Pension and insurance indemnities

The Estonian pension system consists of three pillars: the first pillar is state pension, the second pillar is mandatory funded pension and the third pillar is supplementary funded pension. The second and third pillars operate based on the principle of savings collection by a person. It is also possible for a person to conclude a life insurance contract with investment risk.

Taxation of pensions from 1 January 2021

We recommend you to read the questions and answers about the II pillar on the website of the Ministry of Finance, the information on the pension reform 2021 on the website of the Pension Centre and the explanations of the tax authority about the tax incentives of the contributions to the III pillar.

The table below helps to understand which pension-related payments are tax-free and which payments shall be taxed from 1 January 2021.

I pillar: state pension
II Pillar: funded pension
III pillar: supplementary funded pension

Before reaching the old-age pension age, a person has the right to a flexible old-age pension.

income tax at the rate of 20%:
  • state pensions
  • to a person before the II pillar retirement age1 (also the disbursement and compensation received when leaving the pillar) or a one-time disbursement made to a successor.
  • a one-time disbursement made to a person before the III pillar retirement age2 or to a successor.
income tax at the rate of 10%:
  • a one-time disbursement made at the old-age pension age4 or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy3.
  • a one-time disbursement made at the retirement age of 552 and at the old-age pension age4 or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy3 if the collection period has lasted at least five years.
Tax free is:
  • work ability allowance paid by the Unemployment Insurance Fund
  • to a person with no work ability (regardless of age, can be one-time or periodic);
  • the payment made at the old-age pension age4 or up to 5 years before reaching that age and for III pillar, 55 years of retirement age2, a lifetime pension or a fixed-term pension divided by life expectancy3 payment shall be made periodically at least once every three months.
shall affect basic exemption (up to 6,000 euros per year)?
State pensions are taken into account as taxable annual income and affect the calculation of a person's basic exemption. Payments made before the III pillar retirement age, which are subject to income tax at the rate of 20%, and disbursements made to a successor are taken into account as annual income and affect the calculation of a person's basic exemption.
What kind of payments shall not affect basic exemption (up to 6,000 euros per year)?
  • payments from II pillar, which have been taxed with income tax 20% or 10%, and disbursements made to a successor
  • payments from III pillar, which have been taxed with 10% income tax,
shall not reduce a person's basic exemption.
  • All deductions can be made in the income tax return for a natural person on the account of taxed income tax and withheld income tax (20% or 10%).
  • Tax-free payments are not declared.

Taxation of non-resident's pension

I pillar: state pension
II Pillar: funded pension
III pillar: supplementary funded pension
The following is subject to income tax at the rate of 20%:
  • state pensions
  • the payment made to a non-resident before the II pillar retirement age1 (also the disbursement and compensation received when leaving the pillar) or a one-time disbursement made to a successor.
  • a one-time disbursement made to a non-resident before the III pillar retirement age2 or to a successor.
The implementation of a tax treaty (Article 18 "Pensions") may give an exemption of taxes. The implementation of a tax treaty (Article 13 "Capital Gains") gives an exemption of taxes, i.e. payouts are not subject to income tax in Estonia. In order to apply the tax exemption, a person must submit a Certificate of Residence to the Estonian Tax and Customs Board.
The following is subject to income tax at the rate of 10%:
  • a one-time disbursement made to a non-resident at the old-age pension age4 or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy3.
  • a one-time disbursement made at the retirement age of 552 and at the old-age pension age4 or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy3 if the collection period has lasted at least five years.
The implementation of a tax treaty (Article 18 "Pensions") may give an exemption of taxes. In order to apply the tax exemption, a person must submit a Certificate of Residence to the Estonian Tax and Customs Board. The implementation of a tax treaty (Article 21 "Other Income") may give an exemption of taxes. In order to apply the tax exemption, a person must submit a Certificate of Residence to the Estonian Tax and Customs Board.
Tax free is:
  • work ability allowance paid by the Unemployment Insurance Fund
  • to a person with no work ability (regardless of age, can be one-time or periodic);
  • the payment made at the old-age pension age4 or up to 5 years before reaching that age and for III pillar, 55 years of retirement age2, a lifetime pension or a fixed-term pension divided by life expectancy3 payment shall be made periodically at least once every three months.

