Increase of the rate of second pillar

^{An application for changing the rate of contribution can be submitted from 1 January 2024 and contributions at the higher rate can be made from 1 January 2025.}

^{To increase the rate of contribution, an application for changing the rate of contribution must be submitted. Applications can be submitted in the ‘My pension account’ section of the self-service of Pension Centre (Pensionikeskus) at https://www.pensionikeskus.ee/en/. Applications can also be submitted, for example, in the internet bank or on the website of Tuleva.}

^{Applications for changing the rate of contribution can be submitted from 1 January 2024 and at any time thereafter. The time of submission of the application determines when the new rate of contribution will be applied. If the application is submitted by the end of November at the latest, the new rate of contribution will be applied from January of the following year. The rates of contribution of applications submitted in December will be applied from January of the year after the next.}

^{The chosen rate of contribution is valid until you submit a new application for changing the rate of contribution. As the rate of contribution cannot be changed more than once a year, the chosen rate of contribution is valid for at least one calendar year.} 

Yes. An application for changing the rate of contribution can be submitted at any time. If you wish to change your rate of contribution, a new application should be submitted before the end of November because then the rate of contribution will be changed immediately from January of the following year. If you submit the application in December, the rate of contribution will be changed from January of the year after the next

It is not possible to cancel the application for changing the rate of contribution. However, until the end of November, you can simply submit a new application for changing the rate of contribution and choose the rate of contribution that you wish to pay from January.

If you want to change the rate of contribution later, you can still submit a new application for changing the rate of contribution. In this case, the chosen rate of application will simply be applied from January of the following year or the year after that, depending on when the application was submitted.

The rate of contribution can be changed once a year.

The greater the choice of rates of contribution, the more complex the system would be and the greater the possibility of errors. It is essential that employers withhold contributions at the correct rate and also declare these contributions at the correct rate. This ensures that additional contribution options are simple and clear.

No, it does not. Regardless of whether your rate of contribution to the second pillar is 2, 4, or 6 percent, 4 percent of the social tax is still transferred to the second pillar. Both the first and second pillar are financed from the social tax. Those who have joined the second pillar will acquire slightly fewer pension rights in the first pillar as less social tax is paid to it. However, increasing the rate of contribution does not affect the formation of your pension rights in the first pillar.

No, you do not. By default, the current rate of contribution of 2 percent remains in effect. An application should only be submitted if you wish to pay 4 or 6 percent into the second pillar instead of the 2 percent.

Long-term saving and investing are necessary in any case. While this can be done in many ways, you can enjoy tax benefits when saving money in the pension pillars.

Increasing the rate of contribution helps to increase your pension assets. The impact on your pension is greater the longer you make contributions at a higher rate. As funded pension contributions are withheld from wages prior to the payment of income tax, the amount paid to the second pillar is 22 percent (income tax rate is 22% from 2025) higher than the amount you would otherwise receive as wages.

How much the increase in the rate of contribution affects your future pension depends on several factors: mainly your wages and their growth, the chosen rate of contribution (4 or 6 percent), how long you make contributions at such a rate as well as the rate of return of investments.

Put simply, 6 percent contributions increase the ratio of your gross pension to gross wages by two percentage points for every 10 years of saving. With the rate of contribution of 4 percent, the ratio of your gross pension to gross wages would increase at a rate two times slower, ie by one percentage point for every 10 years of saving. 

If a person earning average wages would otherwise receive from the first and second pillar a pension amounting to 40 percent of average wages, then by saving at the rate of contribution of 6 percent for 40 years, the ratio of pension to wages would increase to almost 50 percent. In terms of pensions in 2024, it would mean a pension of 970 euros instead of the average pension of 776 euros.  

In the calculation, it is assumed in a simplified manner that wage growth is equal to the rate of return of the second pillar in the future. If the rate of return surpasses wage growth, the pension increases even more. However, the same applies in reverse: if wage growth exceeds the rate of return of pension assets, the pension increases less.

Saving money in the second and third pillars are both excellent choices. If you are already saving money in both pillars, it is up to you to decide whether to increase your contributions to one pillar or, where possible, to both pillars. Maximum contributions to both pillars provide the greatest tax gain (see here for more information about the third pillar tax benefit: https://www.emta.ee/en/private-client/taxes-and-payment/tax-incentives/contributions-supplementary-funded-pension).

If you have to choose, the advantage of the second pillar is that you make contributions from pre-tax income, meaning that the investment made is higher by the amount equivalent to the income tax rate (ie 22 percent from 2025). Contributions to the third pillar are made from taxed income and you can request a refund of the income tax on your contributions to the third pillar when you submit the tax return the next year and, if you wish, you can then transfer the refunded income tax to your third pillar.

While the conditions for the payment of pension are the same in both the second and third pillar, there are fewer restrictions in the third pillar on leaving the pillar early and rejoining it later.