In the Netherlands, more than 1.2 million self-employed people work as self-employed persons. An incredible, and growing, number. Never before have so many people chosen to start their own business. This self-employed person arranges everything himself, his customers, his insurance, a separate bank account for the business, and of course his own pension. That is, they should, because almost a quarter are not building up a pension at all. These people run a great risk of having a lot less income later when they stop working.
How does pension work in the Netherlands?
In the Netherlands there are three ways to build up a pension. First of all, every Dutch person is entitled to AOW, a pension provided by the government. In addition, a large proportion of Dutch people build up a pension through a pension scheme with their employer. The third way is a voluntary, individual pension provision. This allows employees without (adequate) pension schemes or self-employed persons to build up (extra) pension themselves.
Pension for self-employed people
Anyone who does not arrange a pension through an employer or a supplementary pension account must rely on the AOW. The current AOW amount is currently €1,187.43 for singles and €812.71 for cohabiting or married people. For comparison: that amounts to 70% and 50% of the minimum wage respectively.
That's not very much, indeed. Certainly not when you consider that the average self-employed person earns less than €40k annually. That is – indeed – almost three times as much on a monthly basis as the AOW for singles. Anyone who does not build up a pension as a self-employed person can therefore be in serious trouble after retirement age. This is also confirmed by the current retiring self-employed. According to Nibud, more than 40 percent of them find it difficult to make ends meet after retirement.
The Netherlands is becoming more enterprising and grayer
There is a good chance that the state pension will decrease in the future. We currently have about 3.2 million people over 65 in the Netherlands, but that number will be 50 % higher in 20 years: by then the Netherlands will have 4.8 million people over 65. So a lot more retirees. The Netherlands is not only becoming more enterprising, but also grayer.
That's nice. It means that we are doing something right. But this aging population could have serious consequences for our pensions. We are currently all paying taxes for our state pension. But if there are more and more elderly people – and therefore relatively fewer workers – less tax will be collected. That can mean two things: either pay more tax or receive less pension. So not a bright future for the self-employed.
Building up your own pension is a piece of cake
The text above may suggest that a kind of doomsday scenario is unfolding around retiring self-employed people. Fortunately, that is certainly not the case. At least, not as long as self-employed people ensure a decent income for later. Fortunately, this is a piece of cake nowadays and the government is happy to lend a helping hand. Below we discuss the different options.
Build up a supplementary pension
We have already indicated that self-employed people can build up an individual pension themselves. This can be done with a specially designated pension account. The Dutch government likes self-employed people to contribute to such a pension account and that is why part of the contribution is tax-free. For example, if you deposit an amount into the pension account in 2020, you can reclaim part of it during your tax return in 2021. In this way, the tax authorities contribute to your pension. Because of this tax advantage, not everyone is allowed to simply contribute to such a pension account and there is a maximum contribution per year: the annual space. You can easily calculate your annual space here.
Fiscal old age reserve (FOR)
If you are an entrepreneur, you can set aside part of your profit tax-free for your pension. The part of the profit that you set aside is called the 'addition to old-age reserve'. You can have this amount paid out at your retirement age, after which you will still pay tax at a lower AOW rate. The addition to the old-age reserve is an accounting reservation. This means that you are not actually obliged to set the money aside in a designated account. So you decide for yourself what you do with the old age reserve, but one thing is certain: you will still pay tax on your old age reserve later. If you want to build up FOR, you can do this by declaring this during your tax return.
Build up a pension through a free savings or investment account
Do you want a little more freedom in building up your pension? Then you can choose to investing or save on a free account. There are no tax benefits associated with this, but such a free account does give you a lot of freedom. You can always withdraw the accrued amount at any time. That is also a pitfall: by withdrawing the money in the meantime, you are actually taking a chunk out of your pension for later...
Start building up your pension immediately
As a self-employed person, you also have to fend for yourself when it comes to your pension. Do you need help with this? Please contact Brand New Day's advisors.