Understanding the Estonian Pension System: A guide for citizens and residents

Pension is a regular cash payment in case of old age, incapacity for work and loss of a breadwinner. The Estonian pension system aims to help people maintain their current standard of living and monthly income when they retire. Recent pension reform has significantly impacted the Estonian pension system, introducing changes to ensure its sustainability and adequacy.

Our guide will break down the Estonian Pension System and what it means for you.

What is the Estonian Pension System?

The Estonian pension system is based on three pillars. The Pillars 1 and 2 are state pensions, and the 3rd pillar is private. The 1st and 2nd pillars are mainly funded by social tax and pension contributions, but contributions to the 3rd pillar are only made by the persons or their employers.

Pillar 1: State pension

The state pension is paid out of the social tax calculated from salaries. The Estonian National Social Insurance Board handles it.

Pillar 2: Mandatory funded pension

Pillar 2 is financed from social tax, the employee’s gross salary, and contributions. The size of the pillar depends on how the funds have grown the amount collected. The pension centre and service providers handle this.

Pillar 3: Supplementary funded pension

Pillar 3 is completely voluntary. You can make contributions to the pillar yourself, or the employer can make them; they are not related to earned income. In the case of pillar III, the size of the pillar is also affected by the yield of pension funds.

The pension centre and service providers handle this.

The Estonian pension system leaves the possibility of retiring separately from different pillars. This means that, for example, retirement from pillar 1 does not automatically imply withdrawal from pillar 2 or 3, or conversely, withdrawal from pillar 2 or 3 does not have to mean simultaneous retirement from state pension. The possibilities and conditions for collecting and withdrawing a pension in the pillars are different, and to receive a pension from the chosen pillar, the appropriate application must be submitted at the desired time.

The state pension of pillar 1 is determined, and the Social Insurance Board accepts applications. Pillar 2 and 3 applications can be submitted to the pension centre, which maintains the pension register, or to service providers such as banks, insurance companies or non-profit cooperatives.

Overview of the Estonian Pension System

The Estonian pension system consists of three pillars: the first pillar is a state-funded pension; the second pillar is a mandatory-funded pension; and the third pillar is a voluntary-funded pension. The system is designed to provide Estonian citizens with a comprehensive and sustainable retirement. The Estonian Pension Insurance Fund manages the pension system, which collects contributions, invests funds, and pays out pensions.

Pillar 1: State pension

The state pension is paid out of the social tax calculated from salaries. Employers pay 33% of each employee’s salary for social tax, 13% for health insurance and 20% / 16%* for the pensions of today’s pensioners.

The state pension covers pension benefits for old age, incapacity for work or loss of provider to

• Estonian citizens
• permanent residents of Estonia,
• aliens residing in Estonia based on a temporary residence permit or right of residence.

The state pension is additionally divided into two

• old-age pension depending on the work contribution,
• national pension.

A person is entitled to the old-age pension after they have become 63 (65) years old and their length of employment in Estonia is at least 15 years.

The national pension is paid to persons of retirement age who do not have sufficient employment (15 years) to receive the old-age pension. A precondition for receiving the national pension is that the person has lived in Estonia for at least 5 years before applying for the pension.

An application and the additional required documents must be submitted to the local pension office to apply for the state pension. You will find the respective contacts here: Estonian National Social Insurance Board

Pillar 2: Mandatory funded pension

The funded pension scheme is based on preliminary financing—a working person saves for his or her pension, paying 2% of the gross salary to the pension fund (from 2025: 2%, 4% or 6%). The state adds 4% to the 33% social tax calculated on the employee’s salary.

If the 33% social tax is calculated from the salary of an employee who has not subscribed to the funded pension, 13% is directed to health insurance and 20% to the state pension, which will be paid to today’s pensioners. When subscribing to the funded pension, 4% of that state pension will be transferred to ensure everyone’s personal future, and that part will not be paid as state pension.

The state pension insurance component of the person who has subscribed to the funded pension is also smaller (for the years when 16% was received for state pension instead of 20%).

Subscribing to the funded pension is mandatory for persons born in 1983 and later. The right and obligation to pay the contributions arise on 1 January of the year following the year when a person becomes 18 years old and a tax-resident of Estonia.

The obligation to contribute to the pillar 2 funded pension system depends on whether you are a tax resident of Estonia or not. You may ask your employer or the Tax and Customs Board for more information about your tax residency.

• If you are not a tax resident of Estonia and will work in Estonia for less than six months, you don’t have to join the II pillar funded pension program.
• If you are a tax resident of Estonia, subscribing to the 2nd pillar-funded pension is mandatory for those born in 1983 or later.