An overview of the taxation of II and III pillar payments and calculation of basic exemption

II pillar Income tax Counts as annual income Affects the calculation of annual basic exemption On the tax return Must be declared
Single withdrawal before pensionable age 20% No No Yes Yes, data pre-filled
Single withdrawal at pensionable age 10% No No Yes Yes, data pre-filled
Partial withdrawal at retirement age 10% No No Yes Yes, data pre-filled
Short-term pension5 10% No No Yes Yes, data pre-filled
Long-term pension6 Exempt from tax No No No No

III pillar Income tax Counts as annual income Affects the calculation of annual basic exemption On the tax return Must be declared
Single withdrawal before pensionable age 20% Yes Yes Yes Yes, data pre-filled
Single withdrawal at pensionable age 10% No No Yes Yes, data pre-filled
Partial withdrawal at retirement age 10% No No Yes Yes, data pre-filled
Short-term pension5 10% No No Yes Yes, data pre-filled
Long-term pension6 Exempt from tax No No No No

Additional information for non-residents: tax exemptions arising from tax treaties.

Entries within II pillar, including the transfer of insurance pension or fund pension money to a pension investment account, shall not be considered as payouts and shall not give rise to any tax liability.

Notes

1 The retirement age of the II pillar is the retirement age or five years before reaching that age.
2 The retirement age for those who joined the III pillar until 2020 is 55 years, and for those who have joined from 2021, the retirement age is similar to the II pillar.
3 Term pension is calculated at least for the calendar year preceding the previous calendar year corresponding to a person's age on the basis of the average number of years remaining for men and women published by Statistics Estonia. More information on the Pension Centre's website or at the e-mail address [email protected].
4 The retirement age is calculated according to the year of birth (more information on the web site of the Social Insurance Board: "Old-age pension"). The pension under favourable conditions does not change taxation.
5 Short-term pension - shorter than long-term pension, i.e. shorter than the average fixed-term pension distributed over the years left to live.
6 Long-term pension - a fixed-term pension distributed over at least the average number of years left to live.

No tax liability arises upon acceptance of the succession. Tax liability may arise upon realization of the inheritance.

In particular, when inheriting the II or III pillar, the successor must decide whether to add them to their respective pillars or to withdraw the inherited amount as money.

  • In case the successor combines the inherited II or III pillar fund units with his/her own pillars, these are in his/her II or III pillar and future payments from there are taxed according to the II or III pillar rules.
  • If the bequeather had entered into a pension or insurance contract with a guarantee period, this means that the payments provided for in the contract shall be made to the beneficiary during the guarantee period. However, for the beneficiary, the payment is not a pension but "other income" and therefore the payments are normally taxed at an ordinary rate of 20%.
  • In case the successor withdraws the inherited II or III pillar fund units in money, the payment is „other income“ for him/her and is taxable at the normal rate of 20%.
  • In case the bequeather had entered into a pension contract or insurance contract without a guarantee period in which there are no beneficiaries, no payments shall be made to the successors under that contract.

The table below explains the taxation of pensions in case of succession.

II pillar or mandatory funded pension III pillar or supplementary funded pension

When making mandatory funded pension payments, the following may be applied:

  • pension contract,
  • fund pension,
  • one-time disbursement, or
  • combinations of the previous ones.

When making supplementary funded pension payments, the following may be applied:

  • insurance contract,
  • fund pension,
  • one-time disbursement, or
  • combinations of the previous ones.

In case of a pension contract:

  • a lifetime or fixed-term pension shall be paid.

In case of an insurance contract:

  • a lifetime or fixed-term pension is paid, or
  • a one-time dispursement shall be made.
Under the pension contract, the pension is paid until the death of the pensioner, after that no further payments will be made to the successors. Under the insurance contract, the pension is paid until the death of the policyholder, after that no further payments will be made to the successors.

Specificity

In case a person had entered into a pension contract or insurance contract with a guarantee period and dies during the guarantee period, the beneficiary specified in the contract shall be provided with:

  • payments which continue until the end of the gurantee period, or
  • a one-time disbursement.

Payments or one-time disbursements made to the beneficiary until the end of the guarantee period are subject to income tax at the rate of 20%.

In case of a funded pension:

  • a pension shall be paid periodically.

The difference between a funded pension and a pension contract or insurance contract is that in the event of the death of a unit-holder:

  • the fund units are freely inheritable, and
  • the fund units are also inheritable if the unit-holder dies before the start of the pension payments.

