Ideal expat pension planning requires that the previous, current and future residency of the expat are taken into account. Often the future residency is not yet known and flexibility in planning is essential.
The most relevant topics for the expat residing in Holland:
A) Dutch Pension System
- Pillar 1: Governmental coverage for residents
- Pillar 2: Corporate coverage for employees
- Pillar 3: Private coverage by individuals
B) Dutch Pension Coverages
In Holland only the following coverages may legally be called pension:
- Old age pension
- Next of kin pension
- Disability pension
If coverage can’t be acquired as ‘pension’, it might be possible as ‘insurance’.
C) Pillar 1-3
- These pensions are for residents and those who voluntarily participate. If this is advisable should be calculated. Total old age pension coverage is acquired after 50 years of participation. Pension payment while one lives abroad is i.e. possible.
- The pension age is increasing. It will be age 67 as of 2021 and then linked to life expectancy.
- Implementation is handled by www.svb.nl . Check your pension age at SVB’s retirement calculator page
- Participation is often mandatory due to collective agreements.
- Pension capital has to be secured outside of the sponsoring company.
- These pensions are i.e. implemented by Branch/Corporate Pension Funds or Insurance Companies. As of 2011/2016 it can also be covered by a Premium Pension Institution (PPI)/General Pension Fund (APF).
- The EU tries to expand the Pan European Pension Plan (PEPP). It is transferable across EU member states.
- As of 2018 the pension age will be age 68. Most plans have a flexible pension age.
- Private coverage entails insurance/investment/mortgage plans. They often have a tax benefit. Check the cost levels of these products as in the past they often were (too) high.
- For expats it is relevant to know that only few in Holland located insurance companies and banks are willing to receive Dutch Private Annuity Capital and provide an annuity to an expat outside of Holland.
D) Dutch Corporate Pensions
DB versus DC
- Defined Benefit (DB) pension plans provide guaranteed pension terms at pension age. There is no investment / interest rate risk. Which now makes these plans extremely expensive.
- Defined Contribution (DC) pension plans give guaranteed amounts of pension premium. At pension age an annuity will have to be bought with the pension capital. There are no guaranteed pension terms. There is a substantial investment / interest rate risk.
- As of 2017 it is allowed to within DC partially keep investing pension capital as of pension age. The risk profile has to focus on the period before and after pension age.
Typical Dutch Restrictions
- The maximum amount of pension earning wages amounts to € 105.075,- in 2018.
- Which wages have to be decreased with a 2018 franchise of i.e. € 12.129,-
- Product-related pension advice may only be given by a licensed pension advisor. He must be independent and may only receive payment from his client.
Social Security Employees Coverage
- Employees in Holland participate herein. It provides basic coverage for disability. If coverage is not obliged and you leave the EU, it is under conditions possible to voluntarily participate.
- Coverage is implemented by www.uwv.nl
E) Dutch Transfer of Pension Capital
International Transfer of Pension Capital
- In general it is possible to transfer pension capital from one expat pension plan/country to the next before pension age.
- The constant value of the existing expat pension claims will be transferred to the next expat pension plan/country and implemented as suitable according to its pension claims.
- It is relevant if the existing and new expat pension plan have a DB/DC/CDC/hybrid nature as this impacts how to determine its constant value and financial implications.
- Each country has its own legal/tax/procedural regime and substantial differences exist. For the procedure it is relevant if the transfer is within or also outside of the EU.
- Distinguish between authorization from civil versus tax authorities.
- Distinguish between individual versus collective transfers and a legal entitlement versus just the possibility to ask for a transfer.
- If a transfer transforms an existing DB/CDC pension claim into a DC pension claim, question if you prefer to trade existing and paid for guarantees for (substantial) interest rate and investment risks.
Transfer from Holland
- Dutch legislation is rather strict regarding civil law/tax requirements.
- To transfer capital from a Dutch expat pension plan to the next plan/country is only possible if the latter has the same guarantees as the Dutch pension plan.
- Thus this transfer is seldom allowed.
Transfer to Holland
- To transfer pension capital to a Dutch expat pension plan from another plan/country is generally less difficult.
Prevent Unnecessary Risks
- Due to the technical, legal, tax and product aspects of international transfer of value, it seems advisable to obtain advice beforehand.
F) Dutch or Expat Plan
Companies often try to provide expats the best service by offering two options:
- Participate in the regular local (Dutch) collective pension plan
- Participate in the only for expats available international plan
Please obtain advice as the differences can be diverse and their impact enormous:
- Do both plans provide the same kind/amount/choices of coverages?
