Thinking about your future and planning your own old age is a completely rational approach to life. And in Western countries, this desire of citizens has been fully supported by current legislation for many decades. In Russia, pension reform has been around for a long time, a little over a decade. Despite this, many working citizens still cannot understand what the funded and insurance part of the pension is, and, therefore, how much security awaits them in old age. In order to understand this issue, you need to read the following information below.
Background to the pension system
Until 2002, the calculation of citizens' pensions was carried out according to the "principle of solidarity", which has been used since the days of the USSR. Abroad, such a distribution system was called "pay as you go", which in translation into Russian means "pay while you go." The essence of this system was that the pension contributions of all working citizens of the country were distributed among people who are on a well-deserved rest at the moment. This approach was quite logical and justified, but only until the moment when the pension burden began to increase rapidly. Previously, the minimum amount of security for one pensioner was assigned to 2 - 2.5 working people, but with the deterioration of the demographic situation in the country, this figure rapidly decreased. And, according to experts, already in 2020 this ratio will be 1: 1.
In addition, contributions to the insurance part of the pension, which are deducted by working citizens in the Pension Fund, for the state fulfill the function of investments in modernizing the country's economy. By changing the pension legislation, the state not only ensures the future of its people, but also receives a substantial injection of capital in its own development.
The essence of reform and the formation of a retirement pension
Since 2002, 4 laws have entered into force that regulate the balanced operation of the pension system. However, it is impossible to talk about cardinal changes, in accordance with the content of these documents, since they are a smooth transition from the distribution system that existed earlier to the distribution and storage system.
Since the entry into force of new legislation, the formation of a retirement pension is carried out in the OPS system (compulsory pension insurance), and it consists of three main parts: insurance, basic and funded. As for the size of the pension provision for citizens, it is calculated according to the formula established by federal legislation.
In general, the reform allowed citizens of the Russian Federation to independently regulate the size of their pensions, increasing their own savings with the help of private management companies or specialized non-state pension funds.
The main problem of pensioners
Despite the fact that the pension reform in Russia has been operating for a long time, many pensioners and working citizens have not yet figured out what the funded and insurance part of the pension is. And, therefore, they cannot properly dispose of their savings and make decent profits. That is why, starting to consider the modern pension system, you should study the basic concepts. And only after that, to argue whether to transfer the funded part of the pension and how to do it?
Pension system 2002-2010
All employers of the federation, in accordance with applicable law, must monthly pay contributions to the PF in the amount of 20% of the salary of each employee. Until the end of 2007, the rate was divided into three parts: 4% was the funded part, 10% was insurance, and, accordingly, 6% was the base. This distribution was not entirely honest with respect to citizens who wanted to increase their investment income and receive a decent amount of monthly security upon retirement . Since January 2008, amendments to the laws on pension reform entered into force. In accordance with them, the percentage of the insurance part of the pension was reduced by 2 units, which were transferred to the funded item.
As for individual entrepreneurs, then, in accordance with the law, they are obligated to monthly pay a clearly fixed rate to the Pension Fund. For organizations of any form of ownership using a special simplified taxation system, contributions for the insurance part of the pension are provided in the amount of 10% and 4% for the funded one.
The basic part of the pension
The smallest component of the pension is the basic part, which is a strictly fixed amount established by the state as a guarantee obligation to citizens. Initially, since 2002, it amounted to 450 rubles, but every year this amount is indexed taking into account inflation.
It is worth noting that formally the basic part of the pension is financed from monthly contributions that employers pay to the PF. However, in reality this amount is not enough for payments, therefore, it is compensated by the federal budget. After all, no matter what size of the insurance base part of the pension received in the current period to the PF accounts, the state must fulfill its obligations to ensure socially unprotected citizens.
This amount of security is assigned to all citizens who have reached retirement age, whose work experience is more than five years. An upwardly adjusted rate is applicable only to persons over 80 years of age, persons with disabilities, and citizens with disabled dependents. In principle, this amount combines the previous surcharges, compensation allowances and the minimum pension. Its main function is to provide a certain basic social guarantee, which is confirmed by its very name.
