Insurance of the Self-employed is Based on the YEL Income
- The self-employed determine income for insurance purposes
- The self-employed finance their own pensions
- Insurance contribution affects pension amount
- Finnish Centre for Pensions monitors
A self-employed person is responsible for arranging his or her own pension security. Self-employment is insured based on the Self-Employed Person’s Pensions Act (YEL). The insurance is obligatory when the self-employed person meets the preconditions of the law, and must be taken out within six months of having started self-employment. The self-employed person may take out the pension insurance either from an earnings-related pension insurance copmany or a pension fund, if one exists in his or her particular field.
A person whose work does not take place within the scope of an employment or service contract is considered self-employed. Other preconditions for being covered by the Act are that:
- the self-employed person is between 18-67 years old,
- business operations have been ongoing for at least four months, and
- the estimated earnings from work amount to at least EUR 7,557.18 per year (2016).
A partner to a partnership and the responsible partner of a limited partnership are insured according to YEL. A person in a leadership position of a limited company, who, alone or together with family members, owns half of the company or the voting rights, has to be insured according to YEL.
A partner who holds a leading position in such a limited company and alone owns 30 per cent of the company’s shares, or who alone holds over 30 per cent of the voting rights produced by the company’s shares, is also considered to be self-employed.
YEL entrepreneurs number slightly less than eight per cent of the total number of earnings-related pension insured.
The YEL earnings form the basis for insurance. The earnings should correspond to the work effort of the self-employed person. The pension amount and insurance contribution are calculated on the basis of earnings.
According to the law, earnings according to YEL must correspond to a wage that would be paid if the work of the self-employed was carried out by another, equally competent person in place of the self-employed, or otherwise corresponds to such compensation that, on average, equals the work insured under YEL.
Earnings referred to in YEL must correspond to the financial value of the self-employed person’s work effort, not the financial value of the business. The earnings are thus not based directly on, for example, the turnover of the company or the earnings as verified in taxation, but these may help set the earnings at a suitable level.
However, the income cannot be set any higher than EUR 171,625.00 (in 2016). The Finnish Centre for Pensions has prepared earnings instructions and provides minimum recommendations for YEL earnings depending on the profession.
The pension provider confirms the YEL earnings that form the basis of the pension and insurance contribution, by application of the self-employed person. If there are changes to the work effort of the self-employed person, he or she will agree on new earnings with the pension provider.
Since 2004, the earnings forming the basis of the self-employed person’s pension insurance has also affected the other social security of the self-employed. The amounts of unemployment compensation, sickness allowance and parenthood allowance are calculated based on the YEL earnings of the applicant. In order to be eligible for the part-time pension, YEL earnings of a certain size are required.
The self-employed are often overly cautious and set their earnings too low, and the YEL income is on average approximately a third lower than the average salary. The YEL earnings have been proven to correspond to an average of 65 per cent of the earnings forming the basis of taxation. The YEL earnings correspond better to actual earnings in fields where the earnings from work are comparatively low. YEL earnings seldom exceed EUR 20,000 per year.
The self-employed person pays his own pension security by paying the YEL insurance contribution, which is determined based on the average TyEL contribution. In 2016, the insurance contribution for self-employed persons under the age of 53 is 23.6 per cent of the confirmed YEL earnings, and 25.1 per cent for those who are 53 and older. The insurance contribution is completely tax-deductible.
Since 1992, a self-employed person who takes up self-employment for the first time has been granted a discount on the insurance contribution. Nowadays, a self-employed person who is starting up will receive a 22 per cent discount on the insurance contribution.
The discount is granted irrespective of age, and applies to the first 48 months of self-employment. If the first period of self-employment lasts less than 48 months, the discount may also be awarded for another self-employment period, up to a total of 48 months.
The state participates in the financing of pensions for the self-employed. There are no funds collected in the pension scheme of the self-employed, as the financing of pension according to the pension acts for the self-employed is pay-as-you-go.
Earnings-related pension fees, with operational costs deducted, are used to cover the pension expenditure of the year in question, and the state pays the remainder share. In 2013, the State’s share was approximately 7 per cent of the estimated pension expenditure for the self-employed .
Contrary to the employee scheme, the YEL insurance contribution is flexible, which means that the self-employed person may choose to pay a greater or smaller insurance contribution. The entrepreneur may choose to raise his or her pension security by paying a bigger insurance contribution based on the confirmed earnings, anywhere between 10-100 per cent, without having to raise the YEL earnings permanently.
If times are bad, the contribution can be decreased by 10–20 per cent. Although there is no change to the confirmed earnings, the pension accrues based on earnings that correspond to insurance contributions already paid.
Pension for the self-employed always accrues based on YEL contributions paid. If the self-employed person has neglected to pay the contributions and they have expired, his or her YEL pension decreases.
If the annual YEL contributions have been paid only in part, the pensionable earnings of that year will be calculated in relation to paid contributions. If the YEL contributions have been left unpaid for a whole year, the earnings of that year will be EUR 0 when the pension is calculated.
The Finnish Centre for Pensions monitors the earnings-related pension insurance of the self-employed. If the self-employed person has not taken out insurance, the Finnish Centre for Pensions will encourage him or her to correct the neglect within a reasonable time frame. If the self-employed person does not heed this admonition, the Finnish Centre for Pensions will take out YEL insurance on behalf of the self-employed person and at his expense.
The self-employed person may take out insurance retroactively for the current and three previous years. It is not possible to accrue pension security from earlier periods than this.