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 information on the pension reform 2021 on the website of the Pension Centre. 

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: mandatory 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.

The following is subject to income tax at the rate of 20%:
  • state pensions
  • to a person before the II pillar retirement age* (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 age** or to a  successor.
The following is subject to income tax at the rate of 10%:
  • a one-time disbursement made at the old-age pension age**** or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy*** .  
  • a one-time disbursement made at the retirement age of 55** and at the old-age pension age**** or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy*** 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 age* or up to 5 years before reaching that age and for III pillar, 55 years of retirement age**, a lifetime pension or a fixed-term pension divided by life expectancy*** payment shall be made periodically at least once every three months.​

What kind of payments 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%, 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 of 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: mandatory 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 age* (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 age** 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 age**** or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy*** .  
  • a one-time disbursement made at the retirement age of 55** and at the old-age pension age**** or up to 5 years before reaching that age or a fixed-term pension with disbursement period shorter than the average life expectancy*** 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.

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

* The retirement age of the II pillar is the retirement age or five years before reaching that age.
** 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.
*** 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 info@pensionikeskus.ee.
**** 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.

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 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 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 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.

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 (IREK) 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.
  • 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.
  • 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. 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.
  • An alternative is not to involve the insurance contract concluded as of 1 August 2010 in the investment account system. In such case the received amount minus insurance premiums paid under the same contract shall be subject to taxation. The investment account system is not practical if, for example, the recipient of a disbursement is a beneficiary or another person – other than an insurer, for both persons must declare the amount received 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.

Last updated: 02.12.2021

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