Retirement, 2nd pillar

While with the first pillar you can do very little to influence the overall results of your retirement, the situation is somewhat different when it comes to the second pillar.

The second pillar is still obligatory but there is a measure of choice about it that will likely end up giving some people much bigger or smaller retirement accounts.

Essentially it’s mandated that 2% of your salary will go into your retirement account and the state will match it with 4% (taking that away from the first pillar), meaning that for all intents and purposes you get 6% into your second pillar every year. It sounds a bit better on paper than the situation is in reality.

Choosing between bad choices

There is a whole wide range of different retirement funds that you can choose from. DIfferent banks offer generally at least 4 funds which are different in terms of their risk level (essentially stock-bonds ratio).

While having the option to choose is great, then it becomes a bit less useful when most choices are just plain bad. The funds have very high expense ratios (though they have gone down a bit), their returns have been abysmal and cashing out of the fund is so complicated and handled by insurance providers that some people will definitely end up having terrible deals.

The benefits and downsides of the 2nd pillar

There are some reasons why I like the second pillar. Mostly because it will force everyone to save some money at least. The first pillar will likely get smaller and smaller as time goes on, so the importance of the 2nd pillar for my generation is quite high.

The second pillar however suffers from a similar problem as the first – it’s heavily dependent on the amount of money you make. This means that people who live in poverty now will also be in poverty in the future. The differences between people’s wealth will carry off into retirement and some parents might end up being incredible financial burdens on their children due to not having enough money in the 2nd pillar.

My experience with the 2nd pillar

2ndpillar

At first I had a terrible 2nd pillar fund that I finally got rid of when I started working full time. The fund I have now is doing OK compared to others on the market, but the net gain over the years is still negative when you take into account inflation. I have little faith that it will ever come close to the stock market’s historic return and I’m a bit saddened that we don’t have the American 401k system where I would be able to make the choices of what to do with my money.

There is a pretty big lack of social discussion about what to do with the 2nd pillar. As it stands now, it’s quite close to being an absolute failure. People don’t believe that they’ll get proper returns and that really keeps them from getting into investing. If you don’t pick your own 2nd pillar fund, then you will get one assigned randomly – that happens to several thousand people every year!

To make the second pillar work, this is what I’d like to see:

– increase the cap for investments (like, maybe max 10%)

– the government match should not come from the 1st pillar

– allow people more individual choice (why can’t I just choose a passive index fund instead of a badly managed active one?)

– drastically lower the maintenance fees to competitive levels with index funds (really, some funds had 2% fees at start!)

– allow for different exit strategies beyond the current insurance contract

5 thoughts on “Retirement, 2nd pillar

    1. You can start taking out money from the second pillar once you’ve hit the official retirement age. For both the first and the second pillar you can decide to take money out later as well, that just means your monthly payments will be bigger. Or you can start taking out money only from the first or the second, it’s your call. (There are some specific terms for people who do early retirement due to health reasons, but that is brutal to your retirement payments.)
      For the second pillar you have to sign a contract with an insurance provider who will essentially assess your risk levels and potential life span and base the payments on that – this means if you’re healthy and from a long-lived family then they payments will be pretty small. If you live longer than expected then the insurance company will take a loss on you, but some people will die earlier than expected so that’s going to balance out.
      As far as taxation goes, currently, for pensioners the tax-free limit is 354€/month (the 144 that workers get + 210 for pensioners). Any money beyond that will be taxed like regular income.

      1. Knowing the insurance companies, I’m pretty sure that people will be more likely to lose from this than get more than they earned pension.

        There are a few exceptions where if you have a lot more or a lot less than most people in your pension, then you can take the money out directly without insurance agreement, but that won’t be usable for the majority of people.

        The biggest problem that I see, is that the pension is not inheritable and neither will it be used for the first pillar or anything else that would help with the pensions in the future. Everything will simply go to the insurance company instead. Unless you pay the insurance company and reduce your payments to get a “guaranteed payment period” during which at least some of the money would be paid out to your spouse/children if you die before the period.

        Essentially you gather the pension for your entire life and then if you die 2 years after going to the pension, it all goes to the insurance company and good luck to your children.

        I personally think that this is one of the stupidest ideas to buy insurance once you already have gathered all the money you need to take some of it away, but what can you do…

        It would make more sense if the pension payments would be insurance payments in the first place and that would guarantee everyone a decent pension in their pension time, irregardless of how much they’ve earned during the working years. Of course that would bring in the question of whether the insurance company would still exist by that time 😀

        1. There is some retirement clause in the 2nd pillar I’m sure. Though I think that was the case if a parent died before starting the payments.
          But I agree, the whole insurance company operated payment system is silly. At least it would be nice to be able to opt out. Since you can’t gather money into the 2nd pillar once you’ve started to cash out… while with traditional investments you’d only take out as much as you need and let the rest grow.

          1. There actually is some scheme that they have to add some of the profits to your pension if they earn from investing your money during the time you’re on pension, but I’m not sure how or if it works.

            I only found out about this part because Swedbank was complaining that it’s unfair towards the insurance company because they might lose money on another year and yearly payments aren’t fair in that case.

            Of course the fact that they force an insurance on people who already have the money that they need and take a portion of this away in fees and other costs, is fair :)

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