A] The Pension System
The Finnish pension system has three pillars:
- Pillar 1: State Pensions;
- Pillar 2: Occupational Pensions;
- Pillar 3: Private Pensions & Wealth.
In every day practice however the system is based on two complementary pension plans: The National Pension Public Plan and the Mandatory Occupational Pension Plan.
Voluntary Occupational Plans and Private Pension Plans are not that well developed. Employer specific or voluntary pensions or pensions based on labour market agreements are rare in Finland. This is because there is no upper limit to the amount of earnings that the pension is based on in the statutory pension system.
The system is furthermore prepared for mortality change. The earned pension capital is adjusted to life expectancy and the lowest age limit of the flexible retirement age will be adapted so that the ratio of expected years in employment and retirement is fixed after year 2030. Postponed withdrawal of pensions is rewarded in an actuarially fair manner.
B] Pillar 1: State Pensions
The State Pension includes two kind of coverages:
- The National Pension;
- The Guarantee Pension.
Both pensions secure the pensioner’s income only if their Pillar 2 earnings related pension is small or not existing.
50% of all pensioners receive a National Pension. The number of pensioners receiving a National Pension has reduced due to legal changes and an increase in the level of the earnings related pensions.
Slightly over 100.000 pensioners or 8% of all pensioners receive a Guarantee Pension.
The National Pension
The National Pension may be granted to a person who lives in Finland and who has lived in the country for at least three years after reaching age 16.
If necessary insurance periods earned in other countries are taken into consideration when the EU Regulation on social security is applied.
If the residence requirements are met but the applicant or the deceased has lived in Finland for less than 80% of the time between the age 16 and the start of the pension, the National Pension is proportioned to the length of time that the individual has lived in Finland.
Under certain conditions, pensions and compensations from abroad reduce the amount of the National Pension.
The Guarantee Pension
The Guarantee Pension improves the economic welfare of low-income pensioners.
If the pensioner’s total gross national and earnings-related pensions amount to less than the lower pension income level stated in the law, the difference is paid in the form of a Guarantee Pension.
In 2021, the gross monthly pension income limit for the Guarantee Pension is € 837,59.
The following qualify for a Guarantee Pension:
- A person as of age 62 who receives an (early) old-age pension;
- A person who gets a pension from the system based on the act on Farmers’ Early Retirement Aid;
- An immigrant who has turned age 65.
The pension is funded by means of general taxation.
The National Pension
The National Pension amount depends on how long you have lived in Finland between the ages of 16 and 65 and how much occupational pension claims you might have.
The general level of the full National and Guarantee Pension is 25% of the average earnings of Finnish wage earners.
The National Pension and the Earnings-Related Pension are integrated into one total pension. Each euro of the Earnings-Related Pension reduces the full National Pension by 50 cents, until the Earnings-Related Pension reaches such a level that the National Pension is no longer granted.
Full National Pension Per Months in 2021
Status Full National Pension Pillar 2 Pension with no Pillar 1 Pension
- Single € 665,29 As of € 1.373,30
- Married/Partner € 593,97 As of € 1.230,63
When calculating the National Pension, the following income is taken into account:
- A voluntary pension arrangement paid by the employer;
- A reduction for early retirement of the old-age pension of the earnings-related pension scheme;
- A partial reduction for early retirement of the earnings-related pension.
Under certain conditions, pensions and other benefits paid from abroad reduce the amount of the National Pension. An Earnings-Related Pension paid from an EU Member State reduces the amount of the National Pension in the same way as the Finnish Earnings-Related Pension does when the EU Regulation on social security is applied.
The Guarantee Pension
If the pensioner’s total gross national and earnings-related pensions amount to less than the lower pension income level stated in the law, the difference is paid as Guarantee Pension.
In 2021, the gross monthly pension income limit for the Guarantee Pension is € 837.59,-.
V. Retirement Age
The general retirement age for the National Pension is age 65.
You can start to claim your National Pension as of age 63 which would also decrease the annual amount of your gross lifelong pension. Then the monthly pension will be reduced by 0,4% for each month from the month in which the pension is taken out to the month in which the individual reaches their retirement age.
