Early retirement? What you need to know

The AOW state pension age keeps rising, but did you know that you don't have to wait until this age to retire? AOW, the General Old Age Pensions Act, is a state benefit that you receive as soon as you are entitled to it. This is at age 67 if you were born before 1 January 1961. For people born between 1 January 1961 and 1 October 1962, this is at 67 years and 3 months. For those born after 1 October 1962, the AOW state pension age has not yet been determined. A private pension, on the other hand, is a savings pot that you build up yourself and that you can access even before your AOW state pension age. What are the possibilities if you want to retire earlier? You can read about that in this blog.

How much earlier can you retire?

If you are considering retiring before your AOW state pension age, it is good to know that this is possible with most pension schemes. Depending on the scheme, you can choose to retire up to ten years earlier than your AOW state pension age. This means that if your AOW state pension age is, for example, 67, you could in principle start enjoying your pension from the age of 57.

With early retirement, there are various options to flexibly adjust your pension to your wishes. For example, you can often choose a full or partial withdrawal of your pension.

• Full earlier pension: this is where you use the full pension amount to stop working earlier.
• Partial pension: with a partial pension, you can continue to work, for example, three days a week, while taking your pension for the remaining days. This helps to make the transition to full retirement more gradual and, at the same time, draw on your pension pot more slowly.

Retiring early sounds attractive, but of course it does affect the amount you receive per month. The amount you have to live on is spread over a longer period. Moreover, the period in which you build up your pension is shortened when you retire earlier, which ultimately also results in a lower return (also see the return-on-return effect).

Older pension accounts have a little more scope

If you have been building up a pension for a long time, you may have older pension accounts that may offer a little more flexibility than newer schemes. In the past, many pension funds offered the option of a so-called early old-age pension or even a pre-pension. This means that with some schemes you could already have a portion of your pension start earlier to fill an income gap. Although not everyone still has these options, older pension schemes can sometimes offer scope for an early payout that is taxed differently than regular pension payouts.

Old pension pots can also be valuable when planning an early retirement strategy. It is wise to find out which schemes you have accrued in the past and what possibilities they offer. On mijnpensioenoverzicht.nl you can easily see what you have accrued with different employers. You will need to visit the websites of the individual pension funds for the specific accrual and schemes. 

Accessing pension assets built up via the third pillar

In the Netherlands, you can build up pension assets via the third pillar of the pension system. This is separate from the pension pot you have built up via your employer through the second pillar. This form of accrual offers you the opportunity to flexibly supplement your pension assets, so that you can stop working earlier without being directly dependent on your regular pension pot.

Those who build up pension assets in the third pillar can benefit from attractive tax advantages that regular savings or investment products generally do not offer. With regular savings and investment accounts, you pay capital gains tax on your savings or investments above a certain threshold. This means that a portion of the return is skimmed off by tax. In the third pillar, on the other hand, you build up your pension assets without this annual capital tax. Furthermore, you receive a tax refund on your deposit, which can make your assets grow faster (provided you reinvest it, of course, otherwise it is a nice pension cashback).

Advantages of pension investing in the third pillar:

• Annual tax benefit on deposit: The annual tax refund effectively lowers your net deposit, resulting in a more favourable build-up of your pension assets.
• No capital gains tax: The assets in your pension pot are exempt from capital gains tax, unlike a regular investment or savings account.
• Lower tax on withdrawal after AOW state pension age: Due to the lower tax rates for those entitled to the AOW state pension, you can withdraw your accrued assets more favourably later, which increases your net income.

Withdrawing your pension assets in one go: What is the impact?

It has recently become possible to withdraw the pension assets in one go upon retirement. This seems attractive, especially if you plan to retire earlier and need extra resources for, for example, a large expense or an investment. But there are important considerations with this choice.

When you withdraw your full pension amount in one go, this can lead to a significant tax liability in the year of withdrawal. In the Netherlands, a pension that is withdrawn all at once is taxed at your highest income tax rate, which means you keep less net of the total amount. In addition, a one-time withdrawal means that you will not have a monthly pension income later, which requires a well-thought-out financial plan for the years thereafter.

Lower income tax after AOW state pension age

An important consideration with early retirement is that as soon as you reach the AOW state pension age, you pay less income tax and social contributions. This means that you keep more net of your gross income as soon as you receive the AOW state pension. For many people who want to retire early, it is useful to include this tax advantage in their financial planning.

For example, if you stop working a few years before your AOW state pension age and draw from your pension assets, this can lead to a higher tax burden. Early withdrawal of pension income means that this income is taxed at the regular rate for working people, which is generally higher than the rate that applies after your AOW state pension age. This means it may be more advantageous to obtain supplementary income for as long as possible from other sources (such as savings or investments) and only draw more from your pension assets after your AOW state pension age.

Tax advantages after AOW state pension age:

• Lower rates: The tax rate on income drops as soon as you reach the AOW state pension age, which results in a higher net income.
• Social contributions: After the AOW state pension age, the social insurance contributions are lower, which further increases your net payout.

By making smart use of these tax advantages, you can better align your pension assets with your future needs. It is worthwhile to create a financial plan in which you optimally utilise the benefits of a lower tax rate after your AOW state pension age.

Should you retire early or not?

Retiring early offers a lot of flexibility, but also requires careful financial planning. By looking closely at your options within the third pillar and utilising tax advantages, you can structure your income so that you can enjoy your early retirement without surprises. Old pension schemes can offer extra possibilities, and considering a one-time withdrawal of your pension assets can be attractive, provided you accurately calculate the tax effects.

Also take into account the benefits of lower tax rates after your AOW state pension age, so that you can develop a strategy that optimally utilises your accrued assets.