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|  Pension system in Lithuania

Pension system in Lithuania


Pension accumulation system – what is it?

Why is it necessary?

Who can participate in the pension accumulation system?

What amount of contributions may be transferred to the accumulative pension?

How will the social insurance old-age pension change for those who participate?

What benefit will you get from a pension fund?

What happens if you stop paying contributions?

How to become a participant in the pension accumulation system?

What will happen if you do not decide to participate in the pension accumulation system?



Pension accumulation system – what is it?

 The pension accumulation system opens a possibility for everyone who pays social insurance contributions to accumulate assets for the future pension.

Now the pensions for the working people who pay social insurance contributions are guaranteed by state social insurance system and private pension funds. Those participating in pension accumulation system will receive the pensions from both sources.

Social insurance system is based on the solidarity of generations – when paying contributions to SoDra, we support our parents and grandparents; when we reach our retirement age – our children will pay for our pensions. By transferring the contributions to the pension funds, everybody of us will accumulate pension for our own old age – the pension will be paid from the assets accumulated in our personal account.

Social insurance contributions are paid every month and then, pensions, sickness, unemployment and other allowances are paid from these contributions. The contributions that are transferred to the pension funds are accumulated – securities and other assets are bought for it, interest is received and reinvested. When old-age retirement age comes, a monthly benefit – pension for life, or in other words, annuity will be bought for the accumulated sum. Voluntary life insurance, which is offered by life insurance companies, is based on the same principle. If you participate in the pension accumulation system part of your social security contributions will be transferred to the chosen pension fund, you will pay additional contributions from your salary and receive the contribution from the state budget.  

 After start of pension accumulation system in 2004 pension system in Lithuania has the following constituent parts:
- State social pension insurance;
- Pension accumulation for old-age from social insurance contributions in pension funds;
- Supplementary accumulation for pension in life-insurance companies or pension funds;
Invalidity and widow/-er pensions will be assigned and paid only by State Social Insurance Fund Board (SoDra).

 

Why is it necessary?

Lithuanian society, just like in other European states, is getting older. It happens because of the low fertility rate and high life expectancy. State constantly faces a problem of welfare of the elderly people, because the “pie” of the contributions paid by the present taxpayers has to be divided among the increasing number of elderly people. This problem should be solved by introducing a pension accumulation system, when the person himself/herself would accumulate money for his/her own pension.

People who accumulate a part from the contributions and the additional contribution from his/her salary would receive higher pensions because, as a rule, the average investment return is higher than the salary growth rate. In the pension accumulation system the amount of benefits will depend on the contributions paid. This should encourage people to pay insurance contributions for their pensions.  

 If  no such system was introduced, the state would have to increase the retirement age or social insurance contributions. Both decisions would affect the society and the economy in a negative way – working force would become more expensive, emigration would increase and there would also be increase of the number of old-age invalidity pension receivers or the pre-pension age unemployed people.

From 2004 when the pension accumulation reform started to the 2008 Lithuania had positive conditions for introducing a new pension accumulation system. There was an increasing number of taxpayers, thus the income to the budget was increasing as well. Although after Lithuania was affected by the Global financial crisis the contributions to private pension funds was reduced that also reduced possibility of accumulating significant funds in them. After the new rates of contributions to the pension accumulation funds were established in 2012 and after the additional contributions from the participant’s salary and the state budget will start to be transferred to the pension funds there will again be the possibilities for participants to accumulate the significant funds.


Who can participate in the pension accumulation system?

 All people, who pay contributions for the whole social insurance pension and who have not yet reached the old-age pension age, may choose transferring a part of social insurance contributions to the pension funds and accumulate for their future pension.

Every month 34% contributions from a person’s salary are paid for social insurance: 3% are paid by the employee and 30.98% by the employer. A person who pays contributions is insured by state health insurance for the old age, sickness, maternity, and unemployment or in cases of accidents at work. When a person reaches old-age pension age or if a disability strikes, he/she will get a pension. If a person loses the job, gives birth to a child, gets ill or suffers an injury at work, he/she will receive an allowance, health care and employment services.

