Many expat clients do not participate in a Dutch pension scheme. Sometimes the employer does not offer participation in such scheme because its Dutch size of business would make it very expensive to set up, or it elects not to make decisions for the employee and leaves arranging/saving for future income to the employee.
A Dutch Defined Contribution pension scheme offers – although variations exist – employers increasing contributions to build pension capital. Often employees contribute too. For participants above 45 these employer contributions become quite sizeable and capital grows quickly as a result. Younger staff’s pension capital takes longer to grow and as they have time this is not strange.
The Dutch pension system offers participants three benefits:
- Employee contributions are tax deductible
- Pension capital is not taxed until the employee uses it
- If you delay use of pension capital to the State Pension age, you will benefit from a lower tax rate.
There are restrictions too. When you leave the country permanently you cannot take your pension capital with you immediately. That means you will remain dependent on the capacity of the pension funds to retain your money. Fortunately, the Dutch pension funds are amongst the financially soundest companies on the planet. This article is not about the technical details of emigrating your pension capital; please contact us if you want to find out more.
But what if you are a Dutch taxpayer and do not participate in a pension scheme?
You can invest in many things but there are few of which there is no limit in untaxed size. Especially expats with a long horizon can benefit from annuities (“lijfrente”). It behaves identical to pension capital. Contributions are restricted (if it looks too good to be true, it probably is). This is called “jaarruimte”, i.e. your maximum annual contribution. There are two ways to alleviate the bad news:
1. You do not need to wait until next year to invest your jaarruimte. Last year’s taxable income determines what you can contribute today. If you start with a monthly amount, it starts a return immediately.
2. There may be a possibility to contribute more than just your jaarruimte. The so-called “reserveringsruimte” (I do not make up the words!) can add more space if you have unused jaarruimte of previous seven (7) years. This can add additional pension capital.
What can it do for you?
The benefit of saving/investing for later not being subjected to fiscal restrictions is that when you leave, in most cases you can simply pack up and go. It is much more flexible than a tax-driven solution.
But if you want to save “tax free” there are big differences depending on your income. If you earned €50,000 in 2020 you can save and deduct (in rounded numbers, in 2021) close to €5,000 in 2021. The latter amount tends to increase annually. If you earned €80,000 it is almost €9,000.
There are possibilities to (i) benefit monthly of the annual tax deduction of c40% and (ii) contribute monthly into an investment account so you can expect more return than in a more traditional savings account. This way your investment will work faster for you.
If you do this for 10 years this effort can add €250-450 per month to your pension income, as long as you live.
Worth considering is, don’t you think?