The disadvantages of pension investing

Let's be honest: investing for your pension has its disadvantages. Your money is locked up, the stock market can fall, and no one knows what the tax rules will be in thirty years' time. Yet, more and more entrepreneurs and employees are choosing pension investments. Are they crazy or do they know something you don't? We list the disadvantages of pension investing and explain why, despite these drawbacks, it is often the smartest choice for your financial future.

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Your money is locked up until your retirement

The biggest disadvantage of pension investing is that your money is blocked until five years before your state pension age (AOW-leeftijd). Do you want to buy a house, take a world trip, or save your company? The money is usually unreachable, even in exceptional situations. If you try to withdraw it anyway, you pay not only income tax but also up to 20% "revisierente" (clawback interest) as a penalty. That hurts. But here is the flip side: precisely because the money is locked up, you are guaranteed to build up a pension. No temptations to spend it on a new car or impulse purchases. Your future self will be grateful that your current self couldn't access that money. With Vive, you can always see how much you have built up in the app, so it doesn't feel like money disappearing into a black hole.

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Investment risk means you can lose money

Pension investing means your money is invested in stocks and bonds. The value can fluctuate significantly, and in the short term, you may even see a loss. In 2022, many pension investments dropped by 10% or more. That's not a pleasant sight when you log in. Unlike pension insurance policies, you do not have a guaranteed final capital. The disadvantages of pension investing become especially visible in bad stock market years. But look at the long term: over periods of twenty years or more, investments historically almost always yield a positive return. Much more than saving can ever offer. Furthermore, with pension investing, you have time on your side - you can calmly wait for the market to recover.

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Tax rules can change

You currently receive a tax benefit on contributions, but later you pay tax on the payout. The problem: no one knows what the tax rates will be in thirty years' time. The government can adjust the rules, usually not in your favour. This is a real disadvantage of pension investing that you cannot brush away. But consider this: pension remains politically sacred in the Netherlands. Drastic deteriorations for existing pension accrual are rare because this affects millions of people. Moreover, you benefit immediately from a tax advantage now - money that you definitely have. At Vive, we always calculate with conservative assumptions, so you won't face any surprises.

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Costs eat into your return

Every disadvantage of pension investing counts, but costs are one that you can influence. Management fees, fund costs, transaction costs - they seem small, but over thirty years they can cost tens of thousands of euros. With some providers, you pay up to 1% per year or more in total costs. With an average return, the difference between 0.35% and 1% in costs over thirty years can amount to a difference of tens of thousands of euros in final capital. With providers like Vive, you pay a 0.35% management fee, supplemented by fund costs and any spread costs. The total thus remains well below many traditional providers. Costs are therefore only a major disadvantage if you choose the wrong provider. Should you ultimately be unhappy with Vive or another provider, you can easily transfer your money to another provider.

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You must pay it out as a monthly income

When you retire, you cannot simply withdraw your entire pot. You must have the pension paid out according to legally established payout rules, usually as a lifelong or long-term monthly income. For people who want complete control, this is an annoying disadvantage of pension investing. You cannot suddenly buy a camper van or give your children a large gift. But there is also an advantage hidden here: you cannot spend all your pension at once. It forces you into a stable income throughout your retirement. Moreover, in the event of death, you can simply leave the remaining capital to your partner or children.

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Why pension investing is smart despite the disadvantages

Yes, pension investing has disadvantages. Your money is locked up, there is investment risk, rules can change, and you pay costs. But against every disadvantage, there is a greater advantage: immediate tax benefit up to 49.5%, no wealth tax in box 3, historically higher returns than saving, and compulsory pension accrual. The disadvantages of pension investing are mainly limitations in flexibility, but these actually force you to truly take care of your pension. At Vive, we make pension investing as transparent and affordable as possible, so that the benefits far outweigh the disadvantages.

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