The largest part of social insurance contributions is dedicated for the financing of pensions (26.3% from the salary). Those who pay the contributions are insured for the whole social insurance pension (base and supplementary part) and can participate in the pension accumulation system.

Those who only pay contributions for the base pension may participate in the accumulation system only voluntarily by paying additional contributions.  


What amount of contributions may be transferred to the accumulative pension?

 The part of the contribution for the pension accumulation was increasing gradually: from 2.5% in 2004 until 5.5% in 2007. In 2009 it was lowered to 3% and then to 2%. In 2012 it will be lowered again to 1.5% but increased to 2.5% at 2013.

 From the year 2014 2% of the person’s salary will be transferred to the pension fund from the social security contributions. The employer will also transfer additional 1% of contributions from the person’s salary to the pension fund and the contributions equal to the 1% of the average salary of the year before last.

 From the 2016 the additional contributions from the person’s salary will rise to 2%. The rate of contributions from the state budget will also rise to the 2%. From the year 2020 the rate of contributions from the social security contributions will also rise and equal 3.5% of person’s salary.

How will the old-age pension be formed if a person participates in the new pension accumulation system?
 

Year

2004

2005

2006

2007-2008

2009.01-2009.06 2009.07-2009.12 2010-2011 2012

2013

 2014-2015

2016-2019 

2020- 

Contributions to „SoDra”

31.5%

30.5%

29.5%

28.5%

37% 38% 38% 38.5%

37.5%

 38%

 38%

 36,5%

Part of social insurance contributions transfered to your account in a pension fund

2.5%

3.5%

4.5%

5.5%

3% 2% 2% 1.5%

2.5%

 2%

2% 

 3.5%

 Additional payment to the pension fund from person's salary

 -

 -

 -

 -

 -  -  -  -

 -

 1%

 2%

 2%

 Additional payment paid to the pension fund from the state budget*

 -

 -

 -

 -

 -  -  -  -

 -

1% 

 2%

 2%

*Calculated as part of the average wage of the state of the year before last.

 The persons that are already participating in the pension accumulation can choose if they want to continue the accumulation according to the new rules in the year 2013. From 1 April 2013 to the 30 November 2013 the person can write a request to the pension accumulation company to either pay the additional contributions from his/her salary to the pension accumulation fund or terminate the transfers of contributions. If the transfers of contributions to the pension fund will be terminated the sum already transferred will remain in the pension fund and be invested till the retirement age. By default, the persons that will not write a request will transfer to the pension fund only the part of the social security contributions.

 The new participants that will sign the pension accumulation agreements after the 1 January 2013 will not have the possibility to accumulate only the part of the social security contributions and will only accumulate the pension transferring the additional contributions from his/her salary and receiving the contributions from the state budget.

 The participants in the pension accumulation system receive their pension from two sources – SoDra and private pension funds.

The amount of accumulated pension depends on the amount of the contributions paid and the period of accumulation – the bigger the contributions and the longer the period, the more one can accumulate. The amount of the interest earned by the pension funds is also important, so the participant should pay attention when choosing the right pension fund.

 

 

Therefore, for younger people who start to accumulate and get the salary that is larger than average, the total pension amount (form SoDra and a pension fund) should be higher than if he did not participate in the accumulation system and received only one pension.

The pension calculator, prepared by the Ministry of Social Security and Labour will help to decide to accumulate a pension in the pension funds or not for those who are older and have lower income. When entering your year of birth, present and anticipated salary and choosing the economic assumptions in the calculator, one may find out the amount of future pension paid by the SoDra and the private pension fund annuity. 

How will the social insurance old-age pension change for those who participate?

