Accruing your own (additional) pension
In some situations it is necessary or sensible to build up additional pension yourself. How can you supplement your pension income yourself, and what are the tax benefits?
In which situations is it wise to build up (extra) pension yourself?
- As a self-employed person or contractor you do not accrue any employee pension.
- Some employers do not offer a pension plan (or only a small one).
- If you have not worked for a number of years or have worked very little, which has resulted in a pension gap.
But even if you do accrue an employee pension, it is good to find out whether the amount you can expect after retirement is in line with your wishes. If not, you can choose to supplement your pension income yourself.
There are various ways of doing this.
Options to save for your pension
You will receive an AOW payment from the government. If you work or have worked in salaried employment, you may also receive an employee pension. Will your AOW and employee pension be enough to cover your expenses? What can you do if you think you will need more income, or if you have built up little or no employee pension?
Save with a pension product
Do you want to put money aside regularly for your retirement? Then consider an annuity insurance, bank savings account or investment account. You can deposit money into this product monthly or annually. Your deposit is deductible if you can demonstrate that you have a pension shortfall. Further below we will give you more information about this. You will receive part of your deposit back if you file an income tax return. At the end date you must use the money to buy a pension benefit. You pay tax on the amount you receive when the pension has started.
A single premium policy is a special form of annuity insurance. With a single premium policy you make a one-off payment, although sometimes you can pay extra money later on. Your insurer or bank will invest this money. On your retirement date you buy a benefit with this money. For a single-premium policy the same tax advantages apply as for annuities and bank savings accounts. Get good advice before taking out a single-premium policy.
Supplementary pension through the company pension plan
Do you voluntarily pay (part of) your pension premium yourself? If your pension plan meets the requirements, you may deduct the pension premium in your income tax return. Ask your employer or pension insurer whether the pension plan in question meets the requirements.
You state the pension contributions with a minus sign in front of them in the ‘Income from employment’ section of the income tax return. You must first deduct any compensation received from your (ex-)employer.
You may deduct voluntarily paid pension premiums for a maximum of 10 years after termination of your employment.
Saving and investing yourself
You can also save or invest for your retirement yourself. The advantage of this is that you basically always have access to the money. You pay tax on your savings and investments every year in Box 3. You pay this tax if your assets exceed a certain threshold. How much wealth tax you pay depends on how large your assets are.
Pay off mortgage
If you have a mortgage, you can decide to pay off more. This will reduce your housing costs when you retire and you will therefore need less income. You no longer pay interest on the amount that you repay. This does, however, reduce the interest deduction you receive on your tax return. Check your mortgage contract to see how much you can repay each year without a fine from your bank.
Pension product: annuity insurance (‘lijfrenteverzekering’)
What annuity premiums may you deduct?
The deduction of annuity premiums to supplement your pension is subject to conditions.
- You may only deduct premiums and deposits in the year you paid them.
- You must pay the premiums or make deposits yourself.
- You have a pension shortfall.
Deduction only for a pension shortfall
You may only deduct (part of) your premiums and payments if you have a pension shortfall. You can also have a pension shortfall while building up a pension as an employee.
Do you work as an employee? And do you pay (part of) your pension premium yourself? Then you may not deduct this premium. Your employer has deducted this premium from your salary before tax was deducted.
To know whether you can deduct an amount, you must first calculate whether you have a pension shortfall. Do you have a pension shortfall? Then you have ‘space’ to deduct an amount. Your annual margin and your reserve margin determine the maximum amount of your deduction.
You may deduct premiums and payments for annuities if you had a pension shortfall in the previous year. We call this the annual margin. The annual margin 2021 depends on your situation in 2020.
Calculation annual margin 2021
These are the formulas you use to calculate your annual margin in 2021:
For people in paid employment: 13.3% x contribution base – (6.27 x factor A)
For self-employed individuals and entrepreneurs: 13.3% x contribution base – (6.27 x factor A) -/- FOR.
- Premium base
The premium base is your gross income from last year minus the AOW deductible. Your AOW deductible is the part of your income that you are not allowed to use for building up a pension, because you receive AOW. In 2021 the AOW deductible is € 12,672. You may use 13.3% of your income above this limit for your pension.
