Did you know that the average self-employed worker gets a much lower pension than the average employee? And do you know exactly how much of your earnings goes to pay for pensions? In this article, we’ll tell you how much you’ll pay into your pension and what pension you’ll ultimately end up with. Finally, we’ll also give you advice on how you can increase your future pension.
If you are self-employed (self-employed) then you must make at least the minimum social security contributions from your income. At present, these minimum contributions amount to CZK 3,852 per month in the case of the main activity and CZK 1,413 in the case of the secondary activity (if your annual income exceeds CZK 105,520).
Social insurance, or social security contributions, are used to ensure decent conditions for you and your fellow citizens. In practice, most of the social insurance goes on old-age pensions and health care, which together account for about ¾ of all expenditure. In addition, social insurance also finances e.g. unemployment benefits, housing allowances and disability pensions.
The pension system is based on pay-as-you-go financing, where you, as current workers, contribute part of your income to finance the pensions of current pensioners. So it doesn’t work that you save for your own retirement through social security.
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To qualify for a retirement pension as a self-employed person, you must meet two basic conditions: you must reach retirement age and you must have completed a minimum period of pensionable service.
For people born after 1971, the retirement age is uniformly set at 65. However, for people born before that year, the retirement age varies according to the year of birth, gender and the number of children raised, and ranges from 53 to 65.
The minimum pensionable period includes not only the time you were in paid employment and paid contributions, but also the time you were caring for children or studying. Specifically, this is 35 years if both contributory and compensatory periods are included, or a minimum of 30 years if only contributory periods are included.
You can read more about the conditions to be met and how to apply for an old-age pension in the next article.
The specific amount you will receive in your pension is determined by the income on which you have paid social security contributions. Many self-employed people pay only the minimum social security contributions, which will be reflected in the pension you receive.
Example: let’s say you use flat-rate tax and your flat-rate spending is 40%. Realistically, you have 50,000 crowns in your pocket at the end of the month, but you pay social security on a much lower amount. You are therefore seen as having earned just over 20,000 in a given month. From your real earnings of CZK 50 000, 40% is deducted, which represents your expenses, as well as your income tax, social security and health insurance contributions, which amount to at least CZK 7 498. Compared to an employee with a gross salary of CZK 50 000, your pension will be significantly lower.
For a more detailed calculation of your pension, use the pension calculator on the Czech Social Security Administration website.
For self-employed workers, the basic pension rule is the same for all pensioners. So if you meet the conditions for earning pensions, you will be paid at least this basic amount. This is set separately for each year and this year it is CZK 4,400.
Even as a self-employed person, you can take early retirement. However, two conditions must be met – you must be over 62 years old and you must have met the minimum period of social insurance payments, which in this case is 40 years. You also have to take into account that the pension you will receive in retirement will be lower.
There are also restrictions if you would like to continue to work in business during early retirement. This is because until you reach retirement age (e.g. age 65), you must not engage in any activity that would give rise to a compulsory contribution. The specific amount you must not exceed this year is set at CZK 105,520 per year. However, once you reach retirement age, you can start your business again without any restrictions.
Find out more about earning extra money in retirement in our next article.
Pension reform is a much discussed topic at the moment to respond to the declining birth rate, the ageing population and the increasingly longer life expectancy. This reform should affect all future pensioners, including those who are currently self-employed. The main changes are later retirement and slower pension growth. In addition, there is also to be a discount for working seniors or an increase in the minimum pension.
As we have already mentioned, self-employed people have much lower pensions than employees. So how to solve this situation? There are several options. First of all, you can voluntarily increase your assessment base and start paying a higher amount of social insurance. However, a more sensible step is probably to save and invest on your own.
For example, you can opt for a supplementary pension saving scheme. This is savings for retirement that is supported by the state through regular contributions and tax relief. The amount of the monthly contribution from the state varies according to the amount you send into the savings each month. The lowest amount is set at 300 crowns with a state contribution of 90 crowns. The maximum you can get from the state is 340 crowns if you save at least 1,700 crowns a month. In addition, you can also write off your savings expenses against your taxes.
Another way to secure a higher pension is to start investing. There are a number of options. Traditionally, you invest in gold or real estate. However, you can also invest in shares of various companies or bonds. Mutual funds, which are managed by professionals and combine different types of securities (stocks, bonds, etc.), are also typical. The current trend is to invest in cryptocurrencies.
How to get started with investing in stocks? Find out in our article.
Before investing, however, a few things need to be made clear. The key factor is the time horizon. The earlier you start investing, the more you can take advantage of compound interest and invest in riskier but higher-yielding assets such as equities. Then, as you approach retirement, it’s a good idea to move your portfolio into more stable assets to reduce the risk of loss.
It is also important to diversify, i.e. to combine different types of investments (e.g. stocks, bonds and property) to ensure the stability of your portfolio. This is because if one type of investment starts to struggle, you won’t lose all your investments, but only one type.
Self-employed people are required to make minimum contributions to National Insurance, which affects the amount of their future pension. To qualify for a pension, the self-employed must reach pensionable age and meet the minimum period of insurance. The amount of the pension depends on the income on which the insurance has been paid.
In order to increase the pension, it is recommended to increase the assessment base, save or start investing money in, for example, real estate, shares or cryptocurrencies. Diversification of investments and time horizon are also important.
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