With pension and holiday pay: how does that work?

Financial planning plays a crucial role in a carefree old age. A frequently asked question here is: how does holiday pay work during your pension? In your working life, you were used to receiving holiday pay annually in May, usually 8% of your gross salary. But how does that work when you are retired? In this article, we explain if and how you receive holiday pay as a pensioner, and what you can expect in terms of payment term and amount.

What is holiday pay?

Holiday pay is an extra allowance – usually around 8% of your gross annual income – intended to cover holiday expenses. Employees in paid employment often receive this once a year (usually in May) in addition to their regular salary. As a pensioner, you are also generally entitled to holiday pay, only the method of payment may be different from what you were used to during your working life.

Two ways of paying holiday pay during a pension

There are two usual ways in which you can receive holiday pay during your pension, depending on your pension provider:

Option 1: Holiday pay once a yearYou receive your regular pension benefit twelve times a year, plus a separate holiday pay payment once a year (often in May, just like your salary used to be). This feels similar to how you were used to when you worked: a fixed amount every month and an extra in May.

• Advantages: You receive a larger amount at once, which can be useful if you are planning a large expense or trip in the summer, for example. It also feels like a bonus, just as you were used to during your working life.
• Disadvantages: You must have the discipline to manage this large amount well yourself. Moreover, your other monthly benefits are slightly lower than they would be if the holiday pay were spread out, because an amount is “withheld” to be able to make that annual payment.

Option 2: Monthly payment of holiday payYour holiday pay is paid out every month together with your pension benefit. You therefore receive twelve equal pension amounts per year, without a separate extra payment in May. In this case, your monthly amount is slightly higher than in option 1 (because the holiday pay is distributed).

• Advantages: You receive a slightly higher income every month, which can help to spread your expenses evenly throughout the year. You don't have to wait until May for the extra and you don't have to set aside a part yourself annually for a holiday.
• Disadvantages: The holiday pay feels less “special” because it does not come as a separate bonus. You miss that one celebratory moment in May. Moreover, if you were used to the holiday pay being for your holiday, you must now reserve an amount for holidays in your own budget, as it is already included in your monthly amount.

Not yet receiving AOW, but receiving a pension

Suppose you retired (for example, through an early retirement scheme or own funds) before you reached the AOW age. You will then already receive pension benefits from your pension fund or insurer, but no AOW yet. Are you entitled to holiday pay in this phase? Yes, generally speaking, you are. How much you receive and when depends on the scheme of your pension provider. A pension fund often pays out holiday pay annually, but it is wise to check this with your pension fund or insurer. The amount is usually comparable to 8% of your annual pension benefit, but the exact calculation and payment date may differ per provider.

Tip: Check with your pension fund how they handle holiday pay before your AOW starts, so you won't be faced with surprises. Each fund applies its own rules and it's nice to know if you can expect something extra in May, for example.

With AOW

As soon as you reach the AOW age and receive AOW (General Old-Age Pensions Act benefit), you also receive a holiday pay payment over your AOW. The Sociale Verzekeringsbank (SVB), which pays out the AOW, pays this holiday pay once a year – usually in the month of May.

• Payment: The AOW holiday pay is calculated over the period from May up to and including April preceding it and is paid every year in May.
• Amount: The amount of this holiday pay on your AOW depends on your AOW situation. Do you have an AOW for single people or for those living together? Do you receive a full AOW or a part (in the case of incomplete AOW accrual)? Income tax credit is also taken into account. You can see how much holiday pay has been accrued in your AOW specification.

In short: in addition to any holiday pay via your pension fund, you will also receive a holiday pay amount from the SVB over your AOW benefit in May.

Pension fund versus pension insurer

Taking a step aside: there are different ways in which your pension is received, which can influence holiday pay:

• Pension fund: This is a collective pot (for example, from your industry or ex-employer) from which your pension comes. Pension funds often pay out in a way similar to salary. With many pension funds, holiday pay is paid out separately (annually). They reserve a small portion of your pension every month to combine it into your holiday allowance in May. The exact policy differs: some large funds do it monthly inclusive, but usually it is separate annually.Example: ABP (large pension fund) pays out pension 12 times a year and an extra holiday pay in May.
• Pension insurer (also called a annuity benefit from an insurer): This is an individual scheme, often through an insurer or bank, where you have built up a pension pot yourself (for example, as a self-employed person or through extra contributions). Here, the holiday pay is usually already processed in the monthly payment. The insurer calculates your annual benefit and divides that by 12 equal monthly amounts; you do not receive separate holiday pay in May, but your monthly amount is therefore actually inclusive of holiday pay.Example: If you have an annuity benefit via a bank or insurer, you receive the same amount every month and no separate holiday pay payment. You therefore effectively receive your "holiday pay" spread throughout the year.

Please note: it is good to know which category your pension falls under, so that you know where you can expect your holiday pay. Are you in doubt? Contact your pension provider for clarity.

What about your individual pension (for example with Vive)?

Not everyone has their pension through an old-fashioned pension fund. More and more people have individual pension pots or products (think of self-employed people who arrange something themselves, or modern pension solutions). With Vive – where you contribute and invest for your pension yourself – you invest for your pension at your own discretion, but you can only invest for your pension, not arrange a pension benefit payment. In such cases, the word "holiday pay" does not appear as a separate component. Instead, during the payout phase (when you retire and have your pot paid out), you determine how you want to receive the money. You then approach various banks or insurers that make pension payments and arrange the payments with them. You often simply opt for monthly payments of a certain amount over a certain period. Your holiday pay is included in this, similar to the method used by pension insurers.

The most important thing is: know how your pension benefit is structured. If you are covered by an old-fashioned pension fund, read their information about holiday pay. If you have your own pot or insurance structure, realise that you must arrange your "holiday bonus" yourself if desired.

What can you do now?

Whether you choose an annual payment of holiday pay or monthly additions to your pension, it is important to know how it works and which option best suits your financial planning. At Vive (and our pension partners), we are happy to help you make your financial future carefree and clear. Inquire with your pension fund or insurer how they handle holiday pay, so you know exactly when and how much you can expect. After that: enjoy your pension and your well-deserved holidays!