What is the difference between the 3rd pillar and the 4th pillar?

Retirement consists of more than just the state pension (AOW) and what you build up through your employer. More and more people are building their own capital for later. However, there is an important difference between building up money within the pension system and outside of it. The 3rd pillar and 4th pillar are both ways to build capital, but they work very differently in terms of taxes and practical application.

The term 4th pillar is not an official pension pillar, but it is often used for free capital that you build up outside the pension system.

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What is the 3rd pillar?

The third pillar is individual pension accrual with tax benefits. Think of an annuity, pension investing or a pension savings account. The money you contribute is tax-deductible from your income, subject to certain conditions. During the accumulation phase, you do not pay wealth tax in box 3. You only pay income tax when the funds are paid out. 

The advantage is clear. Your tax benefit depends on your income and is often between approximately 37% and 49.5% of your contribution. This makes the 3rd pillar fiscally attractive for anyone with annual margin (jaarruimte) or carry-forward margin. The disadvantage is that the money is locked until your retirement age. You cannot access it easily, and there are rules regarding the payout.

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What is the 4th pillar?

The fourth pillar is free capital outside the pension system. This can be a regular investment account, an ETF portfolio, savings, or real estate. You build up capital without being tied to pension rules.

The advantage is flexibility. You can withdraw the money whenever you want, and there are no payout rules. For people who want to retire early or pursue financial independence, this is attractive.

The disadvantage is that you do not receive a tax deduction on your contributions. The capital generally falls into box 3. Depending on the size of your assets, you pay tax on this.

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When should you choose the 3rd pillar?

The 3rd pillar is interesting for anyone who wants to save for retirement in a tax-efficient way. This applies to freelancers and entrepreneurs who are not building up an employer pension, but also for employees with a pension gap.

It is striking that only about 5% of employees actively make use of the 3rd pillar. For the self-employed, that figure is around 11%. On average, the Dutch use about a third of their available tax-advantaged space. This means that many people are leaving tax benefits on the table.

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When should you choose the 4th pillar?

The 4th pillar is suitable for goals where flexibility is more important than tax benefits. Think of retiring early, taking a sabbatical, making a large purchase, or simply building wealth without restrictions. You want to be able to access your money without pension rules.

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Why many people combine both

The strongest strategy is often a combination. First, use your annual margin to maximize tax benefits via the 3rd pillar. Then, build additional wealth via the 4th pillar for flexibility.

At Vive, we see this regularly. People start with pension investing to use their tax-advantaged space and add goal-based investing to it for free capital. Both forms of wealth accumulation have their place, depending on your situation and goals.

For pension building, the 3rd pillar is often the most tax-efficient route. For goals where you need flexibility, the 4th pillar can be attractive. The trick is to combine both smartly.

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