Since the beginning of 2010, this component of the obligation has disappeared from the pension system, and a fixed part of the insurance pension has taken its place.
Features of funded pension
The pension reform in force in recent years in the Russian Federation involves the use of such a concept as the funded part of the pension, which is made up of 6% of contributions deducted monthly by the employer in the Pension Fund. Its distinctive feature from other components of pension provision is that it is a "live" means, the increase in the size of which is completely dependent on the employee. After all, the essence of the funded part of the pension lies in the possibility of independent investment of your money. How much it will be possible to increase the accumulated capital depends on the choice of the right investment strategy, in other words, to whom the money will be given to management.
Citizens began to receive the first payments under this article after the reform began on July 01, 2012, when Law No. 360-FZ entered into force (popularly, this document is better known as the “Pay Law”). Of course, the amounts received by citizens are not very large, as, in principle, the accumulation period, but this was the first step in independently ensuring old age.
Reforming the pension system in the Russian Federation continues at the present time. Many laws have already been signed governing deductions and the way in which the funded part is formed. One of the innovations, which everyone should know about, says that starting from 2015, this component of the pension provision will be formed for all employees “by default”. This means that without filing an appropriate application for the transfer of funds under the management of other organizations, the funded part automatically goes into the insurance.
To whom to trust accumulation management?
Today, there are three options for managing pension savings, and each of them has both its advantages and “pitfalls”.
So, the first thing you can do with your accumulative pension savings is simply to leave them in the state Pension Fund. This is a good option, it does not require a waste of time and effort on paperwork, but, having selected it, one can only hope that by the time of going on a well-deserved rest inflation will leave at least a small amount for old age. Another significant drawback is the fact that a person does not conclude an individual contract with the PF and does not have reliable information about the state of his money. The advantage of such management can be called the fact that the state itself acts as the guarantor of the return of financial resources.
The second option is much more profitable than the first and boils down to the fact that the funded part of the pension can be transferred to the management of the UK (management company). The return on such investments, albeit slightly, but exceeds inflation, which guarantees the safety of savings. In this option, as in the previous one, the state acts as a guarantor, and a person can receive information about the state of his savings account once a year . Despite the economic benefits, financial management of the UK has the highest degree of risk, since these organizations are vested with the right to invest in profitable instruments.
The third option can be used by people who are not only well versed in what the funded and insurance part of the pension is, but are also ready to refuse the patronage of the federation, entrusting their money to the Non-State Pension Fund. From the moment of signing the individual contract, the funded part of the pension becomes the property of the NPF. Undoubtedly, the return on such an investment will be significantly higher than inflation, but even this cannot guarantee the fulfillment of obligations to return funds.
Before choosing the option of investing the funded part of retirement benefits for old age, you should carefully consider all options.
How to transfer the funded part of the pension?
Today, active participants in the pension reform who participate in the funded program are Russian citizens born after 1967. It is they who can independently control part of their pension provision and decide where to invest this amount of funds. Many, of course, without creating additional difficulties for themselves, prefer to leave money in the pension fund of the federation and rely only on the state. But those who are not satisfied with annual income below inflation can transfer their savings to a management company or private pension fund. The term for the transfer of the funded part of the pension is not limited by the time frame, so the application can be submitted at any time. However, the investment agreement will enter into force only from January next year, and money from the federal pension fund to the new management company will be transferred until March 31. If for some reason the insured person is dissatisfied with the result of cooperation with the management company, then after one year the funded part of the pension can be transferred to another UK.
The funded pension component today
Loyal conditions for investing savings funds were in effect in the Russian Federation only until 2013, after which the state at the legislative level took advantage of the inaction of citizens who simply do not engage in their investments. But not everything is so categorical as it seems at first glance. Those who seriously want to tackle the issue of ensuring their own old age, this opportunity is provided in full. It is for this reason that the funded part of the pension was extended, more precisely, the period when people can independently choose the rate and company for investing. Until 2015, any working citizen can apply for the preservation of 6% of contributions to the savings fund. If such a document is not submitted, the state has the right to reduce this rate to 2% or even convert it all to the percentage of the insurance part of the pension. While there is a chance to maintain and successfully invest your accumulative pension funds, it is urgent to contact the PF.
