Insurance of the self-employed
A self-employed person has to take out pension insurance under the Self-Employed Person’s Pensions Act (YEL) on their own. The insurance is mandatory when the self-employed person meets the conditions for the insurance. The insurance has to be taken out:
- within six months from starting self-employment, and
- with an earnings-related pension insurance company or a pension fund, if one exists in the field in question.
A person is considered self-employed if they
- do not work under an employment or service agreement,
- get a grant in the arts and sciences,
- are a farmer, or
- are an artist.
Other preconditions for being covered by the Act include:
- the self-employed person is between 18-69 years old
- for those born in 1957 or earlier, the insurance obligation ends at age 68,
- for those born between 1958 and 1961, the insurance obligation ends at age 69,
- for those born in 1962 or later, the insurance obligation ends at age 70);
- the person has worked as a self-employed person for at least four months; and
- the estimated annual earnings from work amount to at least EUR 7,958.99 (in 2020).
A partner to a partnership and the responsible partner of a limited partnership has to take out pension insurance under YEL. A person in a leadership position of a limited company, who owns alone more than 30 per cent or, together with family members, more than 50 per cent of the company or the voting rights, has to take out insurance under YEL.
YEL entrepreneurs number about nine per cent of the total number of earnings-related pension insured.
The work effort of the self-employed affects the income
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 the earnings.
According to the law, earnings under 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 180,750.00 euros (in 2020). 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, they will agree on new earnings together with the pension provider.
Since 2004, the earnings that form 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. A self-employed person must have YEL earnings to a certain amount in order to qualify for a partial old-age pension.
The self-employed often set their earnings too low relative to their actual earnings from work. On average, the YEL income is around one third lower than the average earnings. The YEL earnings have been found to correspond to an average of 70 per cent of the earnings that form the basis of taxation. Women’s YEL earnings correspond better to their actual earnings than men’s do.
The self-employed finance their pensions mainly on their own
The self-employed finance their pensions by paying the YEL insurance contribution, which is determined based on the average TyEL contribution. In 2019, the insurance contribution for self-employed persons under the age of 53 or between 63 and 67 years is 24.1 per cent of their confirmed YEL earnings. For the self-employed aged between 53 and 62 years, the contribution is 25.6 per cent. The insurance contribution is fully 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. In 2018, a self-employed person who is starting up will get 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 for less than 48 months, the discount may also be granted for another period of self-employment, 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, which means their pensions are based on a pay-as-you-go (PAYG) scheme.
Earnings-related pension fees, less the administrative costs, are used to cover the pension expenditure of the year in question. The State pays the remaining share. In 2020, the State’s share was 20 per cent of the pension expenditure for the self-employed .
Insurance contribution affects pension amount
The YEL insurance contribution is flexible, which means that the self-employed person can choose to temporarily pay a higher or lower insurance contribution. When business is going well, the self-employed can improve their pension security by paying a higher (10-100%) insurance contribution without having to raise their confirmed 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 the paid insurance contributions.
Pension for the self-employed always accrues based on YEL contributions paid. If the self-employed person has neglected to pay the contributions and if the contributions have expired, the YEL pension of the self-employed will be reduced.
If the annual YEL contributions have been paid only in part, the pensionable earnings of that year will be calculated in relation to the paid contributions. If the YEL contributions have been left unpaid for a whole year, the earnings of that year will be worth zero (0.00) euros when the pension is calculated.
Finnish Centre for Pensions monitors
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 them 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 and at the expense of the self-employed person.
The self-employed person may take out insurance retroactively for the current and three previous years. It is not possible to accrue pensions in retrospect for longer periods than that.