YEL insurance is more versatile than you think
The YEL insurance policy is the entrepreneur’s safety network. It affects directly the level of social security benefits payable in case of unemployment, when starting a family and at the times of illness, disability and retirement. For entrepreneurs, the income reported and confirmed for the YEL pension insurance policy is used as the basis for calculating, not only the amount of pensions but also other social benefits paid by Kela.
“For this reason, it’s essential to ensure that the YEL income is always at an appropriate level. Often, the YEL income is too small in relation to the actual income. The risk then is that the entrepreneur’s pension and social security benefits remain inadequate and the insurance fails to provide security as expected”, explains Kristiina Sandén, Business Affairs Specialist at Elo.
Earnings-related pension is accrued throughout your career
For entrepreneurs, accrual of earnings-related pension starts at the age of 18 and, according to the currently valid legislation, the pension accrual rate is 1.5% of the annual earnings, that is, the YEL income, regardless of age. As an exception, the accrual rate of 1.7% is applicable to those aged 53–62 years during 2017–2025 (the transition period following the 2017 pension reform).
“Earnings-related pension is accrued for self-employed persons and those in gainful employment at the same accrual rates. Even when carried out simultaneously, both types of working accrue an individual person’s future pension”, Sandén explains.
YEL income equals to an entrepreneur’s work input
The amount of YEL income should be defined so as to correspond to the annual salary or wages that would be paid to a qualified employee hired to do the same work as the entrepreneur does. The YEL income is the price set for the entrepreneur's work input in the company. The salary or wages actually paid to the entrepreneur does not necessarily match the work input. Entrepreneurs may choose to have their pay from the company in the form of capital income, for example, for taxation reasons, or the company may be otherwise unable to pay the entrepreneur’s salary. Also, the YEL income is not directly related to the profitability of the business activities. The confirmed YEL income is not affected by temporary fluctuation in the amount of actual income. In 2021, the minimum limit for YEL income is 8,063.57 euro and the maximum limit is 183,125.00 euro.
“New entrepreneurs find it often difficult to estimate the value of their own work input when the business is still at its initial stages. You can refer to statistics on wages and salaries in the relevant fields, or you can call Elo’s Customer Service, where our experts help customers solve these issues on a daily basis”, Sandén advises.
What about raising the YEL income when I’m closer to retirement?
Employment pension may seem a distant matter for those in their 30s, and the compulsory YEL contribution is just an invoice among others.
“It is ever more important to keep your YEL income at an appropriate level throughout your career. In terms of pension accrual, the timing may be too late if you increase the amount of your YEL income when approaching your pensionable age. The ‘super accrual’ rate of 4.5% for those aged over 63, as applicable in the earlier pension system, was abolished without a transition period at the end of 2016”, Sandén clarifies.
The easiest way to update your YEL income is to use Elo’s Online Service. You can also call Elo’s Customer Service to adjust your YEL income. It is advisable to update the YEL income without delay since no changes can be done retrospectively.