The difference between the Second and Third Pension Pillar: What do you need to know?

The Dutch pension system is complex. But how do you navigate all this complexity? We would be happy to help you. We have previously written a blog about the pension system and its pillars, which you can read here. 

To start with, the Dutch pension system consists of multiple pillars. Many people are familiar with the AOW (this is the first pillar), but the second and third pillars, or even the fourth pillar, are less well understood, if mentioned at all. 

This article explains what these pillars are, how they differ from each other, and why understanding these pillars is important for your financial future.

Let's start with the second pension pillar. 

What is the Second Pension Pillar?

The second pension pillar consists of a collective pension scheme. In practice, this means that both you and your employer monthly contribute an amount to your pension pot. The amount you receive depends on your salary and your employer's specific pension scheme.

Your (new) employer may already have a second pension scheme for you because it is compulsory in some sectors. For example, in construction or for professions such as notaries, where an industry-wide or professional pension fund applies. It may also depend on the size of the company. 

Features of the Second Pension Pillar:

• Collective and compulsory: You automatically participate in your employer's pension scheme if they have set one up. 
• Contract with your employer: The second pillar pension scheme is an agreement between an employer, an employee, and a pension provider. The employer, as well as the employee, remains permanently bound by the concluded pension agreement.
• Everything is in one pot: You have little influence on the outcome of your pension and it is completely separate from your personal situation (i.e., risk you take relative to age and your pension horizon). 
• Employer and employee contributions: Both parties contribute money to your pension.
• Fixed payment date: Payments often start around the AOW age. But you can also choose to stop working earlier and start your pension. There are many options for this, but they come with caveats. For more information on this, you can visit the Nibud website (here). 
• Not accessible to everyone: A second pillar scheme is only accessible to employees; the DGA (Director and Major Shareholder) cannot participate. You get a new pension scheme every time you change jobs. This is because it is linked to the employer.

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What is the Third Pension Pillar?

The third pension pillar is a supplement to your pension – you can arrange this supplement yourself, by contributing money monthly with tax benefits. It is also possible for your employer to facilitate a third pillar pension. They can contribute and bear the costs for the pension here. However, you often arrange this yourself.  

This can be done via pension investments, annuity insurances, and bank savings. This pillar is mainly for companies that want to flexibly scale up and down their pension for employees (because you do not have to facilitate a third pillar pension for every employee), for self-employed individuals (for example, freelancers/ZZP'ers), or people who want to close a pension gap.

Features of the Third Pension Pillar:

• Individual and voluntary: You decide how much and when you contribute money. If you want to contribute more or less, you can do so entirely at your own pace. 
• No permanent contract: In the third pillar, an employee opens an account on their own initiative. The employer and the employee make mutual agreements about the payment of costs and contributions. The agreement with the employer generally ceases when the employee leaves. The employee then decides how the pension pot is used.
• Own and employer contributions: You can build up capital yourself, or together with an employer. Just like you, the employer can flexibly contribute to the pension. 
• Flexible payment: You choose when the payments start. Depending on the chosen scheme, this can be before the AOW age. Or afterwards. The start of the payment can be postponed up to five years after the AOW age (calculated from 31 December of that year). 
• Earlier surrender: You can retire earlier with the third pillar, but you must then surrender it. You do this by repaying the earlier income tax and possibly any revision interest (a type of penalty).
• Accessible to everyone: The third pillar is neutral in terms of employment status. Whether you are an employee or a self-employed entrepreneur, you can always use this pension scheme. It is linked to the person. This also allows DGAs to participate.

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Tax Advantages of the Second and Third Pension Pillars

Both the second and third pension pillars offer tax advantages. Within the second pillar pension, the employer directly contributes a part of your gross salary to the pension. No tax is paid on this amount. 

The difference is that the contribution for your third pillar pension comes from your net salary. You contribute extra money yourself. Your employer can help with this, for example by making an extra contribution for you. This can take many forms, such as a pay rise, a bonus, or an extra based on a percentage. The tax you pay on the contribution from your net salary is later reimbursed by the tax authorities. However, you must submit the tax application yourself. The third pillar is also calculated differently. In our blog about annual headroom, you can learn more about it.

Flexibility and Risk

Another important difference is the degree of flexibility and risk. The starting point of the second pillar pension funds is that the risks are shared through collectivity; there is safety in numbers. You also cover a number of risks, for example, the 'risk' of living to a very old age (and thus receiving a longer pension). But you have little flexibility, as the contribution in the second pillar is fixed. 

In the third pillar, you have more flexibility in how you invest your money. Contributions to the third pillar can be made via the employer, the employee, or a combination of both. This scheme is flexible because different parties can fill the pension pot, but also because the contribution can be adjusted monthly. Because the pension is individual, there is a chance that the pot may run out if you live to a very old age. 

Who is the Third Pension Pillar Suitable for?

The third pillar is interesting for employees, employers, self-employed individuals (ZZP'ers/freelancers), entrepreneurs, and people who want to close a pension gap. A flexible scheme is ideal for all these parties. For example, in the case of employees without a second pillar pension, or if you expect your second pillar pension will not be sufficient, the third pillar is a good supplement. 

What do we hope you have learned from this?

A good understanding of the pillars and the differences helps everyone realise that an AOW or second pillar pension will not be enough in the long run to have the pension you want. Both pillars have their own advantages but together form a solid pension foundation. This way, you can do what you want to do in your old age, with maximum freedom. So, distribute your money across multiple plans, pillars, and pots.