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What are the three pension pillars?
Latvia pension system consists of three pension pillars complementing each other. The main difference among them is the degree of state involvement in each of these pillars. The state has the highest degree of involvement in the 1st pension pillar, involvement of the person himself/herself is more significant in the 2nd pillar, whereas in the 3rd pillar the responsibility of the state is to ensure more favourable conditions for persons, who have decided to accumulate additional funds for their old age on their own.
Watch the video in Latvian about the pension system here (source: www.manapensija.lv)
How to ensure sufficient savings in each pension pillar?
Savings both in the 1st and 2nd pension pillar are accumulated from your social contributions or tax contributions made from your income. Consequently, the sooner you will start your employment, the longer will be your employment and the period of making tax contributions, and the amount of your pension may largely depend on these periods. You shall take into account that while being on parental leave, having the status of an unemployed or in case of lengthy sickness, significantly lower social contributions are made, and before reaching the retirement your average salary during the period of employment will become an important factor. Therefore, your professional development, your health and your proficiency in managing your finances matter, since all these aspects impact the amount of your pension already today.
You will not receive your contributions made for the 1st pillar savings directly back into your pension, because the actual funds are paid to current pensioners, but the 2nd pillar savings are very real. The share of pension that you will receive from the 2nd pension pillar will also depend on its management and suitability of the selected pension plan, i. e., its appropriateness for your age at the particular period of time, and your willingness to take risks. Moreover, starting from this year assets accrued in the 2nd pension pillar can be inherited; therefore, these savings can also serve as life insurance for protection of your relatives in case unforeseen events occur.
The 3rd pension pillar depends solely on you yourself and your desire to enjoy more pleasant old age than it would be in the case of the state support only. These savings depend only on your desired goal and today's financial capabilities. Contributions into 3rd pension pillar are absolutely voluntary and can be made individually or by the employer. Savings of the 3rd pension pillar, similar to the funds in the 2nd pension pillar, are invested in financial instruments allowing to increase the amount of savings in a long-term perspective.
For example, if you are 40 years old now and you wish for your pension savings to constitute approximately 100 thousand euros at the moment of your retirement, you should make a monthly deposit of approximately 200 euros with the average annual yield of 4 %. If the average annual yield is 2.5 %, the monthly deposit should be increased to 250 euros. But, if you are 50 years old and you start your savings just now, you should make a monthly deposit of at least 450-500 euros even with the average annual yield of 4 %, in order to reach savings of 100 thousand euros by the age of 65. The logic is simple – the sooner you start your savings, the lesser will be the monthly deposit you have to make to achieve your pension savings goal.
If you wish to understand better, what amount of pension you can expect in the future and what you can do already now to be able to enjoy your old age, apply for a consultation with Luminor consultant here and we will help you to choose the most suitable solution for your pension savings.