If the old-age pension is postponed to begin later than the beginning of the month following the individual’s 65th birthday, the National Pension will be increased by 0,6% for each month. The increase is calculated for each month that the pension is postponed.
The pension can be postponed for an unlimited number of months. However, the National Pension is not increased for the months for which the applicant is not entitled to a National Pension after age 65.
C] Pillar 2: Occupational Pensions
I. The Structure
Mandatory earnings-related pension is earned by your paid work and entrepreneurial activities.
It is the responsibility of an employer to take out a retirement pension insurance policy for all their employees and to pay the insurance premiums.
An entrepreneur takes care of his own insurance premiums.
We can distinguish these providers:
- Pension Insurance Companies : Max 299 employees
- Pension Funds : Min 300 employees
- Pension Foundations : Min 300 employees
These providers are independently acting as private sector financial institutions.
Pension Insurance Companies: Group Insurance Plans
A very large number of mandatory and voluntary occupational pension plans are provided by Insurance Companies and by Group Insurance Contracts.
The pension market in Finland is highly insurance oriented with insurance companies holding 85% of all occupational pension assets. Which are controlled by a small number of local insurance companies.
Employers have to choose Group Insurance Contracts if they have fewer than 300 employees covered by a plan.
Pension Funds/Pension Foundations
Pension Funds/Foundations account for 15% of the voluntary occupational pension assets.
A Pension Foundation manages the contributions from employees of one single employer.
A Pension Fund covers the employees of several companies, normally in one particular industry. In both cases at least 300 members are required to create such a plan.
In general full funding of pension liabilities is required for new plans and an adjustment period applies for established ones.
III. Mandatory Versus Voluntary Plan
Mandatory Occupational Pensions
The statutory earnings related occupational pension insurance is the backbone of the Finnish pension system. Which is partially pay-as-you-go-financed and partly funded.
Earnings related pension provision is governed by several acts, each covering a certain group of employees such as:
- Private Sector Employees;
- Public Sector Employees;
In 2007, the pension acts for employees were unified into one act, the Employees Pension Act (TyEL). Which covers more than 66% of the insured workers in the total private sector.
The earnings related pension is financed by contributions paid by both employers and employees. Under TyEL, contributions are unequally split between the employer and the employee. Employees aged between 18 and 52 pay 4,1% and those aged 53+ pay 5,2%.
The employer bears the remaining premium. The precise contribution percentage for the employer depends on its size. The basis is the total wages bill. The employer takes out pension insurance for the employees with the pension company of his choice.
Voluntary Occupational Pensions
Due to the strong mandatory occupational plans, voluntary occupational pension plans in Finland are less common than in other European countries. These plans apply to only 15% of the workforce and mainly executives.
Voluntary plans often simply involve paying additional contributions into the mandatory plan.
Voluntary occupational plans are guaranteed based Defined Benefit (DB) plans with the same accrual rates as the earnings related part of the state pension system.
Employee contributions usually amount to 3% of the wages. However, some plans only require employer contributions.
Employers and employees finance earnings related pension cover together. The employer collects their employees’ contribution from their pay and renders this and their own share of the insurance fee to the pension institution.
The amount of earnings related pension depends on how long you have worked and how high your wages have been.
Employees begin to accrue pension as of age 17 and for self employed persons as of age 18.
A pension reform came into force in 2017. Which means that employees and self employed persons begin to accrue earnings related pension at a rate of 1,5% of their annual employment earnings or self employed persons’ employment income.
However, there is a transition period of 2017-2025 when the annual accrual for persons aged 53-62 is 1,7% of employment earnings or self-employed persons’ employment income.
When a pension is granted, the accrued pension is adjusted by a life expectancy coefficient, which adjusts pensions to the increase in life expectancy.
VI. Retirement Age
There are upper and lower age limits for different age groups.
You can retire on earnings related pension at the lowest pensionable age for your age group aged between 63-65.
If you continue working after the lowest pensionable age, you can accrue further pension up to the upper age limit of the insurance obligation, i.e. until the age of 68-70.
If you do not take your pension at the lowest pensionable age, you will receive an increase for later retirement. Old-age pension can begin when your employment relationship has ended. You can, however, continue working in another employment relationship or as a self-employed person.
