The Slovak pension scheme is based on three separate pillars. Mandatory public pillar (1st pillar), old-age pension saving system (2nd pillar) and tax deductible voluntary saving/insurance schemes, supported by the state (3rd pillar).
1st pillar – old age insurance
The old age insurance is a compulsory statutory insurance, with the participation of beneficiaries established directly by law. As of today, the contributions to old age insurance amount to 18 % of the assessment base, with the corresponding legislative restriction in the given year. The pension amount and the pension entitlement depend on the number of years and the amount of contributions.
The current (2021) rule is that the retirement pension entitlement is accrued after 15 years of old age insurance period.
Benefits paid from the old age insurance:
early retirement pension,
surviving dependant’s pension,
I am not going to details here, as you can find all information on Slovak social insurance agency website here.
2nd pillar – voluntarily compulsory – old age pension saving
Persons who had been insured in frame of the old age insurance (1st pillar) at least once may decide to enter the 2nd pillar by the age of 35. Once you have entered the 2nd pillar, it is not possible to withdraw. Entering the 2nd pillar does not change the amount of contributions; rather, the contributions are re-distributed, partially into the 1st pillar (aprox. 13%) and partially into the 2nd pillar (around 5%).
Savers opting to save in the 2nd pillar will thus receive pension from two sources. An advantage of 2nd pillar is the fact that the money saved belong to the saver directly, and in case of their death it is inherited by their rightful heirs or a beneficiary appointed in the contract.
Currently, there are 5 pension management companies in Slovakia. Pension management companies are obliged to manage one guaranteed bond pension fund (monetary and bond investments) and one non-guaranteed share pension fund (investment strategies related to investing into a series of instruments including shares).
They may also create pension funds with specific investment strategies.
You may want to seek out the assistance of a financial advisor who will help you choose the right strategy and explain in detail the differences in valorisation of individual funds.
3nd pillar – voluntary – supplementary pension saving
Supplementary pension saving represents a voluntary, so-called 3rd pillar of the pension scheme, with the funds of participants being administered by supplementary pension management companies.
Entering the 3rd pillar is mandatory for employees performing hazardous work and their employer is required to conclude an employer contract with a supplementary pension management company of the employee’s choice within 30 days. Entering the 3rd pillar is voluntary for all other employees and persons above 18 years of age.
As of today, there are 4 supplementary pension management companies in Slovakia. Every supplementary pension management company is obliged to create and manage one pay supplementary pension fund and at least one contributory supplementary pension fund. When choosing a specific supplementary pension fund, it is recommended to compare the investment strategy of the given fund with the investment ambitions of the participant in question.
Does it pay for you to establish the 3rd pillar? Or rather, if you are leaving your employer who had provided the 3rd pillar for you, is it worth keeping contributing to? Your personal financial advisor would be happy to answer these questions for you.
Entrepreneurs and pension saving. What is more profitable – paying contributions to the government or investing?
Based on the Slovak pension scheme, you must complete a 15 years of old age insurance period to receive your pension.
Also, you cannot receive your pension before reaching 63 years of age.
Almost three fourths of self-employed persons pay the lowest pension contributions possible, amounting to EUR 181/month. As an entrepreneur, you will thus have contributed with the amount of EUR 32 580 after 15 years.
The current minimum pension amounts to EUR 334.30. However, in the future there will not be sufficient funds to ensure the current level of pensions.
While the average retirement pension nowadays amounts to approximately EUR 500 a month, a significant decrease is to be expected in the future. The average pension of today’s employees will be approximately 20 – 30 % lower than nowadays – and these are employees, who will be paying contributions to the pension scheme over the course of their whole life amounting to more than double the amount compared to the average self-employed person.
The minimum pension will not save you
The minimum pension will be a consolation prize of many self-employed persons. Its aim is to provide an income in retirement amounting to a level which ensures that the pensioner is not reliant on aid in material need. All persons who completed at least 30 years of employment are entitled to the minimum pension.
Will a minimum pension of EUR 334.30 be enough though? Ask yourself: Would it be enough for you today?
I do not think so.
Provide for yourself in retirement
If you want to avoid poverty in old age, you need to take care of it yourself.
You do not need to accrue large savings to ensure a sufficient income in retirement. If you can earn a few hundred Euro more compared to regular permanent employment thanks to low contributions and taxes, make sure to set a part of this amount aside. If you invest EUR 150 regularly, 30 years later, you will have earned about EUR 160 000.
Combined with the minimum pension, you may thus be much better off than most employees. Also, the pension amount will not depend on whims of the future generation of politicians, who may deprive you of a peaceful old age after decades of employment history with a stroke of a pen. No one can take the money you have saved in your account. Unfortunately, this is not the case with pensions.
Where to invest
When saving or investing for pension purposes, the general rule is that the earlier you start, the less it costs to obtain the amount required. In long-term saving, the profit results from accruing interest on interest as well.
An advantage of long-term investment is also the fact that we can benefit from funds which bring high gains in the long term but are not worth investing in over a period of few years only, as they tend to be highly volatile.
That means that the value of investment may significantly increase as well as decrease. Investing in shares, however, has always been profitable in the long term up until now. So-called ETF funds are also suitable for pension saving.
These are index funds based on a chosen equity index and compared to regular mutual funds, they are not subject to significant intervention by their administrator. As they are passively managed, the related costs are lower as well, which is why the investors pay lower fees.
If you are interested in calculation of pension you are currently eligible for or defining an investment strategy to provide for yourself in your old age, please do not hesitate to contact me.