There are various myths in society related to the pension system, its savings and inheritance possibilities. Residents tend to think that retirement is far away and unattainable, however Raivis Vutnāns, financial expert of Luminor banka, emphasizes that it is recommended to think about your old age in time so that the financial future is brighter. Therefore, we will try to dispel the myths existing in society and answer questions about the pension system and its operating principles in Latvia.
Myth: you should think about retirement in old age
One of the most common myths is that while you are still young, you don’t need to think about retirement. However, the expert points out that it can never be too early to start building your pension savings. In Latvia, the pension system consists of three levels – investment in the first two levels is based on social contributions from personal income, while the third level is a voluntary choice of each person, choosing both the amount and frequency of contributions. “We have observed the tendency of residents to more conscientiously evaluate investments in the creation of pension level 3 savings. According to the data of the Bank of Latvia, the contributions made by residents increased by almost a fifth or 18% last year compared to 2022, reaching 91 million euros,” says R. Vutnāns.
Although there is no set best time to start building pension level 3 savings, the sooner you start doing it, the bigger savings you can create for old age. For example, starting to make contributions to the 3rd pension level already after the age of 20, it is possible to accumulate an amount even three times larger than if starting to make contributions after the age of 40, according to the bank’s calculations. If savings are made from the age of 40 to 60 in the amount of 50 euros with a pension plan yield of 5% per year, approximately 20,000 euros will be saved, while if the same savings are made from the age of 20 to the age of 60, the accumulated amount will be approximately 74,000 euros . This is mainly possible due to the law of compound interest, where interest already earned continues to earn new interest.
Myth: it is possible to receive pension level 3 savings only after reaching retirement age
There is an unfounded opinion in the society that it is possible to obtain pension level 3 savings only when the retirement age has been reached. The bank’s expert reminds that a person with level 3 savings can receive a pension from the age of 55, however, there are certain professions that can receive savings earlier. Residents also have the option of choosing how the accumulated amount is paid out – it is possible to receive the entire amount in one payment or to partially withdraw the pension savings.
Myth: Retirement savings are not inheritable
Unfortunately, citizens are often not informed about the possibilities of inheriting pension savings, so they believe that it is impossible to inherit the accumulated funds. The Latvian pension system stipulates that level 1 pensions are not inheritable, however, it is possible to bequeath money accumulated in level 2 and 3 pension funds during your lifetime to your children, spouse or any other relatives. Every citizen is responsible for his own pension savings, so it is important – in order to inherit, a choice must be made. If the client does not choose one of the pension level 2 savings inheritance options, in case of death before retirement age, the savings will be credited to the special state budget. On the other hand, the heirs of level 3 savings receive the pension in accordance with the procedure provided by law, unless the recipient of the accumulated money is separately specified in the contract.
Myth: The pension level 2 investment plan is determined by the bank
Residents often believe that pension level 2 investments depend on the bank and its chosen pension plan. However, the financial expert reminds that everyone has the right to choose the most suitable pension plan and pension funds manager.
“A pension asset manager invests your funds in financial instruments in accordance with the investment policy of the selected pension plan. That is why it is important to choose the most suitable pension plan for you with the greatest possible increase in savings. For example, younger people are advised to choose a riskier strategy with the largest proportion of stocks, because in the long term they tend to provide the best return. However, it should be remembered – a larger proportion of investment in shares is also associated with a greater risk of fluctuations,” emphasizes R. Vutnāns.
