Björn Berg answers questions by the readers of online news outlet Vísir.

A 38-year-old woman asks:

It’s well worth understanding the difference between the two.

Almost everyone who works in Iceland pays into a pension fund, and many people can now choose, within certain limits, how much of their monthly pension contribution goes into private pension savings and how much goes into collective pension rights.

Of course, we can’t make a good decision about what suits us unless we understand these two main types of pension saving.

Collective pension rights

Each month, 4% of our salary is paid into a pension fund. The employer usually adds another 11.5%. This is not optional and is required until the age of 70.

In many cases, a large part of that total contribution, or even all of it, goes towards protecting us, our families, other pension fund members and their families. This is done by building up collective pension rights.

The easiest way to understand collective pension rights may be to compare them to insurance.

I don’t have a specific amount of money sitting in my name at an insurance company. What I do have is a right to be paid under certain circumstances.

The same idea applies here.

Collective pension rights are paid out for specific reasons. With some simplification, we can divide them into three main types.

Old-age pension

Once I reach a certain age, I can start receiving payments from the pension fund. From that point on, they are paid for the rest of my life.

In many funds, the earliest age of withdrawal is around 60, although this varies.

Once payments begin, they are usually linked either to inflation or wages, and they don’t stop until death. Since I don’t know how long I’ll live, I don’t know the total amount I’ll receive over my lifetime.

But I can know what income I have earned the right to receive each month, taking into account continued contributions and the age at which I start drawing my pension.

Disability pension

Collective pension rights also provide protection before retirement age.

If I lose my ability to earn income because of illness or injury, the pension fund may step in. It can estimate my rights as if I had continued working until a certain age, often 65, and then pay me a disability pension to help make up for lost income.

Spouse’s and children’s pension

Since collective pension rights are not personal savings in the usual sense, they don’t pass directly to heirs when we die.

Instead, a spouse and children under a certain age may receive payments from the deceased person’s collective pension rights for a set period of time.

The rights can differ a lot

It’s important to remember that collective pension rights are not the same in every pension fund.

You should take the time to understand the rights you have.

For example, a spouse’s pension can vary greatly between funds. In some cases, it may be half of the deceased person’s old age pension rights for two years. In other cases, it may be paid for life.

The age at which you can start drawing an old-age pension can also differ. So can the amount of future pension rights created by each contribution.

Private pension savings

Private pension savings can mean several different things.

They may be built up through mandatory pension contributions, much like collective pension rights, or through voluntary additional contributions.

Private pension savings have very little in common with collective pension rights.

They don’t come with the same insurance protection. They are savings.

The money belongs to you. It can be inherited when you die. It can run out if it’s spent. You also usually have much more flexibility when it comes to how the money is built up, invested and withdrawn.

Unfortunately, supplementary pension savings are often simply called “private pension savings” in Icelandic. That can be confusing, because supplementary (or additional) pension savings are only one type of private pension savings.

Let’s look at the main types.

Supplementary pension savings

This is probably the type of private pension saving most people know best. It can also be known as Additional private pension and Personal pension savings.

All employees in Iceland are allowed to make supplementary pension contributions, although they are not required to do so.

If you choose to contribute 2% to 4% of your salary into this type of saving, your employer must add at least 2%.

In general, supplementary pension savings become available for withdrawal from age 60. They can also be used, under certain rules, to pay down a mortgage tax-free or to help buy a first home.

Immigrants in Iceland take to little advantage of this wonderful savings scheme, with less than a those third of full-time employed making payments and thus receiving their employer's additional contributions.

Specified private pension savings

In recent years, another type of private pension saving has been added to many wage agreements in Iceland.

A large part of the working population can now choose to build up what is called specified private pension savings, or tilgreind séreign in Icelandic.

This is private pension saving, just like supplementary pension saving. But it’s not the same thing.

Specified private pension savings are built up from part of the mandatory pension contribution. They can amount to up to 3.5% of salary, but if that share goes into specified private pension savings, the amount going into collective pension rights is reduced.

For some people, choosing specified private pension savings and reducing their collective pension rights can make good sense.

For others, it may not.

Other types of private pension savings

Some pension funds also offer private pension savings that are neither supplementary pension savings nor specified private pension savings.

Examples include funds such as Frjálsi, Íslenski and Almenni-Lífsverk pension funds.

These arrangements may be called restricted private pension, open private pension savings, a private part of the minimum contribution, conditional private pension savings, or something else entirely.

The names vary, and the details matter.

So what should you choose?

The rules vary.

It can differ how and when you can access the money, what investment options are available, and who benefits most from each type of saving.

But the choice is yours.

If you want to build up more private pension savings, you may be able to do so. That could either be in addition to your current pension saving, or it could come at the expense of collective pension rights.

You may also prefer stronger insurance protection and less personal savings.

No one else can make that decision for you.

What matters is that we understand where our money is going. We shouldn’t sign up for savings arrangements or sign agreements unless we know they suit us better than what we already have.

Ask about costs, access to the money, insurance protection and anything else that matters.

Pensions are far too important to leave until retirement is just around the corner.