In the event of the death of the policyholder before the start of pension payments, it is possible that the beneficiary shall be paid the accumulated reserve from the insurance contract.
Payments made to a beneficiary are subject to income tax at the rate of 20%.
Death insurance benefit is tax-free.

In case the successor has joined a mandatory funded pension or receives a mandatory funded pension himself/herself, the successor has the right:

  • to transfer the inherited fund units to his/her pension account, or
  • to withdraw the fund units in money (a one-time disbursement shall be made), or
  • to transfer part to his/her pension account and part to withdraw in money.

The successor has the right:

  • to transfer the inherited fund units to his/her pension account, or
  • to withdraw the fund units in money (a one-time disbursement shall be made), or
  • to transfer part to his/her pension account and part to withdraw in money.
A one-time disbursement made to a successor is subject to income tax at the rate of 20%.

In case the successor transfers the inherited fund units to his/her pension account, he/she is entitled to receive at the strong>II pillar pension age:

  • a one-time disbursement or short-term periodic payments subject to income tax at the rate of 10%, or
  • a lifetime or long-term periodic payments that are tax-free.

In case the successor transfers the inherited fund units to his/her pension account, he/she is entitled to receive at the strong>III pillar pension age:

  • a one-time disbursement or short-term periodic payments subject to income tax at the rate of 10%, or
  • a lifetime or long-term periodic payments that are tax-free.

In case the successor has not joined the mandatory funded pension, the successor has the right to:

  • withdraw fund units in money (a one-time disbursement shall be made).

A one-time disbursement made to the successor is subject to income tax at the rate of 20%.

In the event of the strong>bankruptcy of the unit-holder's estate, the fund units will not be transferred to the successors, but the money received from the units would be used to pay the bequeather's debts in the bankruptcy proceedings.

Compensation for suspension of contributions by state to second pillar

From 1 July 2020 to 31 August 2021, the state suspended its contribution payments to the second pillar funded pension from social tax (4%), which are transferred into the pension accounts of persons enrolled in the second pillar (the mandatory funded pension). The state will pay a compensation for this as provided for in the Funded Pensions Act. Temporary suspension of contributions to the second pillar of the funded pension from 1 July 2020 until 31 August 2021

As of 1 September 2021, the contributions from social tax to the second pillar were restored.

The Minister of Finance specified the rules for the payment of compensation by the regulation entitled "Detailed rules for the payment of contributions provided for in subsection 67³ (8) of the Funded Pensions Act" (in Estonian).

The compensation payments will be made by the Pension Centre.

All the people born in 1961 and later, from whose payments the contribution to mandatory funded pension (2%) was withdrawn during the period of 1 July 2020 to 31 August 2021, will receive the compensation.

People born between 1942 and 1960 will not receive the compensation since their contribution payments made from social tax to the second pillar were not suspended.

The basis for calculating the compensation is twice the amount of the withheld 2% funded pension payments calculated on the income declared to the Estonian Tax and Customs Board from 1 July 2020 to 31 August 2021 (from TSD tax returns and sole proprietors' income tax return Form E).

Compensation is not calculated on these funded pension payments, which have not been withheld from a person’s income – i.e. the 4% from the average Estonian monthly income taxed with social tax of one parent of a child up to the age of three transferred to a parent’s pension fund is not taken into account (50.95 euros in the year 2021).

For those who continue in the second pillar, also the loss of return will be compensated. The amount of compensation is calculated by multiplying twice the sum of the funded pension contributions by the increase in the average net value of all mandatory pension funds over the period from 1 July 2020 to 31 December 2022.

To people who will withdraw from the second pillar, the compensations are paid out in cash in the same month as the amounts accumulated in the second pillar. The compensation is paid into the same bank account as the amounts accumulated in the second pillar.

The Estonian Tax and Customs Board calculates the amount of the compensation and forwards the information to the Pension Centre for making payments.

Example

In March, the person applies to leave the second pillar in September 2021. On 3 September, the State Pension Centre pays him the money accumulated in the second pillar. On 30 September, the State Pension Centre transfers compensation into the same bank account. The amount of the compensation is twice the amount of the funded pension contributions from the period of July 2020 to August 2021, which was declared on the TSD tax return no later than 10 September 2021.
The imputed return of pension funds is not added to the compensation.
For people remaining in the second pillar, the return will be compensated in 2023 and 2024.

