The Dutch Government decided last year to introduce a cut off at EUR 100.000 salary for the basis of a pension calculation. For those who think this is already too much, then this is not your article, for those who are indeed concerned about this cut off, please continue.
AOW, how did it start?
The general old age pension you receive at your pension age, for most of us currently at the age of 67 years old, was introduced shortly after the second world war. The big question was how such an pension scheme can be introduced when nobody has made any contribution yet.
The answer was based on a collective thought. The employees working now, are paying for the old age pensioners now. This implies that the system is based on the willingness of the current employees to make contributions to the pension of the current old age pensioners living now.
No rights for AOW
That system also implies you are not building rights for AOW while you are working. You have to hope the system still exists when you are the pension age. Also if you have not worked in your live, the AOW still applies to you as this pension applies to all tax residents.
That said, if you have not been a tax resident for over 40 years time, your AOW payment is pro rata reduced.
What will be the AOW age?
At the time of the introduction of the old age pension the general age people died was 67 years old. So the thought was to enjoy the after working live for two years before you die. Currently the average age we become is 80 years old, but the Government was too afraid to scale up the old age since the second world war, as that is political suicide. The 2008 crisis made this age change to 67 and the age of 68 is already set ready. For sound governance of the old age pension this age should be increased even more.
How does the AOW affect your pension?
Two fold. One minor issue is that your pension is starting to be build up from the assumed AOW amount you receive at your pension date. The other affect which is more significant is the fact that your pension payout date is the moment you have reached your pension age and that is determined by the AOW date.
Pension build up
The old style pension build up was with one employer where you worked your 40, some 42 years of your life. Philips is a good example of such a situation. Now you still have 40 years time to build up your pension, but that will not be with one employer, and you might have gaps in the build up due to unemployment, sabbatical, you even might not have worked in the Netherlands this long.
Maximizing the pension build up to EUR 100.000
Introducing this maximum amount over which you can build up pension was done for budgetary reasons among one of them. By being able to deduct from your taxable salary less contribution to the pension fund because the total amount to be build up is less, makes your taxable salary higher, hence more tax to be expected by the tax office.
Being in control over your own life is by most of us very much appreciated. So why can you not be in control over your pension? If you read this, you are most likely not a native Dutch person living his entire life in the Netherlands. You have arrived at a certain point in time in the Netherlands, certainly not 40 years ago, hence you cannot build up enough pension rights to safely retire.
You might even have assets or pension rights build up abroad and you cannot connect those with your Dutch build up. If you leave the Netherlands, you cannot take with you, without 72% penalty, the Dutch pension value abroad to make it of better use for you.
What if you create your own pension outside the system? It is common knowledge these days that your money is not save in the bank. Then again, if you do think it is save in the bank, you receive nearly no interest over this amount. You could investigate alternatives. If you have knowledge about shares, stocks and options, you can go to the stock exchange in the hope you will have as good a result as the Oerangatang did with his bananas.
You can repay the mortgage over the house you live in. You pay immediately less interest to the bank, please keep an eye on the maximum amount you can repay to avoid a penalty from the bank. It will make the renegotiating the loan over time easier if you already repaid a part. Of course your tax refund will be lower, but if you paid less, the refund can also be less.
Investing in real estate could be an option or in a start up company. All risk involved choices, choices your pension company makes for you every day all day. They have fun with your money, why should you not have a bit of fun. At the same time these alternatives are outside the scope of measures to make you work till your pension date, which could go up to 78 years old. That is the average age we currently become of 80 minus two years of enjoyment of the after work life.
We are not pension advisors, but we do have opinions about pensions. We can help you with your questions, but you always need to keep in mind the risks involved. The risk of making pension premiums while not meeting the pension age in the end and the risk of making alternative solutions which might not work out.