To determine Estonian residency, person must meet one of the requirements below:

• the person’s place of residence is in Estonia;
• the person is staying in Estonia for at least 183 days for a period of 12 consecutive calendar months;
• the person is an Estonian diplomat who is in foreign service.

The person must apply for residency determination (form R) to the Tax and Customs Board.

If the residency determined based on a tax treaty differs from the residency determined under Estonian law or if the tax treaty (or any other international agreement) prescribes more favourable conditions for the taxation of income than those provided by law, the provisions of the tax treaty are applied. Please see the Estonian Tax and Customs Board.

Pillar 3: Supplementary funded pension

Today, the supplementary funded pension, which is a form of pension savings, allows:

• determining the amount of contributions with the possibility of changing the size of the contribution at any time,
• receiving a 20% income tax incentive (22% since contributions made since 01.01.2025) on the contributions made during the year, which do not exceed 15% of the gross income or €6,000 as the maximum,
• changing a pension fund to another pension fund or insurance contract,
• grace periods (also the option to suspend the contract).

In the future, the supplementary funded pension will allow:

• maintaining the established standard of living also at old age,
• taking the accrued sum into use already from the age of 55,
• receiving monthly or quarterly lifetime payments tax-free.

Joining the pillar 2 pension system

To join the second pillar, you must open a pension account and choose the pension fund to which you wish to start making contributions.

The pension account is your personal account. Here, you will find all the information about your second and third pillar funds: submitted applications, selected funds, received payments, acquired pension fund units, unit data and payouts.

Opening a pension account

• The pension account is opened upon submission of a choice application. You can submit the choice application at a bank or in the Pension Centre’s self-service interface, “My pension account“.

Starting on 1 January 2021, applications to join the second pillar can be submitted any time.

Starting in September 2021, you can also choose to have a pension investment account.

In the choice application, you also choose your pension fund.

• A pension fund will be drawn randomly from a list for those who have a compulsory second-pillar pension (people born on 1 January 1983 and later), are at least 18 years of age and employed, but did not submit a choice application when they received their first earnings. A pension account is also opened automatically and simultaneously with a random drawing.

The drawing will take place only when you receive your first earnings.

Contributions to pillar 2

A contribution to the funded pension consists of two components of pension contributions:

• The withholding from salary constitutes 2% of the employee’s gross monthly wage. The employer’s accountant shall withhold it
• The state pays out of the social tax paid by the employee; the employer contributes 4% of the employee’s monthly gross salary. Thus, the state retains 33%- 4% = 29% of the social tax. The 4% of the social tax is added to the 2% the employee pays by the Tax Board.

Example:* If an employee earns a gross salary of €2,000 per month, he or she will pay 2% or €40 per month to his or her pension account if they subscribe to a funded pension. The state will add another 4% or €80, which means that in total, €120 per month will transfer to the employee’s pension account.*

Although the employer will withhold contributions to the funded pension, the actual payer is still the employee. This means that the contributions are not connected to the employer, and a change of employer will not prevent or affect saving for the funded pension.

NB! Contributions can be made only to one selected fund at a time. You can change funds but only contribute to one at a time.

Rates of contributions to mandatory funded pensions 2%, 4% and 6%

From January 1, 2025, contributions to the pension scheme in pillar 2 can be made at 4 or 6% of the gross salary instead of the usual 2%. Increasing the contribution rate is optional; by default, the contribution rate of 2% continues to apply.

The choice of the contribution rate of 2%, 4% or 6% does not affect the pension contributions made from social tax. In the case of all three options, 4% of the social tax is transferred to the 2nd pillar. That means the contribution rate increase does not reduce the pension rights accumulated in the 1st pillar.

The new contribution rate always applies from January and is valid until a new rate is chosen. The contribution rate can be changed once a year.

How does the money reach the pension account?

1. Employers transfer the 2, 4 or 6% withheld from their employees’ gross salaries to the Tax and Customs Board and also fill out a related tax declaration.
   The sums of the funded payment contributions and the tax declarations must be sent by the employer by the 10th day of the following month when the sums were withheld (according to the Taxation Act).
2. The Tax and Customs Board checks the submitted declaration’s correctness and adds 4% of your social tax to the sum paid by the employer. The sums are transferred to the Pensionikeskus AS.
   The Tax and Customs Board has 15 working days to check the contributions and declarations and to transfer the money to the Pensionikeskus.
3. Pensionikeskus calculates the pension fund units chosen by the pension account owner based on the received sum and transfers the money to the respective pension fund.

Applicaton for changing the rate of contributions

The application for changing the rate of pension contributions can be submitted at any time.

