Brief overview of the Estonian pension system

The Estonian pension system consists of three columns: the retirement pension, the mandatory funded pension and the additional funded pension or corresponding column I, II and III. The aim of the pension system is to help people retain their living standard and monthly income after they retire.

Pensions are indexed on April 1st every year to guarantee a gradual increase. The aim of indexation is to keep the balance between the changing salaries and prices.

Column I pension or the state pension is paid on the basis of the calculated social tax – 33%, 20% of the social tax is transferred to the pension fund of the current pensioners. The state pays the state pension to all people, who have reached the retirement age.

As of January 1st, 2017, the retirement age started to rise step by step and by the year 2026 it will be 65 years. The size of pension depends on the person’s salary and the length of employment, which has to be at least 15 years. It is important to note that the old-age pension is paid also when the person continues working. Pension is subject to the income tax: however, the limit rate of the basic exemption can be applied up to 500 EUR per month or up to 6000 EUR per year from the person’s total income.

Column II or the mandatory funded pension is based on pre-financing. Pension accumulated during working increases the amount of pension received after the retirement. Having joined the mandatory funded pension, 4% of the social tax is targeted to the corresponding personal column II of the pension fund. Besides, additional 2% of the salary is transferred in column II. Since January 1st 2021, it is possible to stop payments in column II of the funded pension by submitting an application to stop making payments. It is good to know that after the application has been submitted, one can start the funded pension system only after ten years.

Column III or the additional funded pension is a voluntary way for accumulating additional pension. Contributions and the amount of later payments can be established. In addition, it is possible to get 20% income tax reduction from the contributions made during the year, not exceeding 15% of the gross income or 6000 EUR.

How is the pension sum formed? Since 2021 the pension consists of four parts:

1) the base amount of the pension is the foundation of the pension and is the same for all pensions. It is reviewed every year and as of April 1st, 2022, the base amount is 255.7562 EUR;

2) the part based on the length of employment depends on the length of working, studying, and being in the army until December 31st, 1998. These years are calculated according to the employment record book and other documents. To get the length of pensionable service, it is multiplied with the years accumulated by December 31st, 1998 or the number of years by the value of a year of pensionable service, which amount is also reviewed every year. As of April 1st, 2022 the value of a year of pensionable service is 7.718 EUR;

3) the insured part of the pension depends on the sum of insurance components, which are calculated since January 1st 1999 on the basis of the social tax paid by you. To get the insurance component, the sum of insurance components is multiplied by the value of a year of pensionable service. The value of a year of pensionable service is the value of one year of pensionable service or the cost of the insurance component. Its size is also reviewed on April 1st. As of April 1st 2022, the value of a year of pensionable service is 7.718 EUR;

4) As of the beginning of 2021, the fourth part of pension - the joint share has started to accumulate. One joint share consists of an insurance component within the range of 50% and a solidarity share within 50%. A solidarity share is 1.0, when the social tax has been paid for from at least 12-fold minimal amount of salary. In case the amount paid from the social tax is less than the minimal amount of the annual salary, the solidarity share is paid proportionally.

More information about pensions is available on the homepage of the Pension Centre pensionikeskus.ee and the homepage of the Ministry of Finance fin.ee. The amount of personal pension can be seen in the pension calculator of the Estonian State Portal eesti.ee.

Photo: SHVETS production