The amount of compensation is transferred into the person’s pension account in two parts – half in 2023 and half in 2024, for which the State Pension Centre will buy the units of the mandatory pension fund or transfer the person's pension to the investment account.

To natural persons

The compensation is calculated by taking into account twice the amount of the funded pension contribution (2%) declared on the TSD tax return for the period of July 2020 to August 2021, i.e. for 14 months.

Data declared on Form TSD can be viewed in the e-services environment e-MTA: Registers and inquiries – My income.

Only tax returns submitted for this period no later than 10 September 2021 will be taken into account. Late submission or corrections of TSD tax returns will not be taken into account.

As the compensation is calculated on the basis of the declared data, employers' tax arrears do not affect the amount of the compensation for a person.

However, if the employer has failed to declare the salary, the compensation will be lower.

Example 1

On the TSD tax return submitted for the period from July 2020 to August 2021, the employer declared that a person's salary is 1000 euros per month and the funded pension contribution withheld from the salary is 20 euros per month.

The declared contributions to the funded pension are thus 14 × 20 = 280 euros for 14 months.

The compensation is twice the amount of the funded pension contributions, i.e. 2 × 280 = 560 euros.

Example 2

On the TSD tax return submitted for the period from July 2020 to December 2020, the employer declared that a person's salary is 600 euros per month and the funded pension contribution withheld from the salary is 12 euros per month.

The Social Insurance Board paid parental benefit of 600 euros to the person in year 2021 and paid 50.95 euros (i.e. 4% of the average Estonian monthly income taxed with social tax) to the person’s pension fund.

Parental benefit is the only taxable income of this person in 2021.

As the 2% contributions to funded pension, which are the basis for calculating the compensation, are not withheld from parental benefit, and this person did not have other income in 2021, he/she will not receive the compensation for 2021.

Payments of year 2020 are the basis for calculating the compensation, i.e. 6 × 12 = 72 euros.

The size of the compensation is twice the amount of the contributions to funded pension, i.e. 2 × 72 = 144 euros.

To sole proprietors

As the period of calculation of sole proprietors' compensation falls within two calendar years:

the amount of compensation is determined on the basis of the income tax return forms E submitted for 2020 and 2021;

the proportion of the amount of the funded pension contributions calculated for the year corresponding to the months in which contributions by the state were suspended is taken into account;

the period during which sole proprietors suspended their contributions to the second pillar (the period from December 2020 onwards) is not taken into account;

after the submission of income tax returns, sole proprietors receive the compensation payments in two instalments: in September 2021 and in May 2022.
 

The compensation for sole proprietors is twice the amount
of 6/12 of the 2020 funded pension contribution plus 8/12 of the 2021 funded pension contribution; or

of 5/11 of the 2020 funded pension contribution, if the sole proprietor suspended contributions to the second pillar since December 2020.


The compensation is calculated on the basis of the income tax return for 2020 submitted/corrected no later than 1 July 2021 and the income tax return for 2021 submitted/corrected no later than 2 May 2022.

If the sole proprietor was also an employee during that period, the compensation is calculated on the basis of both the TSD tax return and the income tax return form E, i.e. the funded pension contributions from the returns are aggregated.

Sole proprietors are compensated as private individuals and this is not reflected in their business income.

Example 1

Based on the sole proprietor's income tax return for 2020, the amount of the funded pension contribution was 240 euros. On the income tax return for 2021, the amount of the funded pension contribution is 192 euros.

The sole proprietor did not suspend his contributions to the second pillar in December 2020.

The compensation payable for 2020 is (6 ÷ 12 × 240) × 2 = 240 euros, and
the compensation payable for 2021 is (8 ÷ 12 × 192) × 2 = 256 euros.

The total amount of compensation is 256 = 496 euros.

Example 2

Based on the sole proprietor's income tax return for 2020, the amount of the funded pension contribution was 176 euros.

The sole proprietor suspended his contributions to the second pillar in December 2020.

The compensation is calculated only for the period during which the sole proprietor contributed to the second pillar, i.e. for 5 months of 2020.

Since, based on the tax return, the contribution to the funded pension was calculated for 11 months, the amount of the compensation is (5 ÷ 11 × 176) × 2 = 160 euros.

The compensation paid upon the withdrawal from the second pillar is taxed in the same way as the payments of the money accumulated in the second pillar.

