Retirement, mamma mia what a tricky topic! Aside from the fact that this is so far away, and feels like a “far from my bed show,” it can also seem enormously complicated to get started on your retirement yourself. Indeed, we use the word “seem,” because it seems harder than it is. Last time, the Elfin team fermented and delved into retirement building. These 5 lessons we learned.
Psst: read this article on how to build sufficient retirement for yourself
- The pension system in the Netherlands;
- The principle annual space;
- The tax benefit;
- What is reserve space;
- Factor A.
Lesson 1: The pension system in the Netherlands
In the Netherlands, there are three ways to build up a pension. First, every Dutch citizen is entitled to AOW, a pension provided by the government. In addition, a large proportion of the Dutch build up pension through an employer pension plan. The third way is a voluntary, individual retirement plan. This allows employees without an (adequate) pension plan or self-employed workers to build up (additional) pensions themselves. The latter, building up your own pension in pillar 3, can be done through retirement savings or – investing in an individual account.
Lesson 2: The principle annual margin
If you accrue pension through your employer, you will receive a Uniform Pension Statement (UPO) every year. This statement shows how much pension you accrue through your employer. Often, in addition to the pension you accrue through your employer, you may set aside a little extra for later. Exactly how much this is depends on your annual allowance. Annual margin is the maximum amount you would be allowed to save or invest tax-free in a retirement account this year. How big your pension gap is depends on your employer’s pension coverage. Therefore, when you go to calculate your annual margin, you need your Factor A (we’ll come back to that in a moment).
If you have annual allowance, you can deposit this amount in an escrow retirement account. Part of the deposit you then get back through your income tax return. If you are an entrepreneur or self-employed person, you have annual margin to spend anyway.
Want to know more about annual margin and calculate it quickly? Read that this article!
Lesson 3: The tax benefit
If you start investing for retirement, you can get a tax benefit from it NOW. How so? Suppose you earn €36,000 gross per year. Then you pay 36.93% tax on your income. Your employer helps you and contributes €200 euros per month to pension with you. However, your annual margin shows that you are allowed to add another €1850. This is what you do. And because the IRS wants to reward you, you can get part of that €1850 back from the tax. How much? That 36.93%! That means you put €1850 into your pension for later, and get €683 in return NOW! You may offset that while doing your income tax.
Suppose you had had no employer pension, you could deduct as much as €3000 and even received €1107 back.
Just a reminder of all the tax advantages:
- Used annual allowance is deductible on the next income tax return aft deductible in box 1. So this provides you with immediate interim tax benefit. The amount of the tax refund depends on the bracket in which the top of your income is taxed.
- You don’t pay box 3 capital gains tax
.
- After AOW, you pay a lager rate for the income taxing – namely excluding national insurance contributions, which is now about 19%.
Lesson 4: What is reserve space
We just talked about annual allowance, but there is another term that is important: reserve allowance. The reserve room is the sum of the unused annual margin over the past 10 years. The annual space is the amount the Internal Revenue Service allows you to deduct from your income on your tax return because you didn’t accrue enough pension in a given year. So you can retroactively deposit extra money into your retirement account, and how much that is you can calculate, for example, with this tool.
Lesson 5: Factor A
Factor A, another term. You’re in the mood to get started on your retirement, you open the annual space tool, and there you see it: FACTOR A. Give me a break, you’ll think. But don’t stop now! Factor A is nothing more and less than an indication of your pension accrual through your employer contributed to your pension. Your employer may be lending you a hand by building up collective pensions each month. You enter this amount in the annual margin tool and then find out what you are allowed to put in extra to build up additional retirement income. And on this extra amount, therefore, you get tax benefits again.
