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Taxation of pensions
We recommend that you 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 for contributions to III pillar.
The table below helps to understand which pension-related payments are exempt from tax and which payments are taxed from 1 January 2021.
I pillar: state pension |
II Pillar: funded pension |
III pillar: supplementary funded pension |
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Before reaching pensionable age, a person has the right to flexible old-age pension. |
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Income tax at the rate of 22%: |
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Income tax at the rate of 10%: |
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Exempt from tax is: |
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Which payments affect the basic exemption (up to 7,848 euros per year)?Valid until 31.12.2025 |
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| 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 pensionable age, which are subject to income tax at the rate of 22%, and disbursements made to a successor are considered annual income and affect the calculation of a person's basic exemption. | |
Which payments do not affect the basic exemption (up to 7,848 euros per year)?Valid until 31.12.2025 |
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| do not reduce a person's basic exemption. | ||
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Overview of taxation of II and III pension pillar payments and calculation of basic exemption until 31 December 2025
| II pillar | Income tax |
Counts as annual income Valid until |
Affects the calculation of annual basic exemption Valid until |
On the tax return | Must be declared |
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| Single withdrawal before pensionable age | 22% | 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 Valid until |
Affects the calculation of annual basic exemption Valid until |
On the tax return | Must be declared |
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| Single withdrawal before pensionable age | 22% | 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 |
Transfers within pillar II or III
Transfers within the second (II) pension pillar, including transfers of insurance pension or fund pension money to a pension investment account, are not considered payments and such transfers are not subject to income tax (based on subsection 2 of § 20¹ of the Income Tax Act).
Transfers within the third (III) pillar are not considered payments and such transfers do not entail income tax liability (subsection 1¹ of § 21 of the Income Tax Act).
Notes
1 The pensionable age of the II pillar is the pensionable age or five years before reaching that age.
2 The pensionable age for those who joined the III pillar before 2020 is 55 years, and for those who have joined from 2021, the pensionable age is similar to the II pillar.
3 The pensionable age is calculated according to the year of birth (more information in the article "Retirement age" on the website of the Social Insurance Board). Pensions under favourable conditions do not change taxation.
4 Short-term pension – shorter than long-term pension, i.e. shorter than the average fixed-term pension divided over the years left to live.
5 Long-term pension – a fixed-term pension divided over at least the average number of years left to live, which 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 website of the Pension Centre or by e-mail at [email protected].
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 22%.
- 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 22%.
- 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 |
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When making mandatory funded pension payments, the following may be applied:
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When making supplementary funded pension payments, the following may be applied:
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In case of a pension contract:
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In case of an insurance contract:
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| Under the pension contract, pension is paid until the death of the pensioner or, in the case of fixed-term pension, until the term, and after that, no further payments will be made to the successors. | Under the insurance contract, pension is paid until the death of the policyholder, and after that, no further payments will be made to the successors. |
SpecificityIn 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 will be made:
A one-time disbursement or payments made until the end of the guarantee period to the beneficiary are subject to income tax at the rate of 22%. If the beneficiary has a pension contract or a pension account opened for II pillar (the pension account opened for III pillar is not suitable), he or she may transfer this amount as an additional insurance premium to his or her pension contract, pension fund or pension investment account and this transfer will not be subject to income tax. If a person (beneficiary) reaches pensionable age and receives his/her own pension, the pension is exempt from income tax or subject to income tax at the rate of 10%, depending on the conditions. If a person (beneficiary) withdraws money before reaching pensionable age, the payment is subject to income tax at the standard rate, which is 22%. |
In the case of the third pillar, neither the Funded Pensions Act nor the Income Tax Act provide for the possibility of transferring money from the deceased person's third pillar insurance contract to the beneficiary's third pillar insurance contract or acquiring units of a third pillar pension fund for it without income tax being withheld in the meantime. This is because subsections 51 and 53 of § 63 of the Funded Pensions Act apply only to the policyholder and subsection 8 of § 63 of the Funded Pensions Act provides that in the event of the policyholder's death, payments will be made to the beneficiary designated by him or her in accordance with the terms and conditions specified in the supplementary funded pension insurance contract. Therefore, in the case of the third pillar, this entry is considered a payment to the beneficiary and income tax must be withheld from it. |
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In case of a fund pension:
In the event of death of a unit-holder of a pension fund:
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In the event of the death of the policyholder before the start of pension payments, it is possible that the beneficiary will be paid the accumulated reserve from the insurance contract. |
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In case the successor has joined mandatory funded pension or receives mandatory funded pension himself/herself, the successor has the right:
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The successor has the right:
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| A one-time disbursement made to a successor is subject to income tax at the rate of 22%. | |
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In case the successor transfers the inherited fund units to his/her pension account, he/she is entitled to receive at the II pillar pension age:
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In case the successor transfers the inherited fund units to his/her pension account, he/she is entitled to receive at the III pillar pension age:
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In case the successor has not joined the mandatory funded pension, the successor has the right to:
A one-time disbursement made to the successor is subject to income tax at the rate of 22%. |
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| In the event of 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. | |
I pillar: state pension |
II Pillar: funded pension |
III pillar: supplementary funded pension |
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The following is subject to income tax at the rate of 22%: |
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| 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%: |
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| 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: |
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Read more: Tax exemptions for non-residents arising from tax treaties.