For the new contribution rate to apply as soon as possible, i.e. from January 2025, the application must be submitted by the end of November 2024 at the latest.

Until the end of November, the choice of the contribution rate can also be changed. For this, you would have to submit a new application to change the rate of contributions.

If the application is submitted in December 2024, the new contribution rate will apply from January. This application can also be changed until the end of November next year.

Starting in January 2024, applications can be submitted to Pensionikeskus by logging into the self-service environment “My pension account” or using the options offered by account operators (banks).

Contributions to the second pillar of funded pension can be suspended

If you wish to neither continue contributions to the second pillar nor withdraw the accumulated funds, you can apply for exemption from contributions to the pension scheme.

The application can be submitted periodically:

• from 1 December to 31 March – for exemption from contributions as of 1 September;
• from 1 April to 31 July – for exemption from contributions as of 1 January;
• from 1 August to 30 November – for exemption from contributions as of 1 May.

18-year-olds and younger

You can apply for exemption from contributions if you are at least 18 years old. Where the application is submitted by a person aged 16 or 17, the person’s legal representative must provide written consent, which, in turn, is based on the court’s permission.

If you apply by 31 July on the year you turn 18, you will not be obliged to make funded pension contributions upon starting employment after 1 January.

Ten-year rule

Suppose you have submitted an application for exemption from contributions or a withdrawal of money from your pension scheme but have not cancelled it. In that case, you will have the right to resume funded pension contributions after 10 years have passed since the termination of contributions. For this purpose, an application for resuming donations must be completed after 10 years have passed.

Should you decide to apply resuming funded pension contributions after ten years have passed, you will have the obligation to make contributions for 10 years. Should you apply for exemption from contributions after this period, you will no longer have the right to submit an application for resuming contributions or to continue funded pension contributions.

No work ability

If you are a person who has been established to have no work ability and have been exempted from pension contributions of second pillar funds in connection therewith. In that case, you will have the right to resume contributions to the 2nd pillar-funded pension, if you so desire, after being assessed to have partial or full capacity for work.

Change of the funds

Only another fund of the mandatory funded pension (2nd pillar) can be replaced.

The choice of the pension fund can be changed in two ways:

• Directing contributions to a new fund – the units of the current fund will be retained and will continue earning in the former fund. After choosing a new fund, your future contributions will be transferred to a new fund, i.e. units of different funds will appear side by side in your pension account.
• Changing the pension fund units: The units of one pension fund will be replaced with those of a new pension fund you selected.

List of pillar 2 mandatory pension funds

An investment fund, or simply a fund, is a pool of money owned by investors who have invested in it. Here are the current pillar 2 funds you can invest in when writing this article:

• LHV Pensionifond Indeks
• LHV Pensionifond L
• LHV Pensionifond M
• LHV Pensionifond Roheline
• LHV Pensionifond S
• LHV Pensionifond XL
• LHV Pensionifond XS
• Luminor 16-50 pension fund
• Luminor 50-56 pension fund
• Luminor 56+ pension fund
• Luminor 61-65 pension fund
• Luminor Index Pension fund
• SEB pension fund 18+
• SEB pension fund 55+
• SEB pension fund 60+
• SEB pension fund 65+
• SEB pension fund index
• Swedbank Pension Fund 1960-69 Generation
• Swedbank Pension Fund Conservative
• Swedbank Pension Fund Generation 1970-79
• Swedbank Pension Fund Generation 1980-89
• Swedbank Pension Fund Generation 1990-99 Index
• Swedbank Pension Fund Generation 2000-09
• Swedbank Pension Fund Index
• Tuleva World Bonds Pension Fund
• Tuleva World Stocks Pension Fund

For a list of pillar 2 fund performance, click here.

Funds risk level

Estonian pension funds have a rather safe background. They are supervised on many levels, and the investment restrictions are very precisely defined.

But why are funds so popular worldwide as tools for collective investment? There are four main reasons for that:

• Distributed risks—According to Estonian laws, each fund’s portfolio must contain at least 10 different investments; for pension funds, the number is 20. Generally, the portfolios of international funds contain a few hundred investments.
• Professional management – purchasing an investment fund also entails purchasing investment advice: investors transfer their money into a fund managed by an investment specialist appointed for that purpose.
• Low costs—Buying a fund entails management fees, unit issue fees, and redemption fees. When these costs are added up, the sum will certainly be lower than when a person invests independently.
• Small start-up sum—even if the sum invested in the fund is small, the rate of return for the money is the same as for the big investors and their large sums.