If the compensation is subject to taxation, the State Pension Centre withholds income tax on the payment.

The receiving of the compensation does not affect the amount of a person's overall tax-free income.

The amounts transferred into the pension accounts of the people remaining in the second pillar are not subject to taxation. The taxation of the compensation depends on how the money is withdrawn from the second pillar.

The compensation is also paid to a person who has become a non-resident at the time of leaving the second pillar. The compensation paid to non-residents is taxed in the same way as their second-pillar payments. Tax rules applicable to non-residents' second-pillar payments

If the compensation is subject to taxation, the State Pension Centre withholds income tax on the payment.

Changing supplementary funded pension fund units or insurance contract surrender value

  • Upon placing the surrender value of supplementary funded pension insurance contract into a voluntary pension fund, the five-year term shall be considered from the date of the earliest date of conclusion of insurance contract.
  • It is possible upon the entry into an insurance contract to carry over the redemption price of the units of a pension fund into insurance premiums without the interruption of the five-year requirement of the collection period.
  • The five-year term shall be deemed to be as of the date of the initial acquisition of the units if it is earlier than the date of entry into the insurance contract. The term is considered as of the earliest date or from the date of entry into the contract or the date of the initial acquisition of the units.
  • Upon the shifting of the accumulation reserve, the contribution made earlier cannot be deducted from the income on taxation of the income because the person had been entitled to receive the tax incentive on that part already earlier.

Life insurance contract with an investment risk

Upon taxation of income received under a life insurance contract with an investment risk (hereinafter ‘insurance contract’) the date of entry into the contract is relevant.

Contract concluded before 1 August 2010

  • In the case of a life insurance contract with an investment risk concluded before 1 August 2010, the amount to be received after 12 years of the conclusion of an insurance contract is exempt of tax.
  • Tax exemption concerning the contracts with the duration of 12 years applies until 31 December 2023. If the disbursement is received within 12 years as of the entry into the insurance contract, the amount received minus insurance premiums paid under the same contract shall be subject to taxation.
    If the payout is made from 1 January 2024, the payments shall be taxed in accordance with the basic principles of securities income (difference between payouts and contributions), which shall be declared in table 5.3 of the income tax return.
  • Tax liability arising from income derived from the life insurance contract concluded before August 2010 may not be deferred. An amount received under the insurance contract (taxable or exempt from tax) may be transferred to an investment account as a contribution for further reinvestments. Disbursements from an investment account in the amount of the contribution are not subject to taxation.

Contract concluded as of 1 August 2010

  • In case of a life insurance contract with an investment risk concluded as of 1 August 2010 there are two options for taxation of income.
  1. If the underlying assets of an insurance contract meet the requirements specified in § 17¹ (2) of the Income Tax Act, a taxpayer may opt for an investment account system.
    If a policyholder has notified an insurer beforehand that an insurance indemnity is received from the financial assets acquired for money in the investment account specified in § 17² (2) of the Income Tax Act, the insurer shall be exempt from an obligation to withhold income tax.
    Upon receipt of a disbursement under an insurance contract it must be transferred to an investment account immediately.
    A person, who has notified the insurer, must keep in mind that if he or she fails to transfer the received amount to the investment account immediately, it shall be regarded as a disbursement from the investment account.
  2. Another option is not to include the insurance contract concluded on 1 August 2010 in the investment account system.
    In this case, payouts are taxed according to the general principles of securities income (difference between payouts and contributions), which are declared in table 5.3 of the income tax return.
    The investment account system is not useful if, for example, the recipient of the payment is the beneficiary or another person who is not the policy holder, both persons must declare the received amount (difference between payouts and contributions) as income.

In general, income tax is not charged on insurance indemnities in the event of accident or death or property insurance. However, if a person has deducted the insurance premiums related to an insured event or the acquisition cost of the insured assets from the business income, the insurance indemnities are subject to taxation in business income.

Payouts made on the basis of a 12-year investment risk life insurance contract concluded before 1 August 2010 are exempt from tax until 31 December 2023. Therefore, if a payout is made from the life insurance contract with an investment risk from 1 January 2024, regardless of the date of conclusion of the contract and the validity of the contract, the payout shall be taxed according to the general principles of securities income, i.e. the difference between payouts and contributions will be taxed with income tax. Such payment shall be declared in table 5.3 of the income tax return.

Last updated: 18.07.2023

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