With pension and holiday pay: how does that work?

Financial planning plays a crucial role in a worry-free retirement. A frequently asked question in this regard is: how does holiday allowance work during your retirement? During your working life, you were used to receiving holiday allowance annually in May, usually 8% of your gross salary. But how does that work when you are retired? In this article, we explain if and how you receive holiday allowance as a retiree, and what you can expect in terms of payment term and amount.

What is holiday allowance?

Holiday allowance is an extra payment – usually approximately 8% of your gross annual income – intended to cover holiday expenses. Employees often receive this once a year (usually in May) in addition to their regular salary. As a retiree, you are in principle also entitled to holiday allowance, only the method of payment may be different from what you were used to during your working life.

Two ways of paying out holiday allowance during retirement

There are two common ways in which you can receive holiday allowance during your retirement, depending on your pension provider:

Option 1: Holiday allowance once a yearYou receive your regular pension payment twelve times a year, plus a separate holiday allowance payment once a year (often in May, just like with your salary before). This therefore feels comparable to what you were used to when you were working: a fixed amount every month and an extra in May.

• Advantages: You receive a larger amount at once, which can be useful if you are planning a large expense or trip in the summer, for example. It also feels like a bonus, just as you were used to during your working life.
• Disadvantages: You must have the self-discipline to manage this large amount well. Furthermore, your other monthly payments are slightly lower than they would be if the holiday allowance were spread out, because money is “withheld” to be able to give that annual payment.

Option 2: Monthly payment of holiday allowanceYour holiday allowance is paid out every month together with your pension payment. You therefore receive twelve equal pension amounts per year, without a separate extra payment in May. Here, your monthly amount is somewhat higher than with option 1 (because the holiday allowance is spread out).

• Advantages: You receive a slightly higher income every month, which can help to spread your expenses evenly throughout the year. You do not have to wait until May for the extra and you also do not have to set aside a portion yourself annually for holidays.
• Disadvantages: The holiday allowance feels less “special” because it does not come as a separate bonus. You miss that one celebratory moment in May. Moreover, if you were used to the holiday allowance being for your holiday, you now have to reserve an amount for holiday yourself in your budget, as it is already included in your monthly amount.

Not yet AOW, but already pension

Suppose you retired (for example, via an early retirement scheme or private funds) before you reached the AOW age. You will already receive pension payments from your pension fund or insurer, but not yet AOW. Are you entitled to holiday allowance during this phase? Yes, generally. How much you receive and when, depends on the scheme of your pension provider. A pension fund often pays out holiday allowance annually, but it is wise to inquire about this with your pension fund or insurer. The amount is usually comparable to 8% of your annual pension payment, but the exact calculation and payment time may differ per provider.

Tip: Ask your pension fund how they handle holiday allowance before your AOW starts, so you do not encounter any surprises. Every fund uses its own rules and it is nice to know whether you can expect something extra in May, for example.

With AOW

As soon as you reach the AOW age and receive AOW (General Old Age Act benefit), you also receive a holiday allowance payment over your AOW. The Social Insurance Bank (SVB), which pays out the AOW, pays this holiday allowance once a year – usually in the month of May.

• Payment: The AOW holiday allowance is calculated over the period from May up to and including April preceding it and is paid every year in May.
• Amount: The amount of this holiday allowance over your AOW depends on your AOW situation. Do you have an AOW for singles or for cohabiting partners? Do you receive full AOW or a partial amount (in the event of incomplete AOW accrual)? Tax relief is also taken into account. You can see how much holiday allowance has been accrued in your AOW specification.

In short: in addition to any holiday allowance via your pension fund, you also receive a holiday allowance amount from the SVB for your AOW benefit in May.

Pension fund versus pension insurer

Just a step aside: there are different ways in which you receive your pension, which can influence holiday allowance:

• Pension fund: This is a collective pot (for example, from your industry or former employer) from which your pension comes. Pension funds often pay out in a way comparable to salary. With many pension funds, holiday allowance is paid out separately (annually). They reserve a piece of your pension every month to combine it in May into your holiday allowance. The exact policy differs: some large funds include it monthly, but usually it is separate annually.Example: ABP (large pension fund) pays out pension 12x a year and an extra holiday allowance in May.
• Pension insurer (also called annuity payment from an insurer): This is an individual arrangement, often via an insurer or bank, where you have built up a pension pot yourself (for example, as a self-employed person or via extra deposits). Here, the holiday allowance is usually already processed in the monthly payment. The insurer calculates your annual payment and divides that by 12 equal monthly amounts; you do not receive a separate holiday allowance in May, but your monthly amount is therefore actually inclusive of holiday allowance.Example: If you have an annuity payment via a bank or insurer, you receive the same amount every month and no separate holiday allowance payment. You therefore actually receive your “holiday allowance” spread over the entire year.

Note: it is good to know which category your pension falls under, so you know where to expect your holiday allowance. Are you in doubt? Contact your pension provider for clarity.

What about your individual pension (for example with Vive)?

Not everyone has their pension through an old-fashioned pension fund. More and more people have individual pension pots or products (think of the self-employed who arrange something themselves, or modern pension solutions). With Vive – where you contribute and invest for your pension yourself – you invest for pension at your own discretion, but you can only invest for your pension, not arrange a pension payment. In such cases, the word “holiday allowance” does not appear as a separate component. Instead, in the payout phase (when you retire and have your pot paid out), you determine how you want to receive the money. You then approach various banks or insurers that make pension payments and arrange the payments with them. You often simply choose monthly payments of a certain amount over a certain period. Your holiday allowance is included in this, similar to the method of pension insurers.

The most important thing is: know how your pension payment is structured. If you go through an old-fashioned pension fund, read their information about holiday allowance. If you have your own pot or insurance structure, realise that you must arrange your “holiday bonus” yourself if desired.

What can you do now?

Whether you choose an annual payment of holiday allowance or monthly additions to your pension, it is important to know how it works and which option best suits your financial planning. At Vive (and our pension partners), we are happy to help you make your financial future worry-free and clear. Ask your pension fund or insurer how they handle holiday allowance, so you know exactly when and how much you can expect. After that: enjoy your retirement and your well-deserved holidays!