- Both plans have an equal Capital/Risk based nature?
- Both plans have an equal own contribution?
- It is advisable to be highly critical about cost levels as their compounded impact is huge.
- Are all costs exactly specified?
- Regular collective pension plans can have low cost rates. Please check.
- Expat pension plans too often have (partially) very high cost levels. Please check.
- Both plans have the Reversal Rule?
- Both plans have equal tax exemptions?
- Both plans have similar tax rates and net tax impact?
A company offered two options of which only one had the tax Reversal Rule. Thus the other option was no real option: Due to the tax disadvantage an enormous amount of future pension capital would evaporated annually. Which we prevented from happening.
G) Dutch Tax on Pensions
- In Holland by employer paid pension premiums are exempted from wages taxation. The own contribution is tax deductible. The pension annuity is taxed as of pension age.
- If not all conditions are met, instant and total taxation including a stiff fine might materialize.
No Lump Sum/Exemption
- Contrary to the UK where lump sum deposit is allowed for a DC pension plan as of age 55, Holland allows only lifelong pension annuities.
- Likewise Holland does not allow a 25% exemption from taxation.
Dutch 30% Tax Ruling and Pensions
- Expats who reside in Holland can apply for a 30% tax ruling. If granted they can i.e. receive 30% of their wages without tax.
- In general these 30% cannot be included in the pension earning wages. Only in specific instances it is allowed.
Holland and International Tax on Pensions
- Before retirement expats should check the tax situation of each pension claim.
- It might prevent high tax claims by using international (mostly bilateral OESO based) double tax treaties and unilateral national regulations on double taxation.
- I.e. the country where the retirering expat resides is entitled to tax regardless of nationality/origin of pension. Many exceptions (often for governmental pensions) do exist.
- Double tax treaties don’t create the right to tax. They regulate which country may implement existing national tax law.
- Holland has an extensive international network of more than 100 bilateral double tax treaties. Use it to your advantage.
H) Freelance Expats
Freelancer in Holland
We see many expats working in Holland as freelancer. In Holland you are considered a freelancer when you perform services for a client without having an employment contract and without having set up a separate company.
You are required though to draw up and sign a specific type of contract with a client that defines the working relationship. This is to clarify who would be responsible for contributing to the freelancer's welfare or unemployment benefits.
What does the freelance status mean for your pension situation?
Existing Pension Claims
Already acquired State/Corporate/Private Pension claims abroad have to be included in your pension planning.
Good to check if transfer of value is possible and if so if it is desirable. In case of investments also if the costs are not too high and if the Asset Location Management is optimal.
From now on we will focus solely on Holland.
Pillar 1: State Pensions
Every expat who lives and works in Holland is covered by the Dutch Social Security. Which is implemented by the www.svb.nl It provides a State Pension Coverage regarding Old Age and Next of Kin.
A) The Old Age Pension coverage is called AOW. People who have lived in Holland for 50 years as of age 15 have at retirement age the full benefits. Which is currently annually pre tax per person €10.470,- in case they are married and if they are single € 15.206,-.
The retirement age depends on your own age and is currently in general age 66. As of 2021 it will increase to age 67.
B) The Next of Kin Pension coverage is called ANW. In case your partner passed away and you were covered, then a mere modest pension will be paid until retirement age. The criteria are strict and own resources can limit the amount of the pension quickly.
C) Many expats have lived in other countries before they moved to Holland, which in general results in reduced AOW coverage. For them it is good to know that it is possible to, on a voluntary basis, acquire additional AOW rights. Which possibility has to be compared with alternative propositions.
D) Likewise many expats leave Holland and might not generate substantial State Pension rights in new countries. Under certain conditions it is for them also possible to prolong the Dutch coverage regarding AOW, or ANW or both.
E) Please be aware that the Dutch Social Security Coverage does not include coverage for the employment agreement related unemployment and disability coverage. The WW and WIA are implemented by the www.uwv.nl
Pillar 2: Corporate Pensions
As freelancer you do not have an employment contract. Which means that from a legal perspective you can not be covered by a corporate pension plan.
As a corporate pension claim is in general an important factor for acquiring sufficient old age and next of kin pension coverage, freelancers might want to see how they can close the gap.
Pillar 3: Private Pensions
One of the ways to close the mentioned gap is to acquire Private Annuities.
In Holland each taxpayer has the possibility to acquire a private annuity and to a certain extent with full tax benefits. Meaning that the premium can be deducted from the taxable income.
The amount of tax benefit is determined for each year. For 2018 it is a maximum of € 12.362,-.
