Service by International HR
In many companies, the international HR tries to facilitate expats in the best way they can. In terms of corporate pensions, they often provide expats with a choice about their pension set-up:
- Expats can participate in the regular Dutch collective pension plan
- Expats can choose a special expat pension arrangement
What is best for you as an expat? Be highly critical and check your preferences!
Which elements of both options should you compare?
Ask yourself the following questions:
A) What kind of pension administrators do the options provide?
B) What kind and amount of pension systems/claims/indexations do the options offer?
C) What kind and amount of premiums/own contributions can you expect?
D) What kind of tax treatment do both options provide, now and in the future?
E) What kind of flexibility and voluntary possibilities are there?
F) What kind of changes in legislation might be expected?
A) What kind of pension administrators do the options provide?
In the Netherlands, the law demands that pension claims be secured through a pension administrator from a separate company, which is not part of the sponsoring company.
The choice is between:
- An insurance company
- A premium pension institution (PPI)
- A pension fund (APF)
Until 2011, corporate pension plans were covered by a pension fund or an insurance company.
The PPI option was officially recognised in 2011, after a lot of justified criticism regarding the high-cost levels and absent transparency of insurance companies. A PPI can administer (only) DC pension plans at low-cost levels with more flexibility.
As of 2016, the APF has been introduced as an alternative pension fund administrator. It can take care of any kind of pension plan, not just DC.
B) What kind and amount of pension systems / claims / indexations do the options offer?
These elements regard the content of your pension claims:
- Guaranteed DB / not guaranteed DC / hybrid pension claims?
- Old age / next of kin / disability pension claims and up to what amount?
- In the case of indexations: conditional and up to what amount?
If you have a Defined Benefit (DB) pension, it means that at pension age you will receive totally guaranteed, or possibly (conditionally) indexed, pension terms without any kind of investment or interest rate risk.
A Defined Contribution (DC) pension plan means that you will be entitled to an annual guaranteed amount of pension premium. This also means that you yourself will be responsible for the total investment risk until pension age and, at that moment, the interest rate risk whilst acquiring the mandatory lifelong annuities.
Your pension claim may also be of a hybrid nature with elements of DB/DC.
In the past, many expats have preferred DB pension claims for their security. However, due to the current historically low-interest rate, DB is extremely expensive and therefore often not viable.
When comparing the kind and amount of offered coverage in the standard or tailor-made pension, one has to look carefully to see what the actual after-tax pension claims at pension age amount to.
C) What kind and amount of premiums/own contributions can you expect?
Have you considered these points:
- Is there a limit to the height of the pension earning wages?
- Does your pension provide the maximum tax allowed premium or just a percentage thereof?
- In the case of your own contributions: to what extent can you contribute and are they totally tax deductible?
If your pension premium is fully tax deductible at an attractive rate, it would be financially beneficial to use the maximum possibility thereof annually. The younger the expat, the more this positive outcome is strengthened by the great effect of compounded return on investment.
D) What kind of tax treatment do both options provide, now and in the future?
Make sure you think about the following:
- Is the deposited pension premium not taxed and does taxation only occur as of pension age (reversal rule)?
- Are your own contributions fully tax deductible?
- At pension age, is there a choice between capital, drawdown, and annuity?
The importance of tax options can best be illustrated by the following example: A company offered two pension taxation options, one of which had the tax reversal rule. The other option was therefore no real option. Due to the tax disadvantage that the option without tax reversal offered, an enormous amount of future pension capital would have evaporated annually.
E) What kind of flexibility and voluntary possibilities are there?
Contemplate the following points:
- Is an extension of all coverages to fiscal maximum available?
- In the case of DC pension claims, can you choose your own investments?
- Can the retirement age be expedited or postponed?
Pension administrators have to standardise their services in order to keep costs low. However, the best ones are still able to offer sensible and valuable flexibility.
It is especially important to make use of the annual maximum tax benefits by depositing additional tax-deductible pension premiums, if this option is available and this is what you want to do, of course.
Finally, check carefully what the investment options are and if the offered lifecycle funds are adequate.
F) What kind of changes in legislation might be expected?
Ask yourself the following questions:
- Are changes expected?
- If so, what might the expected impact be?
- Is the impact different for both pension plan choices and, if so, to what extent?
The Expat Pension Holland approach is to translate complex situations into clearly communicated advice. The choice between a standard or tailor-made pension claim is very important, and by its nature rather complex.
Due to all the legal, tax, actuarial and product aspects, it is in your own interest that a licensed advisor carefully assess your situation and provide balanced and optimal advice.
Contact Expat Pension Holland now