Following the pensions reform of 2017, pensionable age limits will increase gradually in time.
D] Pillar 3: Voluntary Private Pensions
Voluntary Private Pension Plans are not that well developed.
One of the reasons thereof is that there is no maximum to the amount of Pension Earning Wages in regular pension plans. Which to a certain extent decreases the need for additional private pensions.
E] Occupational Pension Oversight
Finanssivalvonta or the Financial Supervisory Authority (FIN-FSA) is the authority for supervision of Finland’s financial and insurance sectors.
The entities supervised by the authority include banks, insurance and pension companies as well as other companies operating in the insurance sector, investment firms, fund management companies and the Helsinki Stock Exchange.
The objective of these activities is to enable balanced operations of credit institutions, insurance and pension companies and other supervised entities in stable financial markets.
The FSA’s objective is also to protect the rights of the insured and foster public confidence in financial market operations. In addition, they are responsible for promoting compliance with good practice in financial markets and disseminating general knowledge about the markets. These objectives and duties have been included in the Act on the Financial Supervisory Authority.
The Employee Pension Institutions Division of the Financial Supervisory Authority is responsible for supervising the solvency of employee pension companies, company pension funds, insurance funds and statutory pension institutions. In addition, they participate actively in the preparation and enforcement of regulations relating to pension institutions.
II. More Information
For more information please visit: https://www.finanssivalvonta.fi/en/about-the-fin-fsa/
F] Retirement Age
Individuals have the choice to retire in an age bracket between 63 and 69, but there are in a typical Finnish manner strong financial incentives to retire later.
Early retirement is possible as of the age of 62 linked to reductions of the pension income accounting for 0,6% per month.
The Finnish parliament is trying to encourage later retirement to ensure that the state pension provides sufficient funding.
G] Pay-Out Flexibility
It is typical Finnish that the retirement age is flexible and that the pension amount increases as the chosen retirement age increases.
The manner of pay-out is based on a lifelong annuity and no Lump Sum options.
H] Pensions & Tax
Private sector pensions are financed by contributions collected from employers and employees. Contributions are deductible in income taxation, pensions are taxable.
There is no tax on the yields of the funds during the build up period.
Entrepreneurs have similar benefit rules but they have flexibility in declaring the amount of labour income and thus can influence the paid contributions and accrued benefits. In addition, government supports their pensions.
II. Tax Rates
2021 Taxable Income Rate
- € 0,- - € 18.600,- 0 %
- € 18.600,- - € 27.900,- 6 %
- € 27.900,- - € 45.900,- 17,25 %
- € 45.900,- - € 80.500,- 21,25 %
- As of € 80.500,- 31,25 %
I] International Pensions
I. State Pensions
Retire In Finland
If you have lived or worked in another country, you may be entitled to a pension from that country.
If you have resided or worked in other EU countries or in countries with which Finland has a Social Security Agreement, you might be eligible to receive pension from these countries.
You can apply for pension from these countries at the same time as you apply for Finnish earnings-related or National Pension. Attach to your application a separate form called Residence and Employment Abroad. You can print the form at the website of Kela or the Finnish Centre for Pensions.
If you have worked in a country with which Finland does not have a Social Security Agreement, you must find out for yourself if you are eligible to receive pension from that country. If you are entitled to receive pension, you have to apply for it yourself.
The Finnish Centre for Pension will give you advice for applying for pensions abroad. You can read more on the website of the Finnish Centre for Pension. You can also ask for advice at Kela.
If you work and pay tax in Finland, then you will earn a Finnish State Retirement Pension. You are entitled to the pension even if you live in another country.
Always notify Kela (the Social Insurance Institution of Finland) if you move abroad permanently or reside in a foreign country for more than three months.
If your residence abroad is temporary, i.e. less than one year, Kela will usually continue to pay your pension normally.
In some cases Kela may continue to pay for example old-age and family pension to some countries even if you move there for more than a year. These countries include for example other EU and EEA member states and some of the countries with which Finland has a Social Security Agreement.
Guarantee Pension will not be paid if you move abroad for more than one year.