How to get retirement benefits?
From the moment of going on well-deserved rest, every citizen participating in the funded pension program has the right to receive his money. You can do this in three ways, convenient for a pensioner. Firstly, if the amount of savings is insignificant, you can make a lump sum payment, which will be made within 90 days from the date of filing the relevant application. Secondly, payments can be extended for a certain period and systematically receive fixed amounts. Thirdly, if the insurance part of the old-age pension is small, you can divide the accumulated funds by the period of survival and receive them as a bonus.
But, like in every rule, the law on the payment of funded pensions has exceptions that allow for urgent payments. However, they rely only on the category of insured persons who participated in the co-financing of the program and paid contributions on their own. So, for example, it may be women who sent part of the funds of maternity capital to the PF. The term of such payments may not be less than 10 years.
Inheritance of pension savings
Knowing what the funded and insurance part of a pension is, it is not difficult to guess which one is more likely to provide a decent old age. But this is not all the advantages of the cumulative component. It can be inherited by the receivers of the insured person. To do this, it is enough to contact the UK or the pension fund and submit the appropriate package of documents.
Pension insurance part
Considering the essence of the insurance part of the pension, it is safe to say that this component is part of the previous pension system. After all, all contributions paid by employers to this collateral item are available to the state and distributed among current pensioners. Consequently, the insurance part of an old-age pension is only a concept that has a conditionally funded nature.
Even before 2010, this component of pension provision was allocated in a separate category, and only 8% of the monthly contributions of employers were allocated to it. But then the percentage of the insurance part of the pension was supplemented by the base, significantly increasing the insurance fund. Such a redirection of funds received by the state, made it possible to ensure payment of pension obligations to all current pensioners, without using additional investments.
Basic terminology in calculating pension coverage
Before considering which part of the pension is insurance and which part will be paid to a person after reaching retirement age, it is necessary to consider several other important concepts. So, under the often used term “pension capital” we should understand the amount of funds formed from the monthly contributions of the employee for all years of work experience. The second, but no less important concept that you need to know in order to calculate the size of the insurance part of the pension is the “survival period”. The use of this term, at first glance, seems rather rude and disrespectful to pensioners, but without it it is simply impossible to calculate the monthly security. It marks the estimated life expectancy of citizens of respectable age and is equal for everyone, but this does not mean that after this time a person will cease to receive a pension. Subsequently, amounts are paid from the state budget in the same amount as before.
How to calculate retirement benefits?
To understand what part of the insurance pension will be paid to a citizen after he reaches retirement age, you need to know exactly the amount of pension capital and the period of survival established by law. Moreover, the last indicator in 2002 was 12 years and every year increased by 12 months. Thus, in 2013, this indicator amounted to 228 months.
The amount of monthly insurance coverage is calculated according to one simple mathematical formula: SCP = PC / SD + CP, where PC is the estimated pension capital formed from contributions of a pensioner for years of work experience; SD - the established period for the payment of pensions (survival period); PPP - a fixed part of the insurance pension, which was previously called the base part.
In order for the received amount of pension provision to correspond to the inflation rate, the insurance part of the labor pension is indexed annually. Such an approach to the preservation of citizens' income allows maintaining the stability of the living conditions of pensioners.
The impact of reform on the lives of military pensioners
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Of course, the new pension reform is not about increasing interest rates, but only about redirecting funds from the UK to the federal budget. For those citizens who did not bother with information about what the funded and insurance part of the pension is, everything will become even simpler. They will not need to think about investing funds, but rely only on the state, which will become the guarantor of their pension provision. Thus, the PF will have significantly more funds to pay off its own obligations, but only time will tell how long such a system can exist.