Do you still believe in the state pension?

The topic of pensions is sacred in our society. Any mention of pension payments in a politician’s election campaign can make or break him. Pensions are an untouchable topic. However, given that pension payments constitute one of the largest expenditure items in the state budget, it will become increasingly difficult to get around this “elephant”. Moreover, the demographic situation clearly indicates that the volume of contributions to the pension fund will become smaller, and payments – greater.

Everyone has their own reasons for not using these opportunities, but the result will be the same – a state pension. Naive hope for changing the system looks unconvincing. Relying on one’s own strength and personal savings is a very risky plan, and there is no logic at all in distrust of the system.

I stage

Moreover, the situation can be aggravated not only by a reduction in the volume of income in the first pillar, but also by the behavior of future generations. If, for example, the second pillar becomes more popular, then the first pillar will receive even less money to pay state pensions.

Yes, when distributed from the first pillar, his share will also be smaller, but he can count on his personal second pillar, where savings correspond to his personal contributions, while the size of payments from the first pillar depends not only on the person’s contributions, but also on the total income in this cauldron of political decisions.

II degree

20% of the social tax that the employer pays for the employee goes towards savings in the first pillar, but if there is a second pillar, then 16% of this social tax payment goes to the first pillar, and 4% to the second. This results in a kind of diversification of risks – dependence on the state pension is slightly, but reduced.

Secondly, if there is a second pillar, in addition to 4%, a person also contributes 2% of his gross salary there. This contribution can be increased to 4 or 6 percent. It is important to note that these contributions go entirely into the piggy bank and no income tax is withheld from them. A trifle, as they say, but an additional bonus to your savings.

You can, of course, remember that II pillar money is invested in one way or another, and this is always an additional risk, and this is the honest truth. Whereas, for example, payments from the first pillar are indexed every year, and there is no risk of loss.

The remark is fair, but controversial. The owner of the second pillar has the opportunity to determine the amount of risk when choosing investment funds – today there are 26 funds, as well as the opportunity to use an Investment Pension Account, where a person manages his own pension savings and invests them at his discretion in any exchange-traded assets.

In the case of a state pension, a person has no choice, and the future indexation of payments from the first pillar by 80% will depend on the receipts of social tax into this common pot, as well as the political decisions of the ruling coalitions. And today politicians are already talking about suspending the indexation of pensions.

But the second pillar also recently acquired one risk, which was also facilitated by politicians – it is now possible to withdraw all the money from this piggy bank at any time. It is not easy to resist such a temptation, especially for those who already do not have an additional financial cushion. It would be good if these savings were used to purchase a valuable asset or pay off debts. But there is no doubt that in some cases these savings will simply disappear without a trace. But we admit that this is a risk that completely depends on the person himself.

III degree

The risks of stage III are the same as in stage II – investment risk and the ability to withdraw the accumulated amount at any time. But here, too, there are 17 funds and/or independent investment to choose from.

An additional benefit of the third pillar is a refund of income tax on the amount contributed, which cannot exceed 15% of gross income or 6,000 thousand euros. That is, no matter how your investments behave at this stage, you will definitely get back 20% of the amount you deposited. In the near future it will already be 22%.

Moreover, in pillar II, the length of the accumulation period is of great importance, since contributions are initially small. For example, a person over 50 years old before retirement age will hardly be able to collect in this piggy bank an amount that will somehow greatly affect his increase in pension. Whereas, having joined the third pillar, a person will receive an income tax refund within a year, and thanks to larger contributions, the amount towards the pension can be more impressive. In addition, you can continue to make contributions to the third pillar even after reaching retirement age, if at the same time you continue to work and pay income tax.

Efficient piggy banks

The main idea of ​​the II and III pillars is that today a person is slowly beginning to save for his own retirement, since current trends indicate that the state will not be able to bear this burden in the future.

To stimulate this process, the state offers various tax incentives. At the same time, the conservative approach of most pension funds may not promise great returns, but it has a much better chance of protecting the value of your capital from inflation, as well as protecting it from unwise actions. That is, these are two piggy banks that compare favorably with other forms of accumulation with their higher efficiency and protection.

Another approach practiced by the state is increasing the retirement age. To some extent, this will help relieve the pension system a little, but it is unlikely to save it. On the other hand, this should also be regarded as another form of motivation. In order to receive a state pension, you must live to a certain age. But even despite the increase in life expectancy, it is impossible to predict how many years a person will live in retirement. The state pension from the first pillar will be paid until the end of a person’s life, and this is its undeniable advantage. However, it cannot be inherited if the person did not have time to take full advantage of this advantage.

Stages II and III, on the other hand, are inherited. That is, everything that a person has accumulated will remain “in the family” under any circumstances. Moreover, if overall savings inspire confidence in the future, then you can retire early without waiting for retirement age. In this case, of course, the state pension will be less, but if the accumulated funds allow, then you can simply not work and live on savings until retirement age, and then receive the full state pension.

In any case, pillars II and III provide not only tax benefits and obvious financial benefits, but also more freedom of choice and action.

If you have doubts caused by distrust in the system, then relying solely on stage I is the strangest decision. The state pension depends on the system and political decisions much more than the more personalized piggy banks in the form of II and III pillars.

Of course, you can start saving and investing on your own. However, there is a huge range of risks here, from scammers to bad investment decisions, which have a much greater potential to leave you broke in retirement than II and III pillar pension funds.