Mandatory funded pension
The funded pension is based on preliminary financing – a working person himself or herself saves for his or her pension, paying 2% of the gross salary to the pension fund (from year 2025: 2%, 4% or 6%). The state adds 4% from the 33% social tax calculated on the salary of the employee.
If the 33% social tax is calculated from the salary of an employee who has not subscribed to the funded pension, 13% of it is directed to health insurance and 20% to state pension, which will be paid out to today’s pensioners. When subscribing to the funded pension, 4% of that state pension will be transferred to insure 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 respectively smaller (for the years when 16% was received for state pension instead of 20%).
Subscribing to the funded pension is mandatory for the persons who were born in 1983 and later and. The right and obligation to pay the contributions arises on 1 January of the year following the year when a person becomes 18 years old and he is a tax-resident of Estonia.
Funded Pensions for Sole Proprietors
An obligated person who is a sole proprietor can accrue the funded pension since the year 2004. For the sole proprietors, the period for the payment of the contributions is one calendar year.
If a sole proprietor has subscribed to the funded pension, the Tax Board will calculate the 2% contribution on the basis of their income tax declaration and issues a tax notice on the payable sum by no later than 1 September. The sole proprietors are obliged to transfer the payable sum to the bank account of the Tax Board by 1 October. The Tax Board will calculate an additional 4% from the 33% social tax from the business income, which is to be added to the contribution.
Tax resident or non-resident?
Obligation to make contributions to the II pillar funded pension system depends on whether you are a tax resident of Estonia or not. You may ask more about the tax residency from your employer or from Tax and Customs Board.
If you are not a tax resident of Estonia and you will work in Estonia less than 6 month, you don’t have to join the II pillar funded pension program.
If you are a tax resident of Estonia, subscribing to the II pillar funded pension is mandatory for persons, who were born in 1983 or later.
For 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 over the course of a period of 12 consecutive calendar months;
- the person is an Estonian diplomat who is in foreign service.
The person must submit an application for determination of residency (form R) to the Tax and Customs Board.
If the residency determined on the basis of 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 Tax and Customs Board