We often get the question from clients about their Dutch old age pension. Have they made contributions and what is the current status of their pension rights. Here is how that works.
Dutch old age pension / AOW
Despite what is being thought, nobody is building up pension rights. The old age pension was abruptly introduced by Mr Willem Drees after the second world war and for the old aged persons then it was not able to contribute a premium and then benefit, because they would have been dead before they could enjoy the pension.
AOW no rights being build up
The solution at that time which is still being used is the collective contribution thought. All working Dutch tax payers contribute by paying AOW premium / Government old age pension. This premium is then immediately used for the elderly living now. This transition system does not provide in rights. In other words, if you have reached the AOW age, you need to hope there are still Dutch tax residents willing to contribute for your old age pension without providing any rights to those tax payers.
How do you become eligible to AOW?
Being a Dutch tax resident makes you eligible to AOW/Government old age pension. It is not relevant whether or not you actual contributed by paying tax or if you have been, classic example, the non working spouse all your live. All Dutch tax residents received AOW if the system is still in place when the time comes.
You have been living in the Netherlands for a part of your working life, how about AOW?
If you become 67 years old and you have been a Dutch tax resident for at least 40 years from the age of 15, then you receive the full amount of AOW. To bring in perspective, this is EUR 1.111 (2015) gross per month for a single person and EUR 765 gross per months for a married couple per person and both receive AOW. If you only arrived recently, or you left early, or you returned, then pro rata you are entitled to the AOW monthly pension payment.
There is an option to make extra contributions in order to pay for the years you were not in the Netherlands. With the knowledge of the fact that you are paying for the elderly now without any rights being build up, we have doubts in encouraging you to do so, especially when you look at what it might yield you.
The future of AOW
When Mr Willem Drees implemented the AOW in our tax system, the average age a person became was 67 years old. Hence the AOW age was set on 65 years old, so you could enjoy 2 years of your pension.
Governments since then should have put an index on the 65 years old AOW age as we became older and older. Now man become 75,55 years old and women 81, 44 years old, with is on average 78,43 years old. Taking Mr Drees his calculation in consideration, we should be working till 76 years old to benefit from 2 years AOW. In this considerations man benefit nothing and women benefit all.
Only if that thought is being followed and only if Dutch tax residents accept they are not building up rights but they are contribution to the elderly now, the AOW system will be in place for a long time. However, Governments have neglected this system and only due to the crisis of 2008 this phenomenon has been reinvented and the AOW age has been set at 67 years old, soon to be follow by 68 years old. You can make your own calculations where this will go.
We are not qualified pension advisors, hence we can only provide you with our opinion. Our opinion is that you should disregard the AOW from your future plans. The simple reason being that you have not rights and the future cannot be predicted.
All pension insurances starting date are based on the AOW old age pension start date. This start date is being postponed soon to 68years old, but that will not be the final postponement. You might understand that it is very likely you will not be able to reach that set start date at all. This could make you wonder why to pay for a pension insurance. On the other hand, maybe you easily reach this old age. Know body knows.
Making alternative arrangements under your own full control not influenced by any legislation related to pension insurances could be a good alternative. But then again, only when you are in a position to make such arrangements this can be an alternative. Entrepreneurs doing well should be able to make alternative arrangements.