Expats and Dutch pension schemes
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Many expats struggle with the choices regarding Dutch pension plans during their temporary stay in the Netherlands. Below we shed some light on the different options and terms used, and we summarise the pros and cons of participating in a Dutch pension scheme.
Pensions and annuities
Firstly it is important to distinguish between a pension and an annuity. A pension is an arrangement between employer and employee, where typically both parties contribute part of the total premium; while an annuity is a private pension scheme for either an independent contractor or for an employee who uses the annuity to top up his pension. For the purpose of this article, both forms will be referred to as "pension".
Pensions are taxed later
The key element of a pension is that the scheme is tax deferred, meaning premiums paid into the scheme are tax deductible (if paid by the employee) and are not taxed as salary (if paid by the employer).
The pension and/or annuity capital are then taxed when paid out after retirement, at rates applicable at the time of payment. These rates may well be lower (due to a lower pension income) than the rate when the premiums are deducted from salary.
It is also worth knowing that money "saved" through a pension scheme is not subject to Box 3 tax on the income tax form, where assets such as savings, stocks, bonds and property are taxed annually at a rate of 1,2 per cent.
Pensions and the 30 per cent ruling
Having said this, it is important to note that expats who benefit from the 30 per cent ruling effectively never pay more than 36,4 per cent income tax on their salary; this is therefore the tax rate they save by contributing into a pension.
Also, the 30 per cent ruling provides the option of choosing "partial non-residence", which means no tax is paid on savings in Box 3 anyway.
International tax treaties
Generally, tax treaties allocate the right to levy (charge taxes) on pension payments to the country of residence, even if the pension was built up by deducting premiums under another country’s tax scheme (while being resident in that country).
This may mean that if pension premiums are currently deducted against the top Dutch income tax rate of 52 per cent, then the pension payments may very well be taxed at a lower rate in a different country of residence after retirement.
It is important to note that the Netherlands, under new and revised treaties, aims to obtain the right to tax pension capital built up from premiums deducted under Dutch income tax.
Risk cover and life insurance
Pension, generally speaking, means risk cover; if you die, your dependents are covered through a life-long dependents’ pension. Of course, to cover the risk of paying out this dependents’ pension, pension providers take out a risk premium from the pension capital.
An alternative could be to arrange (temporary) life cover insurance in the form of a one-off capital payment on the earning person’s life. The premium for this straightforward product is relatively low.
Choice of investment
With the knowledge that an expat’s time in the Netherlands may be limited, some internationals may look for a different pension arrangement. The choice (if any) as to where pension premiums are invested is often quite limited.
Payment and transferal flexibility
A Dutch pension is, generally speaking, not flexible. It cannot be received as a one-off lump sum. It can, in theory, be transferred to another pension policy, even a pension policy with a foreign insurer or employer, however this is notoriously difficult.
The conclusion is that the money will be "stuck" in the Netherlands and will only be paid out at retirement. The relevant question for expats is always: how "temporary" is a temporary stay?
Opting out of a Dutch pension?
Some employers do offer the possibility to opt out of, or not participate in, the pension scheme.
Please note that any employer’s contribution into the pension plan will then not be made, and is often not compensated by a higher gross salary. Also note that opting out affects risk cover.
2015 changes in accrual rates
In 2015, further limitations have been introduced to the tax deferred accumulation of pension. The maximum pension accrual rates have gone down significantly, meaning employees may not set aside as much income in a pension as they used to. The accrual rate for average pay plans will be 1,875 per cent of annual pensionable income.
This means that a participant employed for 40 years can realise a pension of 75 per cent of their average salary over 40 years.
The maximum accrual percentage for final pay plans (the last earned salary before retirement) is 1,675 per cent of annual income.
Maximum pensionable income
The maximum pensionable income, the base for calculating the maximum pension premium that employees can set aside, is capped at 100.000 euros (minus the state pension offset, currently 12.500 euros).
Please note that this limitation may significantly influence dependents’ pension rights as well. Disability cover is not limited to the mentioned 100.000 euros.
Annuity schemes for high earners
Employees in higher income brackets (earning 100.000 euros and over) will be able to build up additional voluntary retirement savings via a "net annuity" scheme, approximately equal to a pension accrual of 1,875 per cent of their average salary.
The premium contribution will be paid from the net salary or net income. The future annuity payments will be tax free. The value of this policy will not be subject to Box 3 tax.
Understand your pension scheme
It is advisable for expats in the Netherlands to investigate the details of their pension scheme (or lack of one) with both their employer and/or pension provider. This can be complicated but is certainly worthwhile, especially if you are seeking flexibility.
Specialist advice on the best long-term scheme is also a wise move, as expats often stay in the Netherlands longer than expected.
Previously under the name Finsens, the tax, accountancy and payroll divisions were renamed Broadstreet in 2016.