Pension savings: Funds from the second pillar cannot be transferred to the first before retirement

As in all European countries, pension insurance in Croatia is prescribed as mandatory for all employed persons and for those who perform self-employment as craftsmen, farmers, or in liberal professions. Mandatory pension insurance in Croatia is organized as a combined insurance in two mandatory pillars: in the first pillar, which operates on the principles of generational solidarity, and in the second pillar, which functions on the principles of individual savings of the insured. Insured persons in the second pillar are always insured in the first pension pillar, and they are divided into two groups: those who are mandatorily insured in the second pillar and those who voluntarily chose combined pension insurance.

Mandatory insured persons in the second pillar are those who were under 40 years old in 2002 when this form of pension savings was introduced in Croatia, and all persons who become mandatory insured persons and are under 40 years old at the time of their first entry into insurance. Voluntary insured persons in the second pillar are those who were older than 40 and younger than 50 in 2002 and who voluntarily decided to become insured in the second pension pillar.

Conditions for use

For the first pillar, a contribution is paid at a rate of 15 percent, and for the second pillar at a rate of up to five percent of gross salary or the prescribed base. Funds paid into the first pillar are used for the payment of pensions to current pension beneficiaries, while funds paid into the second pillar are recorded in the personal account of the insured in the mandatory pension fund as their personal savings managed by mandatory pension companies, which generate returns on the financial market for fund members.

Savings in the personal pension account of the second pillar are private property of the insured, but they cannot freely dispose of that property; it can only be used in the manner and for the purposes for which it is intended. It is intended for future pensions, and the insured can dispose of the saved funds at the moment they request the realization of their pension rights.

The conditions for retirement are prescribed by the Pension Insurance Act, and only when a person meets the prescribed age and insurance period conditions, and the insured is in the second pension pillar, and with the additional condition that they voluntarily became insured in the second pillar, can they choose between two options: to receive a combined pension from the first and second pillars or to receive only a pension from the first pillar. In both cases, their personal account in the second pillar is closed, and the funds are transferred to the pension company with which they have contracted the payment of the pension (if they opted for a combined pension) or are transferred to the state budget (if they chose to receive a lifetime pension only from the first pillar).

What is more beneficial

The individual’s decision will depend on what is more favorable for them. In general, it is more beneficial for insured persons who have received salaries significantly higher than average during their working life to choose a combined pension, and conversely, for insured persons who have received lower salaries during their working life, the more favorable choice is only a pension from the first pillar. The pension account in the second pillar is closed, and the saved and capitalized funds are transferred to the pension payer designated by the insured.

In this regard, insured persons who opt for a combined pension, provided that their pension from the first pillar is at least 15 percent higher than the minimum pension, have the right to withdraw 15 percent of the saved funds in a lump sum. The one-time payment of 15 percent of the saved funds is taxed as income tax just like a pension. Once the account in the mandatory pension fund is closed, it cannot be reactivated.

Protected from enforcement

What happens if a person who was insured in the second mandatory pillar before retirement and earns income subject to pension contribution obligations after retirement? If a person is a pension beneficiary only from the first pillar, they pay only the contribution for the first pension pillar on the earnings they earn as a retiree, at a rate of 20 percent from salary or 10 percent from other income. However, if they receive a pension from two payers – a basic pension from the first pillar and a contracted pension from the second pillar – then they also pay contributions for both the first and second pension pillars on the earnings they earn after closing the account in the pension fund. The contribution paid for the second pillar is forwarded to the pension insurance company from which they receive their pension and will be used to increase the pension from the second pillar, as agreed or according to the rules of that pension company. The contribution paid into the first pillar is used for the payment of current pensions.

The assets of mandatory sea insured persons saved in the second pension pillar are protected from enforcement and are not subject to bankruptcy. These protective clauses ensure the purpose of mandatory pension savings. Upon retirement, the personal pension account in the mandatory pension fund is closed, with no possibility of reactivation. If contributions for the second pillar are paid after retirement, the funds are forwarded to the pension insurance company that pays the contracted pension to the beneficiary.