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Pension and insurance indemnities


The Estonian pension system consists of three pillars: state pension, mandatory funded pension and 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* (incl. 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%:
 
  • the one-time disbursement made at the old-age pension age**** or up to 5 years before reaching that age.
  • 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 if the collection period has lasted at least five years.
Tax free is:
  • work capability allowance paid by the Unemployment Insurance Fund

  • to a person with no work ability (regardless of age, võib olla ühekordne või perioodiline);

  • 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%,
  • 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* (incl. 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.
     

Maksulepingu rakendamine (artikkel 18 „Pensionid") võib anda maksuvabastuse. Maksulepingu rakendamine (artikkel 13 „Kasu vara võõrandamisest") annab maksuvabastuse, s.t väljamakset Eestis tulumaksuga ei maksustata. Maksuvabastuse kohaldamiseks peab inimene esitama residentsustõendi Maksu- ja Tolliametile.
The following is subject to income tax at the rate of 10%:
 
  • the one-time disbursement made to a non-resident at the old-age pension age**** or up to 5 years before reaching that age.
  • 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 if the collection period has lasted at least five years.
  Maksulepingu rakendamine (artikkel 18 „Pensionid") võib anda maksuvabastuse. Maksuvabastuse kohaldamiseks peab inimene esitama residentsustõendi Maksu- ja Tolliametile. Maksulepingu rakendamine (artikkel 21 „Muu tulu") võib anda maksuvabastuse. Maksuvabastuse kohaldamiseks peab inimene esitama residentsustõendi Maksu- ja Tolliametile.

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

* 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.

 

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.

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.

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 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.
 

16.09.2021