Increased contributions to the II pillar are a big win for savers

Everyone saving in a II pillar pension has the opportunity to apply to increase their contributions from the current rate of 2% to 4% or even 6% starting from next year. This gives you an even better chance to save for your retirement, since you don’t have to pay any income tax on your contributions. Sten Andreas Ehrlich, a member of the management board of Tuleva, highlights why it’s a good idea to make this choice right away.

To date, around 35,000 people have decided to increase their contributions. A lot of other savers have realised the benefits this will bring them, but have put off making their decision for one reason or another. Sten lists the five main reasons why a lot of people have yet to apply – and suggests ways around them.

Money matters are being talked about more and more all the time in Estonia, and there are lots of ways you can invest. Freedom of choice tends to be emphasised in this regard, but this can actually have a negative impact on how people approach the issue. Financial literacy researcher Leonore Riitsalu has observed that a plethora of choices can deter people, which is why they take so long to make a decision. An early start, however, is the saver’s best friend.

For most people, it makes sense to start consciously saving by upping the contributions they make to the II pillar. In line with the basic tenets of investment, savers should make the most of – indeed prioritise – tax incentives. And for people in Estonia, pension pillars are the most effective ways of saving when it comes to tax.

The big advantage of contributions to the II pillar is that they’re entirely automated. It will come as no surprise then that the people with a better chance of saving for their future, are those who have automated their contributions and made it harder for themselves to back out of it. We’re not robots, so relying solely on your memory and good intentions is anything but fail-safe. As long as you’re in work and haven’t withdrawn your funds from the II pillar, a bit of your salary will be automatically put aside each month to grow for your future. The III pillar, on the other hand, demands more self-discipline and consistency, because if you only put money into it at the end of the month, you might find you have nothing left.

That’s why it’s easier and more effective to start saving by increasing your contributions to the II pillar.

All contributions to the II pillar are pre-tax, which is to say no income tax is deducted from them. Contributions to the III pillar can be made on a taxable basis, i.e. from the money transferred to your account on payday. That said, the state reimburses the 20% income tax paid on contributions to the III pillar so as to encourage saving.

Since there’s no better friend to someone saving for the future than time, a larger amount of money being set aside to grow on a pre-tax basis means more chance of enhancing your wealth in the long term.

Having said that, the opportunities offered by both pillars should be grasped if you want to achieve the best results, because the tax incentives on both are equally good.

In order to have 4% or 6% of your gross salary (as opposed to the current rate of 2%) transferred to your II pillar pension from next year, you’ll need to apply by 30 November.

I’ve heard that some people are still putting off their decision because they’re not sure what their income situation will be in 2025. My advice is to increase your contributions anyway, and to do it now – because you can always change your mind later on, whereas if you miss this year’s deadline you’ll only get another chance to apply in 12 months’ time.

There’s a straightforward formula for success when it comes to long-term saving: the earlier you start, the better. That way, you need to put less aside each month to achieve the same results.

Let’s say your gross salary is 2000 euros: in this case you’re currently contributing 40 euros to your II pillar each month, to which the state adds 80 euros, making 120 euros in total. But if you increase your rate to 6%, you’ll start paying 120 euros into your II pillar, with the state still adding 80 euros of its own, for a total of 200 euros. Over time, this could mean tens of thousands more euros saved for your retirement. Nor does any of this require you to make particular compromises here and now.

Use the Tuleva calculator, to work out how much increasing your contributions to the II pillar will earn you.

People tend to be lazy by nature. We often put things off that irk us or that we feel would take up a lot of our time. But increasing your contributions to your II pillar is quick and easy. You can do it on the Tuleva website, in our Internet bank or on the self-service site of Pensionikeskus.

As the old saying goes, don’t put off till tomorrow what you can do today – take this simple step right now!