The Kela website contains further information on incidences when you can receive Kela pensions abroad. You can also ask about your situation at a Kela office or telephone service.
If you live within the EU, you should contact the pension authority in the country where you live to apply for a Finnish pension.
II. Occupational Pensions
The pay-out from Finnish occupational pensions abroad is in general no problem. A transfer of value from these claims abroad is not always possbile. Maybe this might change due to new EU legislation.
If you leave Finland, you will be paid earnings-related pension accrued in Finland when you reach retirement age. Earnings-related pension can be paid to any country. It is important that you have a testimonial of service for each contract of employment you have had in Finland. Payslips should also be kept.
The way in which you should apply for pension to be paid abroad depends on your country of residence. You can contact your pension institution or the Finnish Centre for Pensions for advice.
Before applying for pension, request a Pension Record from your pension institution or the Finnish Centre for Pensions. The pension record indicates how much pension you have accumulated in Finland.
III. International Tax
When you receive pensions from a country in which you do not live, you should check a possibly existing Double Tax Treaty between those countries. Which prevents and/or mitigates double taxation at residence and at source.
If there is no such treaty, you can only check the existence of unilateral legislation with the same purpose.
J] UK Pension Claims & QROPS
Expats with a UK Occcupational Pension Claim often hear that it is very attractive to transfer their UK claim to a QROPS pension plan.
QROPS stands for ‘Qualifying Recognised Overseas Pension Scheme. A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered pension schemes in the UK.
The initial idea of a QROPS was to get the value out of the UK without paying any UK tax on the transfer value. Which is now not always possible.
To qualify as a QROPS the scheme must meet the requirements set by UK tax law. For example being available to residents in that country and not being accessible before age 55 unless under special circumstances.
If you are interested in such a QROPS transfer, please make sure that a specialist looks into all relevant aspects. Among which there are the following questions:
- Would it result in a much lower tax exposure or would it increase substantially?
- Are the related QROPS costs not too high?
- Is the related transfer capital big enough to earn back the extra costs?
- Are the available investment funds of a quality level?
- Does your advisor have financial benefit from such a transfer by getting a percentage of the transfer value? (For Dutch advisors this is prohibited by law, fortunately.)
K] News February 2021
Study: Finnish Women Worried About Retirement Income
Finns are worried about the retirement income of low-income retirees in particular. Retirees’ income gaps and the availability of reasonably-priced social and health services also cause concern. A recent study by the Finnish Centre for Pensions reveals that women are more worried about pension issues than men.
According to the study, 75% of the Finns are worried about the livelihood of low-income retirees. Women are more worried than men.
“80% of the women and only 66% of the men are worried about their income in retirement. The gender gap is clear”, says senior researcher Mrs. Liisa Maria Palomäki of the Finnish Centre for Pensions.
Mrs. Palomäki estimates that the worry about pension adequacy may be linked to women’s, on average, lower pension level. The low pension level is often due to women’s lower earnings. The income gap between retirees and the risks relating to pension asset investments also worry women more often than men.
“The thought of being a low-income retiree oneself may be reflected in women’s more general worry about the income gap between retirees and the livelihood of low-income retirees”, Mrs. Palomäki explains.
Continued Trust In The Pension System
Regardless of the worries, 70% of the respondents find the pension system to be reliable.
The older age groups, those in a relationship, the more highly educated and those who felt in good health trust the pension system more than the others.
“This study confirms the results of previous surveys on trust. Those with less worries about their economic and employment situation more commonly trust the pension system”, Mrs. Palomäki states.
That said, Mrs. Palomäki sees contradictions in the trust of the Finns. “Although the majority trusts in the pension system, only 25% finds it to be fair or clear.”
Women, those who feel in poor health and those with a lower educational level found the pension system to be fair less often than did the others. They are also more critical regarding pension adequacy.
According to the survey conducted by the Finnish Centre for Pensions, the trust in pension asset investments and the views on investment risks are linked to the general trust in the pension system. Those Finns who find pension asset management to be trustworthy also tend to trust the pension system more often. Similarly, those who are less worried about the investment risks find pensions to be more reliable.