- Factor A
Factor A shows how much your pension has increased in a given year. You will find the factor A on the Uniform Pension Statement (UPO) that you receive annually from your pension administrator. This amount is therefore only applicable if you have accrued pension through an employer. The percentage of 6.27 is fixed for 2021.
- Net increase FOR
For entrepreneurs, the net increase of the Fiscal Old-Age Reserve (FOR) is settled at the end. In 2021 this is 9.44% of the profit (maximum € 9,395). Are you in paid employment? Then you do not have to take this into account.
Suppose: You earned € 50,000 last year. Your annual margin is then (0.133 x (€ 50,000 – € 12,672) =) € 4,964 per year. To then arrive at the amount you are allowed to deduct on your income tax return, do the following:
- Have you, as a sole trader or entrepreneur, also made a donation to your FOR? If so, you must deduct this from the € 4,964.
- If you work as an employee and you fall under a company pension, you must subtract the sum of (6.27 x Factor A) from this amount.
You may then deduct the result of the calculation from your income. Note: You must have deposited the money before December 31 of this year.
Can you not fully use your annual margin, because you have paid less in premiums and deposits in the year concerned? Then this constitutes ‘unused annual margin’. The total amount of all ‘unused annual margin’ is your ‘reserve margin’.
Your annual margin in 2021 is € 1,555. You paid € 1,500 in premiums for an annuity insurance in 2021.
You may deduct € 1,500 in premiums in 2021. The € 55 that you have left over is included in the calculation of your reserve margin for a later year.
There is a maximum for the reserve margin. You may never deduct more than this maximum.
How long can you use the reserve margin?
The annual margin that you have not used, can still be used in your reserve margin in the 7 years thereafter. Do you have both annual margin and reserve margin? Then first use your reserve margin. This will prevent previously unused annual margin being lost.
In your ‘reserve margin 2021’ you can use your previously unused annual margin from 2014 up to and including 2020. In 2022 any unused annual margin from 2014 will lapse.
Maximum amount for all annuity products together
The maximum amount you may deduct applies to all your annuity products together.
Your annual margin in 2021 is € 1.600 and you have no reserve margin. In 2021 you paid € 1,500 in premiums for an annuity insurance and € 500 into an annuity account. So you paid a total of € 2,000 for annuities.
Using your annual margin you may deduct a maximum of € 1,600 from your income in box 1. The remaining € 400 you may not deduct in your tax return. Not in 2021, nor in a later year. However, it can be taken into account in the tax you pay on the payment(s) from your annuity.
Proof of payments
An annuity insurance can run for a long time. Premiums may be deductible in the year of payment. If so, make sure you have proof of payment available. And keep them. This also applies to the policy, communication with the insurer, etc. Keep as much as possible.
If you decide not to deduct the premium in your income tax return or if there is no room to deduct the premium, keep the return well. You can use it to demonstrate that you did not receive any tax benefits in the year of payment. At the time of payment it will be determined whether the entire payment is taxed or whether a portion can remain tax-free based on netting. You must be able to show that part of the premium was not deducted in the past. Even if it concerns a period of 20 years ago. The tax authorities cannot always retrieve all returns from their records. And not all evidence either. So keep these well yourself. Even if you have to do that for 20 years. It is better to save a little too much than to incur unnecessary taxation later on.
Emigration from the Netherlands
If you move abroad and have an annuity, you will have to deal with a conservatory assessment. What is this exactly and what happens after the 10-year period for such a preservation assessment?
Immediate tax assessment
As soon as you leave the Netherlands and emigrate, the tax authorities immediately impose an assessment on the value of your annuity. And actually, you should pay this assessment immediately. But because you do not redeem the policy or bank savings account immediately, you get a postponement of payment. That postponement lasts 10 years. If you do not undertake any prohibited acts within those 10 years, the preservation assessment lapses. A prohibited action is, for example, buying off your annuity. So as soon as that happens, the assessment is collected and you have to pay tax.
Expiration of the policy abroad
If you let the policy continue as agreed then you will come to the moment when the policy starts to pay out. At that point the payment will have to be converted to an annuity. Contact the insurer to discuss what the options are to avoid any tax disadvantage. It is certainly the case in international situations that it is more difficult to make agreements. But the possibilities are there, although it may be that you remain stuck with the existing insurer.