Thinking about your pension accruals, you should know that to the great extent it is only and solely our individual responsibility, how big our pension will be. Working unofficially, receiving envelope wages and avoiding to make social insurance contributions, you will not be making any accrual for your pension. So, when you reach your retirement, it is likely that you will be only entitled to the state’s minimum pension. Therefore, it is important to be prudent and make deliberate effort to form your pension accruals starting today.

Pension system in Latvia

In order to understand, how your pension accruals are formed, you should know that there is three-pillar pension system in Latvia. In accordance with the effective legislation, every month 14% of your gross salary or other taxable income automatically go to 1st pension pillar, 6% – go to 2nd pension pillar, while the contributions to the 3rd pension pillar are voluntary. Each of these pillars has a significant role in your pension accruals.

What to do to have at least 1000 EUR pension when you retire?

A simple way to get a perspective on the potential amount of your pensionis to use the pension calculator. If you are an economically active citizen, making contributions to pension accruals, you just need to enter your information, like age, net monthly salary and existing amounts of pension accruals in all three pillars, and you will get the estimated result.

Using this calculator, you can find out how big your contributions should be in order to receive 1000 EUR pension when you retire.

For example, assuming you are 25 years old right now, your salary is 1000 EUR after taxes, while the current pension accruals in the 1st pension pillar amount to 2000 EUR, in the 2nd pillar – 800 EUR, and 500 EUR in the 3rd pillar, and you are also making at least 25 EUR contributions to your third pension pillar every month, then the estimated pension for you could be 1126.70 EUR.

So, in order to receive at least 1126.70 EUR, every month you need to make the following contributions:

• 140 EUR to the 1st pension pillar and 60 EUR to the 2nd pension pillar (increasing these amounts every year in arithmetic progression on average by 4.21%)
• 25 EUR to the 3rd pension pillar

The calculations assume the following information:

• The 1st pension pillar is indexed assuming that nominal level of capital indexation is 3.53% per year.
• Nominal return of the 2nd pension pillar and of the 3rd pension pillar is 5.06% per year.
• Contributions to the 1st and 2nd pillars are allocated in accordance with existing laws and regulations.
• Average nominal wage growth is 4.21% per year.
• Inflation rate is 2.00% per annum.

Obviously, this calculation is rather theoretical since your salary, inflation levels, as well as the actual return on pension plan, may differ from those used in these calculations. The pension forecast estimates are affected by the current laws and regulations, for example, regarding indexation of the 1st pension pillar capital.

Your pension should constitute at least 70% of your pre-retirement income

It is assumed that the first and second pension pillar capital together will ensure only about 50-60% of your pre-retirement income level. However, to retain the quality of life you are used to, your pension should constitute at least 70% of your pre-retirement incomeYou can achieve that by making voluntary contributions to the 3rd pension pillar and investing this money into the 3rd pension pillar plan of the fund manager of your choice.

Just like it happens in the 2nd pension pillar, the manager will invest your money in stock, securities and other financial instruments in order to make your pension capital grow. A significant advantage of the 3rd pillar is that you can apply for 20% tax refund from your contributions and claim the accrued capital before retirement – already when you reach the age of 55.