The difference between the Second and Third Pension Pillars: What do you need to know?

The Dutch pension system is complex. But how do you make your way through all this complexity? We would like to help you. We have already written a blog about the pension system and the pillars, which you can read here. 

To begin with, the Dutch pension system consists of several pillars. Many people are familiar with the AOW (this is the first pillar), but the second and third pillars, or even the fourth pillar are less well understood, named or not. 

This article explains what these pillars are, how they differ, and why understanding them 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 group pension plan. In practice, it 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 plan.

Your (new) employer may already have a second pension plan for you, as it is mandatory in some sectors. For example, in construction or for professions such as notaries, where an industry or professional pension fund applies. It may also depend on the size of the company. 

Features of the Second Pension Pillar:

• Collective and mandatory: You automatically participate in your employer's pension plan if it is set up with them. 
• Contract with your employer: The second pillar pension plan is an agreement between an employer, an employee and a pension administrator. The employer, as well as the employee, are permanently attached to the pension agreement that has been entered into.
• Everything is in one pot: You have little influence on the outcome of your pension and it is totally independent of your personal situation (i.e. risk you take relative to age and your retirement horizon). 
• Employer and employee contributions: Both parties put in money for your retirement.
• Fixed benefit date: Benefits often start around state pension age. But, of course, you can stop working earlier and start your retirement. There are many options for this, but these come with snags. For more information on this, check out the Nibud website(here). 
• Not accessible to all: A second-pillar plan is only accessible to employees; the DGA cannot participate. You get a new pension plan every time you change jobs. This is because it is linked to the employer.

What is the Third Pension Pillar?

The third pension pillar is a supplement to your pension - you can arrange this supplement yourself, then put money in yourself each month with a tax advantage. Your employer may also facilitate a pension in the third pillar. They can make contributions and bear the costs for the pension. You often arrange this yourself.  

This can be done through pension investment, annuity insurance and bank savings. This pillar is mainly for companies that want to flexibly scale up and down their pensions for employees (because a third pillar pension you don't have to facilitate it for every employee), for the self-employed (e.g., Zzp'ers) 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 deposit money. If you want to deposit more or less, you can do so entirely at your own pace. 
• No permanent contract: In the third pillar, an employee opens an account on his or her own initiative. The employer and employee mutually agree on payment of expenses and deposits. In principle, the agreement with the employer ends when the employee leaves. After that, the employee decides how to use the pension pot.
• Own and employer contributions: You can build up assets yourself, or together with an employer. The employer, like you, can flexibly contribute to the pension. 
• Flexible benefit: You choose when benefits start. Depending on the plan you choose, this can happen even before the state pension age. Or just after. You can delay the start of benefits until no later than five years after the state pension age (calculated from December 31 that year). 
• Buy out earlier: You with the third pillar earlier retirement, but you have to buy it out. You do this by paying back the earlier income tax and possibly possibly revision interest (a type of penalty).
• Accessible for everyone: The third pillar is neutral in terms of form of employment. Whether you are employed or self-employed, you can always use this pension plan. It is linked to the individual. You can also participate as a DGA because of this.

Tax benefits of the Second and Third Pension Pillars

Both the second and third pension pillars offer tax benefits. Within the second pillar pension, the employer puts a portion directly, from your gross salary, into the pension. No tax is paid on this amount. 

The difference is that the deposit for your third-pillar pension comes out of net pay. You deposit extra money yourself. Your employer can help with this, for example by putting in extra for you. This can take many forms, such as a pay raise, a bonus, or a percentage-based bonus. The tax you pay on the deposit from your net salary is later refunded by the tax authorities. However, you have to file your own tax return for this. The third pillar is also calculated differently. You can learn more about it in our blog on annual margin.

Flexibility and Risk

Another important difference is the degree of flexibility and risk. The premise of second pillar pension funds is that the risks are shared through collectivity, there is security through numbers. You also cover some risks, for example the "risk" of getting very old (and thus getting a longer pension). But you have little flexibility, as with the second pillar the deposit is fixed. 

In the third pillar, you have more flexibility in how you invest your money. Deposits in the third pillar can be made through the employer, the employee or a combination of both. This arrangement is flexible because different parties can fill the pension pot, but also because the deposit can be adjusted monthly. Because the pension is individual, you do have the chance that, when you get very old, the pot will run out. 

For whom is the Third Pension Pillar Suitable?

The third pillar is of interest to employees, employers, the self-employed (Zzp'ers), entrepreneurs and people who want to close a pension gap. A flexible arrangement is convenient for all these parties. For example, in the case of employees without a second pillar pension, or if you expect that your second pillar pension will not be sufficient, the third pillar is a good addition. 

What do we hope you learned from this?

A good understanding of the pillars and the differences helps everyone see that an AOW or second pillar pension is not enough in the long run to have the retirement you want. Both pillars have their own benefits, but together they form a solid retirement foundation. This allows you to do what you want to do in your old age with maximum freedom. So spread your money across multiple plans, pillars and pots.