All mandatory pension funds are open to investment risk despite their low risk level. This means that the value of a unit depends on the value of the pension fund investments—the price of a unit may rise or fall. Funds that invest more into equity and less into bonds are generally riskier than those that invest primarily or only into bonds. Funds with higher risk levels have a bigger chance to yield higher rates of return, but the risk to lose with an investment is also higher.

Joining the pillar 3 pension system

The 3rd pillar of the Estonian pension system is a supplementary funded pension aimed at boosting your pension savings.

You can contribute to the third pillar yourself or through your employer. The size of the contributions is not determined by the state but by you.

You can also withdraw money flexibly from pillar 3 funds. The 3rd pillar is not linked to the state pension (1st pillar) or funded pension (2nd pillar).

How to Join?

• Joining the voluntary pension fund means the person will open a pension account and contribute to any voluntary pension funds. A pension account can be opened in Estonian commercial banks (account operators).
• To take pension insurance with a guaranteed interest rate, you should contact a life insurance company and ask for an offer for the 3rd pillar pension insurance through their website or e-mail. You can also communicate your wishes and questions to an insurance company sales representative who will be ready to meet you when and where it is most suitable for you.
• Pension insurance contracts with investment risk can be concluded at insurance companies, banks and sometimes on the internet. You can monitor your assets through the internet environment of the respective life insurance company or bank with whom you have concluded the contract.

Contributions to pillar 3

The word to describe the contributions of supplementary funded pension is flexibility:

• You can determine the amount of pension contributions,
• You can increase or decrease the amount of savings according to your need,
• You can temporarily suspend contributions,
• You can take out part of the money before your retirement.

Contributions to the supplementary pension fund can be made if:

• you have invested in a voluntary pension fund before 2018, or
• if you submit an Application for a voluntary pension fund at a bank office.

The following fields must be completed on the payment orders for acquiring units of the voluntary pension funds.

Exchange of pension funds

The supplementary pension fund units may be changed for the units of another supplementary pension fund.

It is also allowed to transfer the sum accrued in the pillar 3 pension fund to a supplementary pension insurance contract, and vice versa, transfer the sum accrued under the insurance contract partially or fully into a pillar 3 pension fund.

The owner of the voluntary pension fund unit must submit a written application to the management company in order to change the units or transfer the sum accrued in the fund to an insurance contract.

No payments from the pension funds are made upon changing the pension fund units.

Pension funds are not allowed to be established in their terms and conditions:

• the minimum number of units that can be changed at once (was allowed until 1 August 2011);
• the minimum term before which the units cannot be changed (was allowed until 1 August 2011).

Management Company Fees

Upon changing between the funds of different management companies, the management company will charge the unit redemption fee and issue fee in the amount established in the pension fund’s terms and conditions (See the next section).

List of Supplementary pension funds

Here are the current pillar 3 funds you can invest in when writing this article:

• LHV Pensionifond Aktiivne III
• LHV Pensionifond Indeks III
• LHV Pensionifond Roheline III
• Luminor Sustainable Future 50-55 Index Pension fund
• Luminor Tulevik 16-50 Pension Fund
• Luminor Tulevik 55+ Pension Fund
• SEB Climate Future Pension Fund Index
• SEB III Pillar Pension Fund 18+
• SEB III Pillar Pension Fund 65+
• Swedbank III Pillar Pension Fund Index
• Swedbank Pension Fund V100
• Swedbank Pension Fund V100 index (limited redemption)
• Swedbank Pension Fund V30
• Swedbank Pension Fund V30 index (limited redemption)
• Swedbank Pension Fund V60
• Swedbank Pension Fund V60 index (limited redemption)
• Tuleva III Pillar Pension Fund

For a list of pillar 3 fund performance, click here.

Withdrawing funds, known as payments

There are no restrictions on making 3rd pillar payments: you can withdraw the pension savings you have accumulated at any time, whatever amount suits you. To do this, submit a payment application or enter a fixed-term or lifetime pension agreement.

The payment amount depends on the size of the accumulated reserve and the length of the selected pension period. There is great freedom of choice, from a lump sum to a lifetime pension.

You can take out a fixed-term or lifetime insurance contract to receive 3rd pillar payments. You can also specify a guarantee period when receiving lifetime pension payments from the insurance contract. In the event of the policyholder’s death, a successor will receive payments for the selected period.

You will receive payments from the voluntary pension fund upon redemption of units. Payouts are flexible: you can sell all units at once or in instalments.

Taxation

The income tax rate of 0%, 10% or 20% on pension contributions depends on several factors:

• your age;
• the time of the initial acquisition of the units of the voluntary pension fund and/or the conclusion of the pension contract;
• the method of payment you have chosen: lump sum, fixed-term or lifetime pension contract.

