Do you have the freedom to choose?
If You Can Choose a Pension Fund, It’s Important to Choose Wisely as Pension Funds Are Structured Differently
Everyone working between the ages of 16 and 70 is legally required to contribute to a pension fund in Iceland. By contributing to a pension fund, we are guaranteed lifelong retirement benefits and pension payments in case of unexpected events such as disability, spousal or child support pensions.
Different professions may be obligated to contribute to a specific pension fund, while others may have the freedom to choose a fund for their mandatory pension savings. When there is a mandatory affiliation to a pension fund, it means that you are required to contribute to a specific one — this is usually outlined in collective bargaining agreements. For example, government and municipal employees are required to contribute to specific pension funds and therefore do not have the freedom to choose.
If your employment or union contract does not require contributions to a specific fund, the choice is yours. In that case, it is important to choose carefully, as pension funds differ in structure.
Different Structures of Pension Funds
The contribution to a pension fund is at least 15.5% of wages, usually divided into 4% from the employee and 11.5% from the employer. By paying into a pension fund, we earn entitlements. These entitlements are generally age-related, meaning the earlier in your career you make contributions, the more valuable the benefits, as they accrue over time.
Some pension funds allocate the entire contribution to a mutual insurance system, which guarantees lifetime retirement benefits, as well as disability, spousal, and child pensions in case of setbacks.
It is common for funds that allocate everything into the mutual system to still allow members to direct up to 3.5% into a defined contribution plan (private savings). In such cases, members have the freedom to choose where to direct this 3.5%.
Other funds emphasize individual savings, splitting the contribution between a personal savings plan and the mutual insurance system. It’s important to understand that allocating a portion of the contribution to personal savings results in lower insurance coverage — that is, reduced retirement, disability, spousal, and child pension benefits. However, the part in personal savings becomes available for withdrawal during retirement or in case of disability.
The main advantages of personal savings are that they are inheritable and flexible in terms of payout. A fund member with personal savings has more freedom to manage withdrawals according to their needs, based on the withdrawal rules of the fund.
Frjálsi Pension Fund – For Those Who Can Choose
Frjálsi Pension Fund is an award-winning pension fund with nearly 70,000 members, and its board is fully elected by them. Frjálsi offers two options for mandatory savings:
The Frjálsi Path, and
The Inheritable Path.
In both, a large portion of the contribution goes into personal savings. Once you choose a fund and a savings path, the next step is to select an investment strategy for the personal savings portion. Members can tailor their pension savings based on their risk appetite by choosing among investment strategies with varying risk levels.
A popular option is the lifecycle strategy, where your assets are automatically moved to lower-risk investments as you get older and closer to retirement.
It’s very easy to apply for mandatory savings with Frjálsi via the Arion Bank app.
If, however, you are required to contribute to a specific pension fund that allows you to direct a portion into defined contribution savings, you can make an agreement with Frjálsi for that portion via the fund’s online platform, and notify your main pension fund accordingly.
You can also track your pension status and carry out all major actions related to your pension through the Arion app.
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