We recently engaged with an early-thirties expat client originating from the U.S. who wanted to know if is possible for her to build a pension pot here. And if that is still the case if she leaves for a next life outside the Netherlands in say 5 years. The answer is yes and yes!
Pension capital eligibility
Dutch tax residents are allowed to build pension capital through a pension scheme offered by employers. If the employer does not provide that possibility you can put money in to a private pension scheme which is mostly referred to as annuity (“lijfrente”).
For Dutch tax residents with a different passport there may be challenges to open an account at a Dutch insurer, bank or investment manager offering lijfrente possibilities. We have been successful most of the time.
Until 2023, putting your money into a lijfrente was very restricted. The Dutch scheme allows you to deduct contributions to pensions (subject to a maximum amount determined by you taxable income) in the year you contribute. Pension capital is not taxed if you do not touch it. Once you reach Dutch State Pension age you can start using your pension pot. What you use then is taxed. As the tax rate from State Pension age is lower than before, many benefit three times:
- contributions are deductible from current taxable income (i.e. the after tax cost of your contribution is much lower),
- pension capital is never taxed (not only what you contribute but also the return which is made in the pot) as long as you follow the rule book,
- when the pot starts distribution, the income tax rate is lower than today so the net income effect is higher.
The pension law changed this summer, with retroactive effect to 1 January 2023. Because of this change the possibilities to contribute to the pension pot with tax support have more than doubled.
EJ had followed her spouse for a job here and started her own company. Her taxable income for last year was €20,000 and her income for this year is growing quickly.
We built a scenario where EJ would contribute €5,000 per year for 5 years. As the moment she would use the pension pot is now more than 35 years away we recommended she puts these contributions in an investment strategy with a high return probability. We assumed the net return after costs is 6%. When EJ leaves our lovely country she has contributed €25,000 and when she turns 68 she will have a pension pot of €379,000. If we assume a 5% return rate after that moment, the pension pot will yield €2,500 each month for 20 years.
This personal pension pot will distribute to any valid IBAN in your name you have given at the time the pension pot distribution agreement is made. You will receive what is due net of (lowered!) Dutch income tax wherever you put your feet up or finish that bucket list.
Please make sure your adviser points you to a suitable investment house with a strong pedigree. Pension advice is needed by everybody but giving it is not.
Call to action
November is possibly the busiest month for setting up pension plans. We recommend you start quickly!