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 are happy to help. We have written a blog before about the pension system and the pillars, which you can read here. 

To begin with, the Dutch pension system consists of multiple pillars. Many people are familiar with the State Pension (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 contribute a monthly 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, as this is mandatory 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. 

Characteristics of the Second Pension Pillar:

• Collective and Mandatory: 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. Both the employer and the employee remain bound by the pension agreement that has been concluded.
• 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., the risk you take in relation to age and your pension horizon). 
• Employer and Employee Contributions: Both parties contribute money to your pension.
• Fixed Payout Date: Payouts often begin around the State Pension (AOW) age. However, you can also stop working earlier and start your pension. There are many options for this, but they come with caveats. For more information, you can visit the Nibud website (here). 
• Not Accessible to Everyone: A second pillar scheme is only accessible to employees; the DGA (Director-major shareholder) cannot participate. You get a new pension scheme every time you change jobs, as 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 every month with a tax advantage. It is also possible that your employer facilitates a third pillar pension. They can contribute here and bear the costs for the pension. You often arrange this yourself.  

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

Characteristics 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 completely 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 themselves how the pension pot is used.
• Own and Employer Contributions: You can build up capital yourself, or together with an employer. The employer can flexibly contribute to the pension, just like you. 
• Flexible Payout: You choose when the payouts start. Depending on the chosen scheme, this can happen before the State Pension (AOW) age, or even afterwards. The start of the payout can be deferred up to five years after the State Pension (AOW) age (calculated from 31 December of that year). 
• Early Buyout: You can retire earlier with the third pillar, but you must buy it out. You do this by repaying the previously received income tax refund and possibly any reversal interest (a type of fine).
• 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 individual. You can therefore also participate as a DGA.

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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 contributes a portion directly to the pension from your gross salary. 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 contributing extra for you. This can take many forms, such as a salary increase, a bonus, or an extra amount based on a percentage. The tax you pay on the contribution from your net salary is later refunded by the tax authorities. However, you must submit the tax application for this yourself. The third pillar is also calculated differently. You can learn more about this in our blog about annual contribution space.

Flexibility and Risk

Another important difference is the degree of flexibility and risk. The starting point of the second pillar pension funds is that risks are shared through collectivity; there is safety in numbers. You also cover a number of risks, for example, the 'risk' of living very long (and thus receiving a pension for longer). However, 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, if you live very long, the pot will run out. 

Who is the Third Pension Pillar Suitable For?

The third pillar is interesting for employees, employers, the self-employed (ZZP'ers/freelancers), entrepreneurs, and people who want to close a pension gap. A flexible scheme is advantageous 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 a State Pension (AOW) or second pillar pension is eventually not enough to have the retirement 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. Therefore, divide your money across multiple plans, pillars, and pots.