In Slovakia, there is a 3 Pillar pension scheme. It was established in 2004 with the goal to avoid creating an income of the future pensioners form the single source, because we as population have been growing older. The number of working people has been decreasing, while the number of pensioners has been increasing. The latest study pointed out, that in 2070, the average age will have increased up to 60-64 years in men and 55-59 years in women. In comparison to 2019, we are facing a 5-year decrease. 1
Because of the expected dysfunction of the current pension scheme, we recommend to all future pensioners to create their own financial reserves, on top of the pension scheme.
Second Pillar allows citizens to:
- create their own reserves, not only in the Social Insurance Agency (SIA)
- save up obligatory contributions – these contributions are not
- savings be part of the heritage – in case of the premature death of the saver could help the family significantly
- choose the funds – we recommend the index funds as they are one of the most lucrative
- gain so called interest on interest
- gain the savings right after retirement starts
Third Pillar allows you to:
- create your own pension reserves
- gain the employer contribution
- apply for a tax withdrawal up to 180€ yearly
- gain the tax contributions
- as the contributions are higher and the fond efficiency is lower, we recommend to apply for Third Pillar only if the employer offers contributions
BASIC INFORMATION ABOUT THE SLOVAKIAN PENSION SYSTEM2
1st Pillar – consist of a mandatory pension insurance, contributed by every employee from their income. These financial means are continuously (during that year) used for pensions for today’s pensioners.
2nd Pillar - old age pension saving defined by contributions and capital funded insurance administered by pension fund management companies. The contributions are invested in the pension funds, managed by the fund managers. The obligatory contributions of 18% are divided into two parts, please refer to the part old age pension contributions. 2nd Pillar contributions are part of heritage.
Old age pension saving and pension insurance (1st Pillar) form a fundamental pension system and they secure its contributors a retirement income and heritage in case of death.
III. Pillar - voluntary supplementary pension saving defined by contributions and capital funded insurance administered by supplementary pension companies. This Pillar is mostly used as an employer benefit, which distributed to the employee’s account according to the pre-set conditions. This benefit is a private property. And the employer can include this benefit to their tax expenses, however only up to 6% of the employee’s taxed income.
ENTERING II. PILLAR
According to the Amendment from 1. May 2023, everyone who enters job market after 1. May 2023, is automatically entering II. Pillar. The savers have 2 years to decide whether they exit or stay in II. Pillar. The savers can choose the management company of their liking for 6 months, in other case the Social Insurance Agency (SIA) automatically chooses the management company..
People, younger than 40 years, who entered job market before 1. May 2023, is the entering voluntary.
The saver can change the management company once a year.
INVESTMENT STRATEGY AND PENSION FUNDS OF II. PILLAR
According to the Slovak law, every pension management company is obliged to manage one guaranteed bond fund and one non-guaranteed stock fund. At the same time, management companies can offer unlimited number of non-guaranteed funds – stock, mixed, index funds and so on. Every management company shares their information prospects and status of the fund on their websites.
The saver has option to choose the fund, in case he chooses saving in 2 funds in the frame of his investment strategy, one fund must be guaranteed bond fund. The strategy can be changed during the whole time of saving.
With changes valid from 1. May 2023, the so-called default investment strategy came into action.3 It is valid for passive and new savers. The principle being, 100% savings are invested index fund until reaching 50 years of age. After 50 years of age, the savings arrangement is being changed. 4% of savings are being transferred to guaranteed stock fund.
Passive savers are those, who have done none active decision since their savings were transferred to the bond guaranteed fund in 2013.
WHAT THE FUTURE BRINGS?
We have been witnessing a problematic pay out of pensions from the Social Insurance Agency (SIA) in the recent years. According to the statistical data, we know the ratio of working population and pensioners is decreasing, meaning the contribution to the social system have been decreasing, however the costs have been increasing. That is the reason why we need to get prepared for retirement today and enter II. and III. Pillars. And on top, also create our own savings. How to start investing with a small budget is explained here.
Do you need individual approach to your finances? Do not hesitate to contact us.
Your ProFin Experts team! Translated by Barbora Zemko Zuzaniaková
