Topping up your pension with an annuity: what are your options?
When you retire, the last thing you want to worry about is money. You’ll receive a state pension, but you’ll also need to make sure you arrange your own private pension, either through your employer or in another way. In this blog, we’ll explain your options for topping up your old-age pension with an annuity.
The three pension pillars
Before we begin, it’s worth knowing that the Dutch pension system consists of three pillars. The first is state pension, the second is pension accrual through your employer and the third is an annuity with an insurer or bank. These three pillars form the foundation of your retirement income. To determine whether you’ll have enough in each of these pillars, you need to consider what assets you’ll have by the time you retire and how much you expect to spend. Once you know that, you can decide what you need to do for each of the three pillars. We’re now going to discuss annuities and help you strengthen your third pillar.
What is an annuity?
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. In the accrual phase, you deposit amounts into your bank savings or investment account or pay premiums to an insurer. In the payout phase, you receive the benefits.
Save tax while you save for a pension
The Dutch Income Tax Act stipulates that 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 means that the accrued value of the annuity is not taxed in box 3. However, the benefits you receive later do constitute taxable income in box 1.
Strict conditions apply both to the maximum deductible amounts and to the payout term and amount of benefit you will get. Read on to find out what these conditions are.
How much annuity capital can you build up?
The amount your annuity will contribute to your pension depends on several factors, such as the tax-deductible amounts allowed, the return on the accrued value and the payout term.
1. The annuity premium amount
The new Pensions Act took effect on 1 July 2023. One of the principles of this legislation is to harmonise the margin for accruing an annuity for your pension. The goal is to make sure that both employees and the self-employed (whether or not they have a pension plan) will have the same opportunities for building up an old-age pension. To achieve this, the rules on annuities have been substantially amended.
- Annual margin: the maximum amount of tax-deductible premiums you can pay into annuities is now 30% of the premium basis (up to a maximum of €36,077). The premium basis is essentially your income minus the portion on which you will receive the state pension later.
- Reserve margin: if you do not use up your annual margin completely, you can use this reserve margin later. This unused deduction is now equal to the unused annual margin for the past ten years, up to a maximum of € 41,608.
- Additional years of accrual: you can continue paying tax-deductible premiums for up to five years after reaching the state pension age.
- Just like in the current situation, annuity premiums can only be deducted if you have a pension shortfall.
2. The return on the accrued value
The annual margin and the reserve margin together determine the maximum tax-deductible amounts. These amounts deposited or premiums paid to the insurer and the bank, plus the return, minus the costs, form the capital that you will receive when you start receiving your annuity payments. The return on the accrued value, and the costs, vary from one annuity and provider to another. See ABN AMRO’s current rates and costs.
3. The annuity payout term
On top of premiums and returns, the payout term determines the amount that your benefit will be. The accrued value could be paid out over a period of five years or the rest of your life, and this will affect your benefit amount. But you don’t always have the option of deciding, as there are legal stipulations. Let’s take a look at the most important ones.
- 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). The assumed number of years over which the annuity will be paid determines the benefit amount. But 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, and the benefit will not exceed €26,463 per year (in 2024). - Annuity with a bank or an investment firm:
You can choose to have the capital paid out by a bank or investment firm. The balance in this account must be converted into periodic benefits, which will take effect no later than five years after the year when you reach state pension age. You must receive periodic benefits until you are at least twenty years older than your state pension age. If you start taking the benefit before reaching your state pension age, the twenty-year term will be increased by the number of years until you reach state pension age. You could opt for a temporary benefit here too.
It’s important to know that a pension from an insurer will cease when you die, unless there is a second insured person. The benefits could transfer to your partner, for instance. If the pension is held with a bank, your heirs will receive the remaining benefits.
In summary
Bear in mind that the legislation on old-age pensions changes regularly. If you have an older annuity policy, terms and conditions other than those above may apply. Be sure to seek advice on this. Also look at the balance between the three pillars, your assets and your expenses when planning finances for your golden years. Our advisers would be happy to discuss your situation with you. Make a no-strings-attached initial appointment for whenever it suits you.