In case the fax benefits of the last 7 years have not totally been used, it is still possible to use them in the current fiscal year with a 2018 maximum of € 14.152,-.
While determining the personal maximum tax benefit, the tax authority also takes into account already existing pension claims. Such existing claims decrease the personal annual tax benefit.
Regarding the implementation of the private annuity, there are many different product/cost/ risk/investment possibilities. As there are many technicalities, it seems wise to seek advice.
As the freelancer has no corporate pension plan based next of kin pension as risk coverage, it is advisable to carefully look at alternatives if you have a family. A logical first step.
Make sure your coverage reflects your whishes. A lacking coverage is not advisable but equally wise to prevent unnecessary annual risk premium costs.
As there are many different products, it seems again wise to seek advice.
PEPP for Freelancers
In June 2017 the European Commission introduced ‘PEPP for freelancers’. This might become a private annuity for each EU citizen and with free transfer throughout the EU.
The EU hopes to create the PEPP with annual tax benefit. Currently the PEPP is still in the legislative creation process. We believe that the PEPP can only be an interesting alternative for freelancers if it has equal tax benefits.
The optimizing of the freelance pension planning means that the existing/current/future State/Corporate/Private Pensions are optimized from a personal/cost/investment/risk/tax point of view.
I) Pan European Pension Plan (PEPP)
Relocating Expats and their Pensions
Many expats in Holland have already resided in other countries and probably will do so again in the near future. These expats might end up with many different kind of pension claims in several countries.
Of course this is not very convenient and also not good for the oversight. In order to prevent these issues, expats can try to transfer all their corporate pension claims to one final corporate pension claim. Is this as easy as it sounds?
Such a transfer of pension claims raises several issues:
- Each country has its own legal and tax regulations about the possibility of such an incoming or outgoing pension capital transfer.
- Transfer of value is a rather complex issue as it regards legal/tax/actuarial/product specifications.
- Even when transfer of pension capital is possible from a legal and tax point of view, expats still have to decide whether it is also desirable to transfer. Differences in the nature of pension claims for example might make transfer of pension capital not attractive at all.
Ideal Solution for Expats in EU
In order to prevent all these issues, it would be ideal for expats in the EU to have their own personal corporate pension plan, which they can use in each country in the EU they reside in.
This would prevent transfer issues and the expat could also choose the kind of pension plan that best suites his wishes.
Due to several legal matters it is not yet possible for an expat to have and use such an individual corporate pension plan in the EU. It is also highly unlikely that this will change in the near future.
New EU Alternative: PEPP for Expats
In June 2017 the European Commission introduced ‘PEPP for Expats’.
This newly to be created Pan European Pension Plan (PEPP) should come within reach of every EU citizen in order to build up sufficient retirement coverage with tax benefits.
The PEPP will be a voluntary scheme and offered by a broad range of financial companies across the EU. It has to be available to savers as a complement to public and occupational pension systems, alongside existing national private pension schemes.
Which results in the following summary regarding pension accumulation:
Pillar 1: State Pensions
Pillar 2: Corporate Pensions
Pillar 3: Private Annuities like PEPP
Positive aspects of PEPP for Expats
- The expat will be able to use his PEPP in the whole of EU without any transfer of value issues. Which is a substantial improvement and cost reduction.
- Expats who currently do not have any pension claim can use the PEPP to start with building up pension claims with tax benefits.
- The expat can choose the PEPP product he prefers and also buy it from the financial institution he prefers.
- Many employees and expats have a (severe) lack in pension rights. With the current very low interest rate and the increasing life expectancy these problems will not go away automatically. As many Member States have to look at the future funding of state pensions, which might lead to a reduction thereof, it seems almost inevitable for a PEPP to be useful.
Critical aspects of PEPP for Expats
- The essence of optimal pension planning is to reduce costs and invest in the best way possible. Cost reduction is best done through a collective approach. As the PEPP does not have a collective but individual nature, that does not really give the PEPP the best starting position for all important cost reduction.
- The EU Commission advises Member States to provide tax benefits for citizens who have a PEPP. As the alternatives like corporate pensions also will have tax benefits, this sounds plausible. But the big issue is if and if so how much the tax benefit will amount to.
Support for the PEPP
Besides the EU Commission, there is substantial support for the PEPP from the European Parlement and from the European Insurance and Occupational Pensions Authority called EIOPA.
EIOPA is the European supervisor on insurance and pensions and has an important role and fine reputation. Its very positive attitude towards the PEPP is relevant.
We will follow the process of how the EU tries to create the PEPP as viable alternative for corporate and state pensions in a positive critical manner.
