Pension contributions to 2nd pillar pension funds, when a new pension accumulation agreement is signed or if maximum accumulation was selected in April-November 2013, comprise:
- base contributions transferred to the pension fund by the State Social Insurance Fund (SODRA) from taxes paid to SODRA;
- additional contributions to the pension fund by participants themselves of the amount established by law (note that the payment of these contributions reduces a participant’s net income);
- added contributions from the state budget of the amount established by law.
If minimum accumulation is chosen, the pension only accumulates with the amounts transferred from SODRA. If participants have halted accumulation, money is not transferred to their account and only the already accumulated sum is invested.
Following rules established by the government, SODRA transfers the pension contributions to participants’ chosen pension accumulation companies. A participant can change to a different 2nd pillar pension fund as soon as the first pension contribution is received. Maximum allowable administrative fees are established for 2nd pillar pension funds. Disbursements can begin only when participants reach the age of retirement, though they have the right to delay the start of pension disbursements. Disbursements can begin earlier if a participant is granted an early SODRA pension.
Contributions to 3rd pillar supplementary voluntary pension accumulation funds are made from a participant’s personal resources. Here contributions to a pension fund can also be made by other persons, for instance employers or family members. A participant can simultaneously accumulate savings in several different 3rd pillar pension funds. Legislation does not limit the size of possible deductions from the assets of 3rd pillar pension funds. Disbursements from 3rd pillar pension funds can begin when the age specified in the funds’ rules is reached, but cannot be more than 5 years before the established age for receiving a state social insurance retirement pension. Persons accumulating savings in 3rd pillar pension funds have the right at the end of each year to a refund of part of the income tax they have paid (15 per cent of contributions paid into 3rd pillar pension funds which do not exceed 25 per cent of taxable income). For contributions made on or after 1 January 2017 to which the personal income tax benefit applies, an additional requirement now in effect stipulates that the total amount of eligible expenses reducing taxable income under the benefit may not exceed 2,000 euros.
Participation in the pension accumulation system only reduces the supplementary part of one’s social insurance pension and only for the period in which the person participates in pension accumulation. But there is no reduction of the basic part, which depends solely on length of service as an insured employee, or of the supplementary part of the pension prior to participation in pension accumulation.
Is pension accumulation possible if you work under a business certificate or an authorship agreement or conduct individual activity? What’s the smartest way to accumulate?
All persons can accumulate in 2nd pillar pension funds who are obligatorily insured for the full state social insurance pension. Thus participation in 2nd pillar accumulation is not possible for people who work under business certificates, but is possible for individuals with an individual activity certificate, those working according to an authorship agreement, owners of individual enterprises and agricultural workers. The same rate for SODRA contributions to pension funds is applied to these people as for those with an employment contract. All the persons mentioned can also accumulate in 3rd pillar pension funds, although those working under business certificates are not eligible for a tax refund based on the personal income tax exemption.
Pension fund participants themselves choose what contribution amount they want to pay, and thus also their pension size. Calculations show that current thirty-year-olds who want a pension of at least 70-80 per cent of current income need to allocation 10-15 percent of their current earnings. As the age or retirement nears, getting a bigger pension may require contributing as much as 30 percent of current income. A more exact figure for the future pension when accumulating at a given contribution size can be obtained with the INVL Asset Management pension calculator or by meeting with a pension consultant.
What will happen if I lose my job and for some period am unable to make contributions to the 3rd pillar pension fund?
Pension saving in supplementary (3rd pillar) pension accumulation funds is voluntary, so if you lose your job, contributions can be stopped for some time. If you make fewer contributions, your future pension will be smaller, so once you are employed again it’s recommended that during a corresponding period of time you make larger contributions in order to ensure a pension at 70-80 per cent of current income. The sum of the pension contributions you made during previous periods will increase since the pension fund will earn an investment return.
The size of the accumulating pension is influenced by many factors that are associated with the investment policy of pension funds, the return on investments, the length of the accumulation period, applicable taxes and contribution sizes.
In the 2nd pillar it’s hard to accumulate a bigger amount over a short period because pension accumulation is a long-term process. It’s recommended to start participating in the 2nd pillar before you are 52. If you want to get a bigger pension, you would be wise to choose 3rd pillar supplementary voluntary pension accumulation. And in that case, it’s better to choose balanced pension accumulation funds or those with a small equity portion.
Under what conditions is it possible to cancel a pension accumulation agreement and withdraw the accumulated money?
