Pension funding target of tax revision

TALLINN - While currently few employers in Estonia make payments into the third pillar pension funds of their employees, next year the situation may change as a result of a legislative amendment, reports Postimees. At the moment, the state views employers’ payments into employees’ pension funds as special benefits and thus they are subject to income tax. From the year 2012 onwards, however, these payments would no longer have to be paid income tax on, with certain limitations. The employer and employee combined can pay up to 6,000 euros per year to third pillar pension funds, or up to 15 percent of the employee’s annual gross pay.

Whereas the state will lose tax revenue on the change, it can afford to feel less concern over the sustainability of the pension system as the payments into the third pillar are likely to increase, commented the CEO of Nordea Pensions Estonia, Angelika Tagel.

“If we were to assume that employers will start making additional payments to wages paid to their employees, the changes will not bring any remarkable decline in revenue in terms of collected income tax,” stated the advisor of the insurance policy department of the Ministry of Finance, Kertu Fedotov. “For the state, this means that at the same time, social tax revenue would be increased; payments will also increase employees’ first and second pillar pensions,” she added.

Fedotov conceded, however, that if the pay cost in total will not increase – i.e. if the payments into pension funds will partially replace current wages – the income tax revenue would fall. “The truth is, people themselves can already use the tax benefit in the same extent if they were to invest 15 percent of their income into third pillar funds,” she added, noting that the legislative amendment did not increase tax benefits, it merely provided the opportunity to share it between employer and employee.
The Ministry of Finance stated that they have not concluded any projections whether employers would start contributing to third pillar pension funds more actively after the amendment.

Chairman of the Confederation of Trade Unions Harri Taliga estimated that it is likely that in the future employers will make third pillar pension fund payments to employees in higher positions, not regular workers.