How can you build up an extra pension pot?

Your state pension (AOW) and employer pension might not be enough later on. Many people in the Netherlands only realise this too late. Building up an extra pension pot gives you more security and flexibility for the future. But how exactly does it work, and why do so few people do it?

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Why an extra pension pot may be necessary

The Dutch pension system consists of three pillars: state pension (AOW) from the government, pension via your employer, and individual supplements such as annuities or pension investing. That third pillar is voluntary, but for many people, it is essential.

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On average, households with AOW and employer pension can replace about 60 per cent of their former income. With extra private assets, this can rise towards 78 per cent. The difference between a basic income and financial comfort often lies in that extra pot.

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Approximately 1.7 million workers do not build up a pension through their employer. That is almost a quarter of all workers. Young people in particular are at risk: up to 15 per cent of 21 to 35-year-olds have no pension scheme. And even those who do build up a pension through work often find it is less than expected. About half of people in the Netherlands will likely receive less pension than anticipated.

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How can you build up an extra pension?

Extra pension accumulation falls under the so-called third pillar. You open an annuity account and deposit money periodically or as a lump sum within your annual margin. That money is invested and grows until your retirement age.

At Vive, this works fully digitally through a pension account. You decide how much and when you contribute. The amount deposited is automatically invested according to a personal lifecycle strategy: more growth potential when you are young, and gradually less risk as your retirement date approaches. Everything is visible via the app, from your deposits to your expected final capital.

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The tax advantage makes this form of extra pension accumulation attractive. Your contribution is deductible from your taxable income, allowing you to get a portion back through your tax return. During the accumulation phase, you pay no wealth tax in box 3. You only pay income tax upon payout, usually at a lower rate than during your working years.

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Yet, only a small minority makes use of this. In 2020, about 5 per cent of employees and 11 per cent of the self-employed deposited money via the third pillar. On average, people in the Netherlands only use a third of their tax room. There is, therefore, plenty of opportunity to build up extra pension with tax benefits.

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Who is an extra pension pot interesting for?

The most common reasons for building up an extra pension are:

• You build up little or no pension through your employer
• You are a sole trader or entrepreneur
• You want the flexibility to retire earlier
• You expect that your current pension will not be sufficient
• You want to protect yourself against inflation and rising life expectancy

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Additionally, the Dutch pension system is shifting towards more individual responsibility. The reforms make personal pension accumulation more relevant than ever.

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How can I build up an extra pension through Vive?

At Vive, you can easily open a pension account. You decide how much and when you contribute. The money is invested through a personal lifecycle strategy: more risk when you are young, automatically decreasing towards your retirement date. Low costs, no minimum deposit, and full insight via the app.

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Want to know how much you can contribute with tax benefits? Check the annual margin calculator. Or read more about pension investing to discover how to build your extra pension pot step by step.

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