We expect that the deciding factor for the creation and success of the PEPP will be to what extent Member States are willing to provide tax benefits for the PEPP owner. As well as the question who within the EU will fund those tax benefits!
In Holland the tax benefits for corporate pensions are more substantial than tax benefits for Pillar 3 ‘s private annuities.
J) Global Expat Reality & Services
Expats Pensions Underexposed
Expat pensions are often underexposed. Mostly due to busy schedules and the lack of required knowledge regarding:
- Civil/Tax/ Social Security law
- Pension and financial products
Expats Require Customization
- Each expat has a special situation and personal preferences. Circumstances can change in time. Only customization provides the required optimal international (risk) coverages, cost control and flexibility.
- Standard financial products might seem practical. However, they tend to be (extremely) expensive, not flexible and not providing the required customized coverage.
Issues of Customization
- What is the exact coverage and premium of the (concept) pension scheme?
- Is a discussion regarding DB/DC/CDC/Hybrid and PPI deemed suitable?
- In case of DC/PPI the offered investment funds perform well with low costs?
- Their Life Cycle propositions are well structured and with several risk profiles?
- What is the current and future applicable tax/social security regime?
- What does a salary split/tax ruling mean for the (new) pension scheme?
- The next of kin coverage often lacks. Annuity or capital based is desired?
- ‘Small’ differences in disability coverages can have huge impact.
- What is the (proposed) premium allocation between employer and expat?
- Are equal expats treated equally or will harmonization follow later on?
- Timely closure of additional coverage often reduces costs by 50%.
- Is international transfer of value possible and desirable?
K) News August 2019
New Kind Of Workplace Next Of Kin Coverage?
Currently the Unions and Employers are looking into the best manner to change the existing workplave next of kin coverage.
In the past this coverage was often Capital Based. Due to the related high costs, this has in general been replaced by Risk Based coverage. The amount is often 1,16% of the Pension Bases times the years from the start of employment until retirement age.
For example, in case a person of age 40 with a pension bases of € 60.000,- passes away while being covered, he will leave a lifelong next of kin coverage for his widow of gross annually rounded € 20.000,-.
The proposed new plan will provide more choice and pay-out flexibility as is often seen in the UK and USA: The widow would receive 5 times the gross annual wages of the employee and would be able to choose if she would like to get this in 5 annual terms or as a lifelong next of kin pension.
Of course the amount of the claim would be new but in the Dutch regime it would be really new to be able to choose during what kind of term the grant would be received. It would though still be an annuity, not a onetime capital.
More pay-out flexibility is desirable
I support a regime change to more pay-out flexibility.
I often see that expats for themselves choose not an annuity but instead an insured next of kin capital of € 500.000,- for a 5 to 10 year covered period. Which provides relief when needed and is currently not taxed.
Dutch Pensions: Pension Funds In Trouble and Unions Plan National Campaign
Almost two million people could face smaller work-related pensions next year because of problems facing the two big engineering funds.
Both funds booked poor investment returns in the final quarter of last year and do not have the assets considered necessary to meet all their pension obligations, hence the threat of cuts.
‘The chance of a cut has increased, but it is not yet 100%,’ Benne van Popta, who chairs the PMT pension fund said. Eric Uijen of the PME fund told there is a chance of ‘almost 80%’ than pensions will go down next year.
Dutch pension funds are required to have a coverage ratio of 104%, which means effectively they should have €104 in assets for every €100 in pension obligations. Both the PME and PMT had dipped below 100% at the end of last year.
The three big Dutch trade unions are starting a campaign in support of better pensions in the run up to the March provincial elections. March 18 is tipped as a national day of action.
‘We are aware of the fears and concerns of both pensions and people in work,’ Tuur Elzinga, head of the biggest trade union federation FNV. ‘People have watched their pensions evaporate in recent years and they have less to spend. We want to see index-linked pensions which go up with prices,’.
More funds According to the Financieele Dagblad, some 40 of the 200 sector pension funds may have to cut pensions but most have until 2020 to get their investments up to scratch. Research by the family spending institute Nibud last year showed pensioners with a state pension and a supplementary pension of at least €5,000 a year have been steadily losing spending power since 2010.
Reforms Talks between unions and employers on reforming the Dutch pension system collapsed last November after the big three unions pulled out. Experts believe that the Dutch pension system – a combination of a state pension (AOW) and corporate pension schemes – needs to be reformed because the aging population is putting more pressure on the current pension system and pension funds are having to pay out to more people for longer.
The rise in self-employment is also having an impact, with fewer people paying into company and sector-wide schemes. Talks on reform began several years ago.