The third pillar

The third pillar was the first voluntary, private option for long-term retirement saving. Several supplementary pension insurance companies were set up in Slovakia as early as the late 1990s. After a change in legislation, these were transformed into the supplementary pension companies (DDS) we know today.

Investing through a DDS is essentially the same as investing through mutual funds. Many small investors direct their payments there, and the funds pool them and invest them on the financial markets. That in itself is a good idea. However, in the Slovak market, with its low competition, third-pillar funds are inefficient at managing assets and charge excessively high fees for their service.

ADVANTAGES OF THE THIRD PILLAR

1. Employer contribution

The fact that your employer contributes to your third pillar is the only tangible advantage of the third pillar. If your employer does not contribute, get out of the third pillar as soon as possible.

For the employer, contributions to the third pillar are a tax-deductible expense up to a maximum of 6% of the employee’s gross wage. In practice, employers contribute around 2% of the gross wage on condition that the employee also contributes the same amount.

2. Your money

The money saved in the third pillar is your personal property and can therefore be inherited.

3. Inheritance

Since the investments in the third pillar are your money, your heirs will inherit them.

4. Tax advantage for the saver

A taxpayer’s contributions to supplementary pension saving can be deducted from the tax base up to a maximum of €180 a year. At a 19% tax rate, you can “save” €34.20 a year in tax. Or you can see it as a return of 19% on the amount paid in, i.e. on the €180.

DISADVANTAGES OF THE THIRD PILLAR

Fees in the third pillar are high. The maximum permitted by law is 1.2%, and all funds except one actually charge that maximum. On top of that comes 10% of the returns. So if a fund increases the value of your money by 3%, it will charge you a further 0.3% in fees.

Fees are therefore one of the main reasons for the poor performance of funds in the third pension pillar.

ENTITLEMENT TO A THIRD-PILLAR PENSION

You can apply for payment of a supplementary old-age pension, i.e. a third-pillar pension, if:

• a) you have become entitled to the payment of a pension from the Social Insurance Agency (Sociálna poisťovňa),
• b) you have become entitled to the payment of an early old-age pension from the Social Insurance Agency,
• c) you have reached the age of 62,
• d) a participant who has an old contract (concluded before 2014) and has paid contributions for 120 months is entitled to third-pillar benefits as soon as they reach the age of 55.