The pension predicament: save the stress and start making decisions

Ybo is 61 and wants to retire as soon as he reaches 63. Unfortunately, he lost his job in 2014, but then went to work at a small accounting office. Although he had a good pension scheme with his previous employer, he soon found himself with a pension shortfall after getting divorced in 2005. He does not have a pension with his current employer. Instead, he gets a higher salary and has to sort out his pension himself, which he does in the form of annuities through bank savings. He has also paid off his mortgage early.

Ybo now works four days a week and takes home €4,000 net per month. He has €500 left over every month and has managed to build up a stock portfolio of around €80,000. He also has another savings account for any unplanned expenses. He hopes to cut down on his spending a little once he retires. Ybo lives with his partner, who has a good income and is building up enough of a pension.

Over the years, the state pension age has been rising. If you go to mijnpensioenoverzicht.nl, you will most likely see multiple retirement dates. Your own state pension date may be different from this.

For Ybo, who hasn’t built up any more pension since 2014, his private pension starts on his 65th birthday. His state pension age is three months after his 67th birthday. Once he starts receiving state pension, his net monthly income will be €3,500. That is 87.5% of his current net monthly income, which Ybo is happy with.

If you want to retire early, not only will you no longer receive your salary, you will no longer be building up a pension either. To bridge that gap, you can bring your retirement date forwards. This means you’ll receive a lower pension amount, because your existing pot has to be stretched out over a longer period.

Ybo faces a gap between his ideal retirement date (his 63rd birthday) and his state pension start date. When he retires, he will not be getting his state pension straight away; also the tax rate on his income will be much higher than after he starts taking his state pension. His annuity payments will not make up for this shortfall, and his net income will be €2,000. He isn’t keen on the idea of cutting back heavily on his spending or working part-time. What can he do?

a. Take a higher retirement pension and lower partner’s pension (or vice versa)

If you don’t have a partner or if your partner has enough income of their own, you can reduce the partner’s pension and increase your own retirement pension. It works the other way round too, for instance, if not enough pension has been built up for your current partner following a divorce or if your partner has a low income. In that case, you can choose to reduce your retirement pension and increase the partner’s pension.

Ybo’s partner has built up enough income, so together they decide that the partner’s pension can be converted into a larger retirement pension. For Ybo, this means an increase of about €175 net per month in his pension. Unfortunately, that alone isn’t enough to bridge the gap.

b. Increase your private pension and reduce your state pension

If, like Ybo, you won’t be receiving the state pension initially when you retire, you can compensate for this by increasing the amount of private pension you receive in the meantime. Because you will be receiving some of your private pension capital to bridge the gap, the monthly state pension you will get when you reach state pension age will be lower.

Ybo decides to take advantage of this opportunity. His net income (pension and annuities) per month before state pension age would then amount to €2,850 ‒ about 70% of his current net income per month. This means the amount of state pension he receives once he reaches state pension age will be lower, but because he’s also converting his partner’s pension into a retirement pension, his total monthly net income after reaching state pension age will amount to about €3,100. But Ybo then realises that he wants to do some travelling as soon as he reaches retirement, which means he will need more money to spend.

c. Receive more (or less) of your pension initially

When you retire, you might want to receive more of your pension at first and less later on, maybe because you haven’t fully repaid your mortgage or because you want to go travelling. Once your pension starts, you can choose to vary the amount you receive, but you can also do this the other way round and take less of your pension for the first few years. If you choose to receive a lower amount at first, this cannot be less than 75% of the higher pension amount taken.

Ybo opts to do this and take a higher pension until he reaches state pension age. This results in a net income (pension and annuity) of €3,150 before he reaches state pension age and approximately €3,050 afterwards.

d. Take a lump sum payout

Ybo has now mostly completed his pension planning. Six months before he retires, he can inform his pension administrator about his final choices. There may still be another choice to make. The Dutch government has put forward a bill that would allow you to withdraw 10% of your pension capital in one go. Having a higher amount paid out as a lump sum might sound attractive, but this can create a lot of financial complications. More about that in a blog post to follow.

The table below shows the difference in income for Ybo before and after retirement at the age of 63, based on annual amounts.

Retiring early means saving more earlier, spending less now or settling for a lower income later.

Taking the right steps starts with setting out the building blocks:

• Your ideal retirement date
• Your income
• Your expected expenditure

Once you know what these are, it’s time to start putting your pension plan into action and make adjustments when needed. For example, you can top up your pension through tax-friendly annuities, with more options now available to you.

If you want to work out the pension built up with your employer, you can often find useful calculation tools on your pension provider’s website. By knowing the options you have and making smart choices, you may be able to do more than you might think. Yet, it’s still important to keep abreast of changes. The new Dutch Pensions Act will have an impact on the level of pension benefits. And remember that any change to your income can affect taxes and benefits. A good pension adviser will pay for themself soon enough!

• ‘Topping up your pension with an annuity: what action can you take?’
• 'Should you top up your pension with pension savings or repay your mortgage?’
• ‘To retire or not to retire: should you carry on working after retirement age?’