The laws that regulate pension accumulation in the 2nd pillar do not foresee the possibility of ending participation and withdrawing the money one has accumulated in a pension fund unless the participant is granted an early state social insurance pension. The pension accumulation law only foresees a so-called “reconsideration” period of 30 calendar days from the signing of one’s first pension accumulation agreement, when the participant can cancel the pension accumulation agreement before accumulation has begun.
In the 3rd pillar pension accumulation system, it’s foreseen that the state encourages pension accumulation by of-fering a yearly personal income tax exemption. When accumulating a supplementary pension until the retirement age or until no more than 5 years remain until that age, with accumulation during at least 5 years, and making use of the tax exemption, disbursements from the supplementary voluntary pension fund account will not be taxed, that is, the exempted taxes will not have to be repaid. If the agreement is cancelled earlier, the income tax benefit would have to be repaid, that is, a 15 per cent personal income tax would have to be paid.
Pension fund assets are kept separate from the assets of the pension fund management company, so that if the pension fund management company undergoes reorganisation or even enters bankruptcy, pension fund partici-pants’ accumulated money is protected and transferred to another pension fund management company.
The safety of pension funds investing activity and of the fund itself is also ensured by keeping to the pension fund investing strategy and rules for diversification, which determine what portion of pension fund assets may be invested in securities. The activity of pension funds is supervised by the Bank of Lithuania, which ensures that the activity of pension fund management companies complies with the effective legal norms. The Bank of Lithuania also sets qualification requirements to which the employees of the management company INVL Asset Management must conform. Only licensed companies which meet certain requirements and have been granted a license by the Bank of Lithuania may engage in pension accumulation.
The Bank of Lithuania undertakes supervisory activity to ensure that pension fund participants’ assets are managed and invested safely and in keeping with established requirements, that the company behaves honestly with pension fund participants, that participants get their pension disbursements on time, and that the information provided to them at set times is suitable. To ensure the transparency of pension accumulation companies, they are required to undergo an annual audit of their activities, the results of which are publicly announced. Moreover, a participant has the right at any time to check the status of his or her personal pension account.
The state has by law set strict rules regarding the accumulated assets of pension fund participants. Participants assets are physically separated from those of the pension accumulation company, which does not directly manager them but submits orders to carry out operations, the legality and reasonableness of which is checked by a bank custodian (depository). The accounting of participants’ money is separate from that of the accumulation company’s own assets (accounting separation of assets). Moreover, creditors cannot make any demand on participants’ money for debt obligations of the accumulation company.
It’s established by law that in such a case residents’ accumulated assets are not included in the company’s account – SODRA transfers contributions directly to a special pension fund account so that the company will not be able to use them. Participant’s accumulated assets are physically separated. They are held not in the pension accumulation company itself, but in a special depository bank, which is an important accumulation-system safety link. The activity of the depository is constantly supervised by the Bank of Lithuania. Since the accumulation company does not directly hold participants’ accumulated savings, even in the case of bankruptcy this money will remain safe and will be transferred to a pension fund at another pension accumulation company chosen by the participant. Asset separation is one of the most important guarantees of the safety of participants’ accumulated savings.
If an employer accumulates pensions for employees in 3rd pillar pension funds, to what taxes is the employer subject?
Since 2010, employers that accumulate pensions for their employees in supplementary voluntary pension accumu-lation funds have enjoyed favourable tax conditions:
- A personal income tax exemption: according to the Law on Personal Income Tax, pension contributions paid by an employer on behalf of an employee into a pension account in a pension fund are regarded as untaxed income in kind, so long as during the tax period the contributions do not exceed 25 per cent of the employment compen-sation due to the employee for the period (article 17 section 1 item 14).
- Social insurance tax is not deducted from income in kind that an employee gets from an employer; in other words, since 2010 pension contributions on behalf of employees are not subject to social insurance tax (Law on State Social Insurance article 8 section 1 item 22).
- A profit tax exemption: an employer’s contributions to a pension fund on behalf of an employee are included in allowable deductions, which reduce taxable income (when the contributed sum is accounted for and does not ex-ceed 25 per cent of the employment compensation due to each employee for the period (Law on Corporate In-come Tax chapter V “Allowable Deductions and Deductions of Limited Amounts” article 17 section 1).
Banks and other pension fund management companies work under the same laws. In terms of risk management methods, the products are identical. What’s different are the way products are presented, the product fees and the management strategy. INVL Asset Management prepares an individual pension accumulation solution for each person, explains it, advises what would be better today and what should be done in the future, and so on. Our products are also different in that we select a pension fund for a client based on his or her age, and later recommend that it be changes in terms of the level of risk assumed.