Topping up your pension with an annuity: what are your options?

The Dutch pension system is divided into three pillars: state pension, workplace pensions and annuities with an insurer or bank. These three pillars form the foundation of your retirement income. It’s a good idea to work out whether your income from those three pillars is enough to cover your usual outgoings, taking account of your assets. This will help you decide whether you need to take action. Let’s look at annuities as one way of topping up your pension.

An annuity is a way of building up additional income for later on in life. It is divided into an accrual and a payout phase. During the accrual phase, you pay insurance premiums or deposit money into a pension account at a bank. You can use this account to save or invest. During the payout phase, you receive payments from your annuity.

If the annuity capital you are building up meets certain conditions, the deposits or premiums paid can be deducted in box 1 of your tax return. This is governed by the Dutch Income Tax Act. The Dutch Tax and Customs Administration does not tax the accrued value of your annuity in box 3. The benefits you later receive will be subject to income tax in box 1.

Strict conditions apply both to the maximum deductible amounts, the payout term and the amount of benefits you receive. Read on to find out what these conditions are.

The amount your annuity will contribute to your pension depends on:

• the premiums you paid or the amounts you deposited
• the returns from saving or investing those premiums or amounts
• the payout term

The new Pensions Act took effect on 1 July 2023. One of the main aims of this law is to align accrual margins for annuities and pensions, giving everyone the same scope to build income for later life. These are the rules that apply in 2025:

• Annual margin: the maximum amount of deductible premiums you can pay into annuities is 30% of the premium basis (up to a maximum of €35,798). Essentially, the premium basis is your income minus the portion on which you will receive your state pension later.
• Reserve margin: if you don’t use up your annual margin completely, you can use this reserve margin later. The unused deductible is equal to the amount of your annual margins from the previous ten years, but is capped at €42,108.
• Additional years of accrual: you can continue to deduct premiums for up to five years after reaching the state pension age.
• Annuity premiums can only be deducted if you have a pension shortfall.

The annual margin and the reserve margin together determine the maximum tax-deductible amounts. You accrue capital through your deposits and the returns and you can access this capital on the date on which your annuity matures. The return and the costs vary from one annuity and provider to another.

The amount of your benefits depends on your deposits, return and payout term. The length of the payout term is legally defined, but you do have some freedom. Let’s take a look at the most important rules.

1. Annuity with a professional insurer:
   You can take out an annuity with an insurer, which will take effect no later than five years after you reach state pension age and will end when you die (old-age annuity). A ‘temporary old-age annuity’ is another option. This will pay out for at least five years, starting between when you reach your state pension age and no later than five years after that. The benefits cannot exceed €26,781 per year (2025).
2. Annuity with a bank or an investment firm:
   If you have accrued capital at a bank or investment firm, you can convert that capital into periodic benefits. These benefits must start within five years of the year in which you reach state pension age. You must receive periodic benefits until you are at least twenty years older than your state pension age. If your benefits start before your state pension age, you must add the number of years before that date to the 20-year period. You could opt for a temporary benefit here too.

You should also be aware that your insurer will stop paying benefits upon your death. The benefits could then transfer to your partner, for instance. If the pension is held with a bank, your heirs will receive the remaining benefits.

Bear in mind that the law changes regularly. If you have an older annuity policy or an annuity account, terms and conditions other than those above may apply. As ever, it’s wise to seek advice. Review your financial plan for later life, making sure there’s a balance between the three pillars, your assets and your expenses.

Our advisers would be happy to discuss your situation with you. Make a no-strings-attached initial appointment whenever it suits you.

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