Pension annuities

Which annuity to choose?

It is likely that individuals who contribute to the second pillar pension scheme over a long period will accumulate between EUR 16,785 and EUR 83,926 and will be required to purchase a pension annuity.

A pension annuity is a way of paying out the funds accumulated in the second pillar pension scheme for the remainder of a person’s lifetime. The sole provider of pension annuities is Sodra (the State Social Insurance Fund Board). You may choose from three types of pension annuities:

When choosing a standard pension annuity, the entire amount accumulated in the pension fund is transferred to Sodra, which pays stable annuity benefits on a monthly basis for the rest of the participant’s life. These payments are periodically indexed but are not inheritable.
When choosing an inherited standard pension annuity, the entire accumulated pension fund amount is transferred to Sodra, which pays stable monthly annuity benefits for the rest of the participant’s life. The unpaid portion of the annuity up to the age of 85 is inheritable. These payments are periodically indexed.
When choosing a deferred pension annuity, part of the accumulated pension fund assets is transferred to Sodra, which will pay stable annuity benefits from the age of 85 for the remainder of the participant’s life. These payments are periodically indexed but are not inheritable. Until the age of 85, periodic payments are made by the pension fund management company. Any unpaid portion of these periodic payments continues to be invested and is inheritable if the participant does not reach the age of 85.

3 myths about pension benefits

Unlike the 1^st pillar pension with SODRA, which cannot be inherited, the money saved in the second and 3^rd pillar pension funds belongs to you and is inheritable. The specific amount to be inherited will depend on how much money has been accumulated and on the method of payment chosen, i.e., standard or deferred annuity. If you choose a deferred annuity, most of the accumulated funds (85-90%) can be inherited.

There is no need to worry for a very simple reason. The pension fund’s assets are separated from the company that manages them. So, even if the fund manager goes bankrupt, your money will still remain in the fund, with a new company managing it. The funds’ assets are held in a special bank, the depositary, and the activities of pension funds are supervised by the Bank of Lithuania.

Saving in second pillar pension funds can protect your money against inflation. If you keep your savings in an account or under a mattress, inflation will simply eat them away. Another important point is that long-term pension savings have compound interest effects. With periodic investments, as markets rise, more and more money accumulates and earns interest, so the amount starts to grow not only on the amount deposited but also on the interest earned. So the earlier you start saving and the longer you do it, the more you will save for your retirement. Of course, when calculating potential future earnings, you need to bear in mind that markets are constantly fluctuating and the value of money is also affected by inflation, which is likely to reduce the real value of money.