How does pension accumulation work?
Most Dutch employees aged 21 and older accumulate pension through their work. Accumulating pension works almost automatically in this way because your employer arranges the pension scheme or is affiliated with a pension fund and ensures that pension premiums are paid every month. Often, your employer pays the majority of the premium, and you contribute a small part yourself. This part is deducted from your salary monthly.
Is such a pension scheme mandatory? No, not legally, unless specified in your collective labor agreement (CAO). However, it is customary to accumulate pension through your employer if you are an employee. So, when you’re in the running for a new job, it’s a good idea to inquire about the pension scheme with this employer.
What is AOW exactly?
When you mention pension, you mention AOW. But what is AOW exactly? AOW stands for General Old Age Pension and is a basic pension for those who reach the AOW retirement age. You receive this in addition to the pension arranged through your employer and any pension you have accumulated yourself.
How can you accumulate AOW?
In principle, AOW accumulation happens automatically. The main requirement is that you have been insured, which applies to most people living in the Netherlands. So, you also receive AOW if you have never worked. For a complete AOW accumulation, it is important that you have lived in the Netherlands for the 50 years before your AOW benefit starts. For each year you did not live in the Netherlands, your AOW is reduced by 2%.
An example: your AOW retirement age is 67 years. The accumulation of your AOW starts when you are 17 years old. From the age of 20, you have lived abroad for 3 years, so you have missed 3 years of AOW accumulation. Therefore, you receive 6% less AOW. You can buy these years from the Social Insurance Bank. Did you live in the Netherlands for the entire period from your 17th to your 67th? Then you will receive a full AOW benefit.
Building your own pension
It’s great that AOW exists, but it’s not a lot of money. Therefore, you can also arrange your own pension, partly or fully. This is wise in the following situations:
- You are self-employed or a freelancer and do not accumulate pension through an employer.
- You have an employer who does not offer a pension scheme.
- You have not worked or hardly worked for a few years, resulting in a pension gap.
Filling in pension gaps
Most people want to build their own pension because they are self-employed or have a pension gap. A pension gap means a shortage of pension, and such a shortage can occur sooner than you think. You have a pension gap if you have not accumulated enough pension to live on after reaching the AOW retirement age.
By arranging part of your own pension, you can fill in your pension gap and receive a higher pension monthly in the future. From a tax perspective, it is wise to do this through an annuity. As long as you stay within your annual allowance, which is the amount the government allows you to use to accumulate extra pension tax-efficiently, you benefit from tax advantages.
Building additional pension
Even if your pension through your employer is well arranged, you can still accumulate additional pension yourself. This way, you will have more to spend in your old age, and it is likely financially more feasible to maintain your current standard of living or maybe you can retire early.
You can accumulate additional pension in one of the above ways, by saving in a savings account, investing, or taking out annuity insurance or an annuity savings account. In addition, it is sometimes possible to accumulate additional pension through your employer’s pension scheme. You pay extra premiums yourself, which allows you to accumulate more pension. This means that your pension will not only consist of your AOW and the pension you saved through your employer but also a portion that you arranged yourself. Everyone can accumulate additional pension, even if you don’t have a pension gap. In that case, however, you cannot take advantage of the tax benefit.
By now, you know that you can arrange your pension in various ways. If you want to save (extra) pension yourself, you can do so, among other things, through an annuity savings account (bank savings) or annuity insurance. This way, you can build annuity. With these forms of saving for additional pension, you deposit a one-time or periodic amount into a blocked account. The annuity will only become available after your retirement date. There are both pros and cons to these forms of pension accumulation.