 Social insurance pension consist of three parts – the main (or base pension), premium for extra work record and the supplementary part. The amount of the base pension depends only on the insurance period and if a person has the required social insurance period (now 30 years), he/she receives the full amount (110% of state social insurance basic pension). Premium for extra work record is paid for the people that have work record longer than 30 years. Supplementary part depends on both the insurance period and the contributions paid. It is calculated according to a formula established by the law.

When a smaller amount of contributions is paid to SoDra, only the supplementary part decreases – this does not influence the size of a base pension and Premium for extra work record. Also, it does not decrease for the period when you did not participate in pension accumulation. A supplementary pension part for the period of participation is decreased according to the proportion between the part of social security contributions paid to the pension fund and contributions for the social insurance supplementary pension part.

Due to your participation in the new pension accumulation system, other social insurance benefits (sickness, maternity, unemployment, labour accidents) will not change. Only the old-age pension is decreased. If a pension accumulation participant becomes disabled, looses his/her spouse, disability or widow/-er pensions is not reduced. 

What benefit will you get from a pension fund?

Since accumulation is for the old-age pension, the benefit from a pension fund is paid only when a person reaches his/her old-age pension age, the same as for the social insurance pension.

With the assets accumulated in a pension fund, a person has to buy a monthly pension benefit paid for life – annuity. These benefits would be paid by the life insurance company chosen by person, where he/she would conclude annuity payment agreement. The accumulated amount would be transferred to the account of this company, which would undertake the commitment of paying the agreed annuity for life. If the sum left after person‘s death can be inherited depends on the type of annuity the person chooses – with or without the inheritance rights.

The participants who have accumulated less than is required to purchase an annuity that is worth at least half of base pension have the right to receive the accumulated assets as a lump sum or as periodic benefit payments. This may happen if the accumulation starts late, when only several years are left until pension age or if there were long periods when the contributions were not paid. On the other hand, if the accumulated amount is very large (larger than is needed to purchase a triple size base pension annuity), the participant will have the right to receive the exceeding sum as a lump sum or as periodic benefit payments.



What happens if you stop paying contributions?

Even in case you stop paying contributions for some time or stop paying at all (if you loose job, leave the country, become invalid), your accumulated assets will still be invested in a pension fund and wait until you reach your retirement age. If you start working again, you will not have to make any new decisions – the contributions will start flowing into your account in the chosen pension fund. If you terminate the trasfers to the pension fund in the year 2013 you will could only resume the accumulation in the 1 January 2014 by writing the request to the pension accumulation company.

  If the employer will not transfer social insurance contributions to SoDra or the additional contributions from your salary, accumulative contributions will still be transferred to your accumulative account and SoDra will make debt exactions from the employer.

If the worst happens – you die before pension age, the accumulated assets will be inherited because these are your assets. 



How to become a participant in the pension accumulation system?

It is very simple to become a participant in the new pension accumulation system – you just have to sign a pension accumulation agreement with the chosen pension accumulation company. This company would inform SoDra about your decision. The employer would continue to transfer the contributions to SoDra as usual and transfer the additional contribution from your salary. SoDra will transfer the part of the social insurance contributions and additional contributions from your salary to your pension accumulation company. A pension accumulation company would inform you about the amount of contributions transferred in your name and the amount earned.

We advise you to think carefully when choosing a pension accumulation company, read the rules of a pension fund you are about to choose.
  

What will happen if you do not decide to participate in the pension accumulation system?

 You can sign a pension accumulation agreement anytime you start working and paying the social insurance contributions. The contributions will start to be transferred to pension fund at the third month after the registering your pension accumulation agreement.

 Folk wisdom reminds: Measure thrice and cut once. This decision is very important for you – it may influence your future, thus you have to think it over.

 The pension accumulation system will not influence the pension of those people who cannot participate or have decided not to participate. The payments and increases of these pensions are guaranteed by the state. When a part of contributions is transferred to the pension funds, the assets lost by SoDra will be compensated from the state’s budget and used for paying present pensions.

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