Building up an individual pension: What you need to know?

At Vive, we believe everyone deserves financial freedom, especially during your retirement. The Dutch pension system offers many possibilities, but sometimes that is not enough. That is why it is smart to build up an individual pension. In this article, we explain why this is important, what options there are, and how you can start today.

What is financial freedom?

Financial freedom means having enough money and financial stability to lead the lifestyle you want without being dependent on a salary. It means you have control over your own finances. This way you can provide for your basic needs, pursue personal goals, and solve emergencies without unnecessary stress. 

In practice, this means, "I can pay for everything I want within normal limits." It does not mean you no longer have to work - or that you can just buy a car. Then you are already a bit further advanced. 

But why the link with retirement? 

The link between financial freedom and retirement is that pension planning ensures long-term stability and independence. By saving or investing enough for your retirement, you can stop working earlier and avoid financial stress. Pension accrual offers freedom of choice in your future lifestyle and contributes to well-being and health. Investments for your retirement help your assets grow and protect against inflation. In short, a well-planned pension is an important part of the path to financial freedom.

Why build up an individual pension?

Your pension consists of three pillars: AOW (State Pension), collective pension, and supplementary pension (you can also optionally invest in shares, your home, et cetera, which is also called the fourth pillar). Although the first two pillars offer a basic income, this often cannot support your desired lifestyle. That is why it is wise to build up an individual pension yourself for more financial security and freedom. But what are the options for building up an individual pension?

1. Supplementary pension (e.g. through your employer)

Some employers offer the possibility to build up an individual pension through voluntary contributions. This can significantly increase your pension pot and offers tax advantages. For example, the employer can bear the costs of the individual pension pot, which encourages you to contribute money to your pension. The employer helps the employee with their future (read our other blog about the second and third pillar to learn more about this).

‍Example: Suppose you work for a company that offers an individual pension savings system. You can choose to automatically deposit a portion of your salary into this fund, which will yield a nice amount over time.

2. Bank Savings

Bank savings (Banksparen) is a safe and simple way to save for your retirement. You periodically deposit money into a blocked account that is only released when you retire. After it is released, you can withdraw it in instalments.  This money is tax deductible. However, you receive low interest here compared to investing. 

Example: Every month you deposit €200 into a special pension account at your bank. This amount is blocked until your retirement age. You receive a low interest rate on your total deposited money. 

3. Pension Investing

Pension investing is a way to build up individual wealth for your retirement by investing, which often happens via a blocked investment account.

Pension investing offers the chance of a higher return than saving, but it also entails risks and costs. As with any form of investing, this can happen because the investments - shares, bonds, funds - may increase or decrease in value. That depends on the market. 

Despite this, pension investing has become more popular. This is due to the chance that your investments will become more valuable in the future, which gives you a higher pension. Furthermore, because you can enjoy tax benefits.

‍Example: You decide to invest €150 per month in a pension fund that invests in funds. You do this with the estimate (and perhaps expectation) that the final amount will be higher than, for example, a savings account. This is exactly what Vive does for you. 

Tax Advantages

One of the biggest advantages of building up an individual pension are the tax benefits. With both bank savings and pension investing, you can benefit from tax deductions. This means you get money back from the tax authorities on the amount over which you have already paid income tax. You do not have to pay this amount because it is blocked until your retirement age. When you have the money paid out, you often pay a much lower income tax. Until then, you can use the reimbursed money to achieve extra returns.

Tools and Calculations

It is important to gain insight into how much pension you need and how much you should save. Use tools such as pension and annual allowance calculators (you can find the definition of annual allowance here) to get a clear picture of your financial future. 

If you simply want to find out what you need for your pension, you need the following information anyway (regardless of any calculators):

1. Current income: Your current annual gross income.
2. Desired retirement income: The amount you think you will need annually after your retirement. A rule of thumb is 70-80% of your current income.
3. Retirement age: The age at which you plan to retire.
4. Life expectancy: How long you expect to live after your retirement.

Example: Use an annual allowance calculator to calculate how much extra you can save tax-free for your pension. This helps you create a financial plan.

You can find the government's annual allowance calculator here: Calculate your deductible annuity premium (from 2016) (belastingdienst.nl)

What we hope you have learned from this?

Building up an individual pension is important for financial freedom. The Dutch pension system offers a basic foundation, but often not enough for your desired lifestyle after retirement. By saving extra through supplementary pension, bank savings, or pension investing, you ensure greater financial security. These methods also offer tax benefits, which helps you get more out of your saved money. Use tools such as pension and annual allowance calculators to create a clear plan for your financial future. And remember, financial freedom is different for everyone.

‍