Over the years your pension savings, there could be thousands of euros accrued in all three pillars. The less you pay attention to those accruals, the more likely you will receive a lower pension in your old days than you could had you known some tips and tricks.
To help you make a thorough decision, in this article we will explain the most common mistakes people make:
According to current government regulations, each month, 15% of your gross salary or other income subject to social contributions is automatically allocated to your first pillar pension, and 5% to your second pillar pension. Working unofficially, receiving illegal income, and not making social contributions means you do not create a financial safety net for cases of illness or unemployment, nor do you build up savings for your pension. Consequently, if you do not make social contributions, you will not accumulate pension savings, and upon reaching retirement age, you may only be eligible for the minimum state-provided pension.
The initial investment plan of the 2nd pension pillar accruals for the people who have just started their careers and social insurance contributions is chosen by the State Social Insurance Agency by random draw. The new member of the investment plan is given two months to inform about the desire to change their investment plan. If it is not being done, then the contributions are being forwarded to the 2nd pension pillar investment plan chosen by the SSIA.
If you have never changed your 2nd pension pillar plan, it is most likely that your money goes to the plan randomly selected by the SSIA, which is not always the best solution, because the long-term return of various pension plans differs greatly. If you don’t know who is managing your 2nd pension pillar accruals, learn how to find that out in our blog “Vai zini, kur katru mēnesi nonāk 5% no tavas algas?”.
Note that you can change your 2nd pension pillar funds’ manager once in a calendar year, and you can switch between the investment plans of each manager twice in a calendar year.
The SSIA statistics for the year 2023 about investments in various 2nd pension pillar plans show that tens of thousands of Latvians have invested their pension accruals in investment plans not suitable for their age, which can have serious impact on the amount of their future pension. In accordance with these data, younger people have been joining more conservative plans that bear lower risks and hence lower chances of high return. However, conservative pension plans are more suitable for those who have less than 10 years left till their retirement, while active plans with higher return possibilities are more suitable for younger people.
Currently, there are seven 2nd pension pillar plan funds’ managers registered in the state funded pension scheme register. Each of them has one or more investment plans, which makes a total choice of more than 25 plans. In order to help you navigate through them, we have summarized the main criteria by which to select the most suitable 2nd pension pillar plan.
Many believe that the 2nd pension pillar accruals are something virtual and do not pay attention to it. People often do not even know who the manager of their accruals is, in which pension plan those accruals are invested and what investment strategy is being applied. Even if you are still young and think your pension is too far to be concerned about it now, you should take a look at the performance of your investment plan in order to assess it and compare to the performance of other plans. Learn more about how to read your 2nd pension pillar account statement..
If you are approaching your retirement age and you have been making social insurance contributions, also to the 2nd pension pillar plan, you should know that by the time you decide to retire you will have to choose one of these two options:
What is lifetime pension insurance? Lifetime pension insurance is a state approved alternative that gives you more control over the disbursements of your 2nd pension pillar capital. By signing the lifetime pension agreement with an insurance company, you will be receiving the state pension, and the lifetime pension, which consists of your 2nd pension pillar accruals, and the 3rd pension pillar accruals if you had made contributions to it.
It has been discovered that the first and the second pension pillar accruals will provide you only 50-60% of the income you had before the retirement. While for maintaining your usual quality of life, your pension should amount to at least 70% of your pre-retirement income. That can be achieved by starting to make voluntary contributions to the 3rd pension pillar and investing this money in the 3rd pension pillar plan managed by the investment manager of your choice. Just like with the 2nd pension pillars, the manager will invest your funds in stock, securities and other financial instruments in order to grow your pension capital. The significant advantage of the 3rd pension pillar is that you can get 20% income tax refund, as well as claim the accrued capital before retirement – as soon as you reach the age of 55.
An alternative to contributions to the third pension pillar could be also making regular investments in other well-diversified financial instruments like mutual funds or index funds.
The most favourable conditions for pension calculation are achieved if you have accumulated at least 30 years of insurance contributions, although the minimum required is 20 years. Therefore, when considering retirement, it is worth checking how many years of contributions you have already accumulated and assessing whether it is sufficient for the most advantageous pension calculation, as the difference could amount to hundreds of euros. For example, if one person has 29 years of contributions and another has 30 years, the pension amount could differ significantly despite similar levels of social contributions, as a different calculation formula would be applied.
Moreover, if you claim your pension with 29 years of pensionable service, but continue working, then upon recalculation of pension after some time there will be only the social insurance contributions taken into account, but not the additional years of pensionable service.
If you have worked in several EU/EEA member-states, have accrued years of pensionable service, and have reached the statutory age of retirement in any of those countries, then you are entitled to receive your pension in those countries. In this case, in order to apply for the old age pension, apply to the state institution in the country you live in or in the country your last place of employment was. Then this country will review your application and collect the documents certifying your social insurance contributions in all countries you have been working before. The amount you will be receiving from each country will comply with the period of pensionable service in each of those countries. Learn more about how the employment in other EU/EEA countries will affect your old age pension..
Unlike the 1st pension pillar that cannot be inherited, the funds accrued in 2nd and 3rd pension pillar belong to you, and you can leave them to your spouse, child or other significant person after your death. So even if you do not live to your retirement, your accruals will do good for someone dear to you.
There are to options how to leave your 2nd pension pillar capital to someone:
* What does the length of the period of insurance include?
In accordance with Section 9 of the "Law On State Pensions" the pensionable service period is the period of time when the person has been an employee or self-employed, for whom there were social insurance contributions made. The pensionable service period includes also periods, when the person has been receiving disability, maternity, parenthood, sickness, and unemployment benefits, as well as other cases provided in the law.