Building an individual pension: What you need to know?

At Vive, we believe that everyone deserves financial freedom, especially during retirement. The Dutch pension system offers many possibilities, but sometimes that is not enough. That is why it is smart to build up an individual pension. In this article, we explain why this is important, what options are available, and how you can get started today.

What is financial freedom?

Financial freedom means having enough money and financial stability to live the lifestyle you want without relying on a salary. It means you are in control of your own finances. This way you can provide for your basic needs, pursue personal goals and resolve emergencies without undue stress. 

In practice, this means "I can afford anything I want within normal limits." It doesn't mean you don't have to work anymore - or that you can just buy a car. You're a little more advanced then. 

But why the link with pensions? 

The link between financial freedom and pension is that pension planning ensures long-term stability and independence. By saving or investing enough for your pension, you can retire earlier and avoid financial stress. Pension accrual offers freedom of choice in your future lifestyle and contributes to well-being and health. Investments for your pension help your assets grow and protect against inflation. In short, a well-planned pension is an important part of the path to financial freedom.

Why build up an individual pension?

Your pension consists of three pillars: state pension (AOW), collective pension, and supplementary pension (you can also optionally invest in stocks, your house, etc., which we also call the fourth pillar). Although the first two pillars provide a basic income, this often cannot support your desired lifestyle. Therefore, it is wise to build up your own individual pension for more financial security and freedom. But what are the options for building up an individual pension?

1. Supplementary pension (for example, through your employer)

Some employers offer the possibility to build up individual pension through voluntary contributions. This can significantly increase your pension pot and offers tax benefits. For example, the employer can bear the costs of the individual pension pot, which encourages you to deposit money into your pension. The employer helps the employee with their future (read our other blog about the second and third pillars to learn more about this).

‍Example: Suppose you work for a company that offers an individual pension savings system. You can choose to automatically deposit a portion of your salary into this fund, which will yield a nice amount over time.

2. Bank savings

Bank savings is a safe and simple way to save for your pension. You periodically deposit money into a blocked account that is only released when you retire. After it is released, you can withdraw it in installments. This money is tax deductible. However, you will receive a lower interest rate here compared to investing. 

Example: Every month you deposit €200 into a special pension account at your bank. This amount is blocked until your retirement age. You receive a low interest rate on your total deposited money. 

3. Pension investing

Pension investing is a way to build individual capital for your pension by investing, often through a blocked investment account.

Pension investing offers the chance of a higher return than saving, but it also involves risks and costs. Like any form of investment, this can occur because the investments - shares, bonds, funds - may become worth more or less. That depends on the market. 

Despite this, pension investing has become more popular. This is due to the chance that your investments will be worth more in the future, giving you a higher pension. Moreover, because you can enjoy tax benefits.

Example: You decide to invest €150 per month in a pension fund that invests in funds. You do this with the estimate (and perhaps expectation) that the final amount will be higher than, for example, a savings account. This is exactly what Vive does for you. 

Tax benefits

One of the biggest advantages of building individual pension is the tax benefits. You can benefit from tax deductions with both bank savings and pension investments. This means that you get money back from the tax authorities on the amount you have already paid income tax on. You do not have to pay this amount because it is locked in until your retirement age. When you have the money paid out, you often pay much lower income tax. Until then, you can use the money you get back to achieve extra returns.

Tools and Calculations

It is important to gain insight into how much pension you need and how much you should save. Use tools such as pension and annual allowance calculators (you can find the definition of annual allowance here) to get a clear picture of your financial future. 

If you simply want to find out what you need for your pension, you will definitely need the following information (apart from any calculators):

1. Current income: Your current annual gross income.
2. Desired pension income: The amount you think you will need annually after your retirement. A rule of thumb is 70-80% of your current income.
3. Retirement age: The age at which you plan to retire.
4. Life expectancy: How long you expect to live after your retirement.

Example: Use an annual allowance calculator to calculate how much extra you can save tax-free for your pension. This will help you create a financial plan.

You can find the government's annual allowance calculator here: Calculate your deductible annuity premium (from 2016) (belastingdienst.nl)

What do we hope you learned from this?

Building an individual pension is important for financial freedom. The Dutch pension system offers a foundation, but often not enough for your desired lifestyle after retirement. By saving extra through supplementary pension, bank savings, or pension investing, you ensure greater financial security. These methods also offer tax benefits, helping you get more out of your saved money. Use tools such as pension and annual allowance calculators to create a clear plan for your financial future. And remember, financial freedom is different for everyone.