020