In Finland, when entrepreneurs decide to establish their own companies, one of the first things to consider is the obligation to take out YEL insurance.
YEL insurance is not just a whim of some entrepreneurs or an extra cost, but a safety net for the self-employed. The entrepreneur’s level of social security depends on it. Being insured and up to date in the payment of premiums is essential to access some important social rights and contribute to collect a pension in the future.
A quick look at some internet forums on entrepreneurship shows that there are some myths, misunderstandings and erroneous assumptions that colour the discussion, raise doubts and generate uncertainty around YEL insurance and its characteristics.
In this article, we are going to shed light on the subject and clear up misconceptions. For that purpose we have enlisted the help of Maria Ihalainen, a YEL insurance expert at the pension insurance company Elo, which serves a third of Finnish companies and more than 40% of the self-employed in Finland.
YEL insurance is not compulsory, there are other options
Maria Ihalainen: That is wrong. YEL insurance is the statutory insurance for entrepreneurs in Finland and it cannot be replaced by any other voluntary insurance.
YEL insurance is based on the law and as an entrepreneur you have to take it when you meet the specific criteria, for example when your entrepreneurial income is annually more than 8,063.57 euros (for 2021) and even in some cases when you are a partner in a company, if you do part-time entrepreneurship or when you work in your spouse's business.
More information about who should take out YEL insurance and when can be found HERE
YEL insurance is a waste of money for young entrepreneurs because it only affects the retirement pension
MI: That is not right. YEL insurance affects entrepreneurs’ life and protects them from the very first day they start paying for it.
Entrepreneurs must bear in mind that something unforeseen may happen in the middle of their careers, for example they may become sick or have an accident so that they can no longer do their job (imagine, for example, a hairdresser to whom something happens in the hands…). In those cases YEL insurance is the guarantee and the basis of their income.
Being insured also allows entrepreneurs to plan the collection of some benefits, for example a parental allowance.
Entrepreneurs pensions are lower than those of employees
MI: Actually both entrepreneurs and employees accrue the same amount of pension per year, which is 1.5 per cent of the annual income or annual salary. The difference is that for employees the accrual is calculated from their annual earnings, while for entrepreneurs from their declared income.
If an entrepreneur's pension is lower than that of a salaried employee, it is because the average YEL income has also been lower. But this is something that entrepreneurs can change and adapt to their needs.
Click HERE to learn how to calculate the amount of your pension.
YEL income cannot be adjusted to entrepreneurial activity
MI: That is not correct. Sometimes, especially when the business is in the early stages, the YEL income amount is low because the entrepreneur's turnover and customer base are also limited. But when the business grows, it is possible to raise the YEL income, which should correspond with the value of the entrepreneur’s work.
YEL income can be changed according to the development of the business anytime, through the internet or by requesting the support of a professional. For example, at the beginning of the Covid-19 pandemic some entrepreneurs reduced their contributions in anticipation of difficulties. Over time, having overcome the impact of the situation on their companies, many of them have brought their payments back to the level which is appropriate to their needs.
There is no point in paying more than the basic YEL contribution
MI: I cannot support that claim. Entrepreneurs must think that when their business grows it is because the value of their contribution to their own company also increases, as does the value of their work. That is why they must also improve their salaries, their level of social protection and pensions.
Unfortunately, sometimes entrepreneurs are so focused on work that they forget themselves when in fact they should be thinking about their future. By improving YEL income, a self-employed person will not only invest in their pension: the amount of the allowances will also be higher in case something happens during their careers.
There are two things to remember at this point: these premiums are tax deductible and, like any other insurance, cannot be increased after something unexpected has happened.
The smartest thing to do is to pay as little as possible and later raise the YEL income in the last 5-10 years of work
MI: That is very risky because in the last few years you cannot affect anymore so much to your pension and the premiums are quite high. So the best thing to do is that, when you are in your 20s, 30s or 40s, you also pay attention to your pension.
Some people wake up to this too late and only try to improve their retirement pay in the last years of work, when it is no longer possible to affect it substantially. A correct YEL income for the whole working years is the only way to earn the right to have a reasonable pension.
Money is better in the entrepreneur's pocket, it makes no sense to give it to a pension insurance company or the state
MI: The Finnish pension system is very secure and the amounts paid each month work as insurance, but also as a kind of investment at the same time.
YEL payments ensure your pension, but they also protect you in your entire working life. Imagine that something happens to an entrepreneur and, for example, s/he cannot work for one or two years. How many of us have enough money in our pockets to pay for our allowances and our livelihood during that time? It's rare for the self-employed to have so much savings. That is why insurance like YEL is the most sensible and appropriate option.
Do you need YEL insurance? Read more and take insurance from Elo