After reaching the age of 55 (if pension fund units were first purchased before 1 January 20212), at pensionable age or up to 5 years before reaching pensionable age, a 10% income tax is levied on
- a one-off payment or
- a payment of short-term pension4 ,
if the accumulation period has lasted at least five years. The rules for calculating the five-year period are set out in § 21 of the Income Tax Act.
The five-year period is calculated from
- the date of entry into an insurance contract with an insurance undertaking holding an activity licence issued in a Contracting State (including Estonia) or
- the date of initial acquisition of units in a voluntary pension fund operating in a Contracting State (including Estonia) or
- the entry into a pan-European Personal Pension Product (PEPP) contract.
Section 21 of the Income Tax Act provides for exceptions:
- If a partial payment under another contract or the surrender value of a cancelled contract has been used for paying an insurance premium under an insurance contract for a supplementary funded pension, the five-year term is calculated as of the entry into the earlier of the above contracts.
- If an insurance contract for a supplementary funded pension has been entered into for the redemption price of the units of a voluntary pension fund, the five-year term is calculated as of the initial acquisition by the policyholder of the units of the voluntary pension fund if it took place earlier than the entry into the contract.
- If units of a voluntary pension fund have been acquired for a partial payment under an insurance contract for a supplementary funded pension or for the surrender value of a cancelled contract, the five-year term is calculated as of the entry into the contract if the unit-holder entered into the contract earlier than the initial acquisition of the units of the voluntary pension fund.
- If a PEPP contract has been entered into in the course of switching the PEPP provider or modifying the investment option, the five-year term is calculated as of the entry into the earlier of the above contracts.
Income tax at a rate of 10% is also levied on
- payments made upon liquidation of a insurance undertaking;
- payments made from the voluntary pension fund upon liquidation of the pension fund;
- payments made to the PEPP saver upon liquidation of the PEPP provider.
For the purposes of the Income Tax Act, a unit-linked life insurance contract is deemed to be a contract where the investment risk related to the underlying assets thereof is borne, in accordance with the insurance contract, by the policyholder and where the preservation of the nominal value of the insurance premiums paid for the acquisition of the underlying assets is not guaranteed (Subsection 8 of § 17¹ of the Income Tax Act).
The rules for taxing payments made under unit-linked life insurance contract (Subsection 3 of § 20 of the Income Tax Act) changed on 1 August 2010. Under contracts concluded before 1 August 2010, tax-exempt payments could be made until 31 December 2023. Payments made from 1 January 2024 are taxed according to the general principles of securities income (the difference between payments and contributions).
The Income Tax Act provides two options for taxing income received under a unit-linked life insurance contract (NB! for contracts concluded from 1 August 2020):
1. Include unit-linked life insurance contract in the investment account system
If the underlying assets of the unit-linked life insurance contract meet the conditions set out in subsection 2 of § 17¹ of the Income Tax Act, a person may choose between an investment account or a pension investment account system.
If the policyholder has previously notified the insurance undertaking that the insurance indemnity is received from financial assets acquired with money held in an investment account referred to in § 17² of the Income Tax Act, the insurance undertaking is exempt from the obligation to withhold income tax.
Upon receipt of a payment under a unit-linked life insurance contract, it must be transferred immediately to an investment account or pension investment account. If the payment is not received in the investment account, it must be declared and taxed as a payment from the investment account or pension investment account.
NB! Tax liability on income received from an unit-linked life insurance contract concluded before 1 August 2010 cannot be deferred. The amount received from a unit-linked life insurance contract can be transferred to an investment account as a deposit for further investment. Payments from investment accounts are not taxed to the extent of the contribution amount.
2. Tax income received under a unit-linked life insurance contract in the so-called standard system
Under the standard system, income tax is levied on the amount paid to the policyholder, insured person, or beneficiary under a unit-linked life insurance contract, from which the insurance premiums paid on the basis of the same contract have been deducted (based on subsection 3 of § 20 of the Income Tax Act).
Therefore, the insurance undertaking taxes the difference between the payments and the contributions with income tax. The insurance undertaking must withhold income tax from the payment (based on subsection 6 of § 41 of the Income Tax Act). If the insurance undertaking has withheld income tax, the data will be pre-filled in table 5.3 of the person's income tax return.
Insurance sums and indemnities paid under standard life insurance contracts (i.e. insurance against death or accident or endowment insurance that is not a unit-linked life insurance contract within the meaning of subsection 8 of § 17¹of the Income Tax Act) and under property insurance contracts are not subject to income tax (pursuant to subsection 5 of § 20 of the Income Tax Act).
Insurance indemnity paid in the event of a property insurance claim is subject to income tax only if the recipient of the indemnity is a self-employed person (FIE) and has deducted the insurance premiums or the costs of acquiring the insured property from their income (pursuant to subsection 4 of § 20 of the Income Tax Act). A self-employed person declares the insurance indemnity received as business income, such as income from the sale of property. If a self-employed person purchases new property for their business with the indemnity, they have the right to deduct the purchase price of the property from their income, and as a result, the self-employed person will not have any income tax liability.
Last updated: 13.02.2026
