The AOW state pension age continues to rise, but did you know that you do not have to wait until this age to retire? AOW, the General Old Age Pensions Act, is a benefit you receive as soon as you are entitled to it. That is at 67 years old if you were born before 1 January 1961. For people born between 1 January 1961 and 1 October 1962, this is at 67 years and 3 months. For those born after 1 October 1962, the AOW state pension age has not yet been set. A pension, on the other hand, is a savings pot that you build up yourself and that you can access even before your AOW state pension age. What are the options if you want to retire earlier? You can read about that in this blog.

How much earlier can you retire?

If you are considering retiring before your AOW state pension age, it is good to know that this is possible with most pension schemes. Depending on the scheme, you can choose to retire up to ten years earlier than your AOW state pension age. This means that if your AOW state pension age is, for example, 67 years old, you could, in principle, start enjoying your pension as early as age 57.

With early retirement, there are various possibilities to flexibly adjust the pension to your wishes. For example, you can often choose a full or partial drawdown of your pension.

• Full early pension: with this, you use the full pension amount to stop working earlier.
• Part-time pension: with a part-time pension, you can continue working three days a week, for example, while drawing your pension for the remaining days. This helps to make the transition to full retirement more gradual and, at the same time, slows the depletion of your pension pot.

Retiring early sounds attractive, but it naturally affects the monthly amount you receive. The amount you have to live on is spread over a longer period. Moreover, the period in which you build up your pension is shortened when you retire earlier, which ultimately also results in a lower return (also check out the compounding effect).

Old pension accounts offer a little more flexibility

If you have been building up a pension for a long time, you may have old pension accounts that possibly offer slightly more flexibility than newer schemes. In the past, many pension funds offered the option of a so-called early old-age pension or even a pre-pension. This means that with some schemes, you could start drawing part of your pension earlier to bridge an income gap. Although not everyone still has these options, older pension schemes can sometimes offer scope for an early payment that is taxed differently from regular pension payments.

Old pension pots can also be valuable when planning an early retirement strategy. It is wise to check which schemes you have built up in the past and what options they offer. On mijnpensioenoverzicht.nl (my pension overview), you can easily see what you have built up with different employers. You will have to visit the websites of the individual pension funds for the specific accrual and schemes. 

Accessing pension assets built up via the third pillar

In the Netherlands, you can build up pension assets via the third pillar of the pension system. This is separate from the pension pot you built up via your employer through the second pillar. This form of accrual offers you the opportunity to flexibly supplement your pension assets, allowing you to stop working earlier without being directly dependent on your regular pension pot.

Anyone who builds up pension assets in the third pillar can benefit from attractive tax advantages that regular savings or investment products generally do not offer. With regular savings and investment accounts, you pay wealth tax on the return on your savings or investments above a certain threshold. This means that a part of the return is skimmed off by tax. In the third pillar, however, you build up your pension assets without this annual wealth tax. Moreover, you receive a tax refund on your contribution, which can make your assets grow faster (provided you reinvest it, of course, otherwise it is a nice pension cashback).

Advantages of pension investing in the third pillar:

• Annual tax benefit on contribution: The annual tax refund effectively lowers your net contribution, resulting in a more advantageous build-up of your pension assets.
• No wealth tax on returns: The assets in your pension pot are exempt from wealth tax on returns, unlike a regular investment or savings account.
• Lower tax upon drawdown after AOW state pension age: Due to the lower tax rates for AOW state pension recipients, you can draw down your built-up assets more favourably later, which increases your net income.

Drawing down your pension assets in one lump sum: What is the impact?

It has recently become possible to draw down your pension assets in one lump sum upon retirement. This seems attractive, especially if you plan to retire earlier and need extra funds for a large expense or an investment, for example. But there are important considerations with this choice.

When you draw down your full pension amount in one lump sum, this can lead to significant tax liability in the year of drawdown. In the Netherlands, pension that is drawn down in a lump sum is taxed at your highest income tax rate, which means you keep less net of the total amount. Furthermore, a one-time drawdown means you will not have a monthly pension income later, which requires careful financial planning for the years thereafter.

Lower income tax after AOW state pension age

An important consideration with early retirement is that, as soon as you reach the AOW state pension age, you pay less income tax and social contributions. This means you keep more net of your gross income as soon as you receive AOW. For many people who want to retire early, it is useful to include this tax benefit in their financial planning.

For example, if you stop working several years before your AOW state pension age and draw from your pension assets, this can lead to a higher tax burden. Drawing down pension income early means that this income is taxed at the regular rate for working people, which is generally higher than the rate that applies after your AOW state pension age. This means it may be more advantageous to draw supplementary income from other sources (such as savings or investments) for as long as possible and only draw more heavily from your pension assets after your AOW state pension age.

Tax advantages after AOW state pension age:

• Lower rates: The tax rate on income falls as soon as you reach the AOW state pension age, which results in a higher net income.
• Social contributions: After the AOW state pension age, the contributions for social insurance are lower, which further increases your net benefit.

By cleverly utilising these tax advantages, you can better align your pension assets with your future needs. It is worthwhile to create a financial plan in which you optimally use the benefits of a lower tax rate after your AOW state pension age.

Will you or won't you retire early?

Retiring early offers a lot of flexibility but also requires careful financial planning. By taking a good look at your options within the third pillar and making use of tax advantages, you can structure your income so that you can enjoy your early retirement without surprises. Old pension schemes can offer extra possibilities, and considering a one-off lump sum drawdown of your pension assets can be attractive, provided you calculate the tax implications correctly.

Also take into account the benefits of lower tax rates after your AOW state pension age, so that you can develop a strategy that optimally utilises your built-up assets.