Money can be withdrawn from pillar 3 at any time. When withdrawing, income tax of 20% must be paid, and a withdrawal fee is also charged in some funds before retirement age.

When you retire, you can receive payments from your pillar 3 savings. The specific conditions depend on the personal situation and the rules related to a particular fund or insurance product.

If you have been saving in the 3rd pillar fund for at least 5 years, then after the age of 60, a 10% rate will be applied to withdrawing money (instead of the usual 20%). If you enter into a pension fund contract upon reaching pension age and make withdrawals in the form of regular payments, you do not have to pay any income tax on it. Tax benefits for those who started saving in the third pillar before 2021 apply from the age of 55.

Read more about what taxes you’ll pay here.

How does the pillar 3 tax return work?

Pillar 3 is subject to a 20% income tax refund on pension savings contributions that do not exceed 15% of annual gross income or €6,000. If 15% of gross income is more than €6,000, then €6,000 is tax-free. If 15% is less than €6,000, then 15% of gross income is tax-free.

Income tax will be refunded if you have paid income tax in Estonia during the year and if there is any income tax to be refunded after all other deductions (for example, education expenses).

Example* Let’s say your gross salary is €2,000 per month, and this year, you have already contributed €1,000 to the III pillar.

15% of your annual income is €2,000 x 12 months x 15% = 3,600 euros. This amount is less than 6000 euros, so the ceiling of your pillar 3 tax deduction will be €3,600.

How much do you gain from it?

On the €1,000 paid into the 3rd pillar during the year, you will gain:

20% x 1,000 = 200 euros.

If you find a way to increase your investments, you can gain up to

20% x 3,600 = €720 in total.

How much would it be reasonable for me to invest in the 3rd pillar?

A suitable contribution depends on various factors such as income, current expenses and liabilities, age, and pension goals. However, saving as much as possible and taking advantage of tax incentives is important.

15% of your annual gross income is a good goal because this will maximise your income tax refund and boost your investment.

Contributing to the 3rd pillar is primarily for long-term saving, so it is not worth investing money that you will need in the near future.

You can also use different calculators that help you determine the amount of tax-free pillar 3 contributions. For example, they can be found on Tuleva, Swedbank or SEB websites.

Final thoughts on pensions in Estonia

Estonia’s pensions are low. 

Our average pension is nearly 40% of the average salary, but the EU average is much higher. Recent pension reform has significantly impacted the Estonian pension system, aiming to improve its sustainability and adequacy.

The most you can do is increase your involvement in retirement savings. To do this, take advantage of the investment options with tax incentives created by the state, which are the second and third pillars.

1. The money in the second and third pillars accumulates at the rate you contribute. As your salary increases, so do your second pillar contributions. You can now also decide what percentage of your salary will be deposited there. The higher the percentage, the faster your savings will grow.
2. Contributions to the second pillar are automatic. Since you do not have to make or declare contributions, increasing your savings is a very convenient way. Automatic contributions mean no temptation to spend the money in other ways, so you can invest regularly and consistently without worrying.
3. Contributions to the second and third pillars are tax-free. With all other investment options, you will have to pay 22% income tax to the state, and only then will you be able to move forward. The state income tax incentive gives you a good leverage to grow your wealth.

Pension Accumulation and Investment

Pension accumulation and investment are critical components of the Estonian pension system. Contributions to the second and third pillars are invested in various assets, including stocks, bonds, and real estate.

The investments are managed by professional fund managers who aim to generate returns that will help grow your pension fund over time. You can see how your pension fund performs by logging into your online account or contacting the Estonian Pension Insurance Fund.

Retirement age

Estonia’s retirement age is 63 years and 9 months, but it will gradually increase to 65 years by 2026. When you reach retirement age, you can apply for a pension payment from the Estonian Pension Insurance Fund.

The pension payment is based on your accumulated pension rights and is paid out monthly. You can receive it as a lump sum or a monthly annuity.

Pension planning and calculator

Pension planning is an essential part of securing your financial future. The Estonian Pension Insurance Fund provides a pension calculator that can help you estimate your future pension payment based on your current contributions and investment returns.

You can access the calculator online or by contacting the fund directly. The calculator considers your current income, participation in the second and third pillars, and whether you choose to retire before or after reaching the official retirement age.

Using the calculator, you can see how your current decisions affect the size of your future pension and make informed decisions about your pension planning.

Investing in your pension is one of the most important financial decisions you’ll make in your lifetime. When you save into a pension, the value of your investment could fall and rise, and you could get back less money than you put in. This article can give helpful tips but isn’t financial or tax advice. If you’re unsure if something is right for you, you should speak to an independent pension adviser.