In retirement and vacation pay: what about it?

Financial planning plays a crucial role in a worry-free retirement. A common question here is: how does vacation pay work during retirement? In your working life, you were used to receiving vacation pay every year in May, usually 8% of your gross salary. But how does that work when you're retired? In this article, we explain if and how you receive vacation pay as a retiree, and what to expect in terms of payout period and amount.

What is vacation pay?

Vacation pay is an extra allowance - usually about 8% of your gross annual income - meant to cover vacation expenses. Salaried workers often receive this once a year (usually in May) in addition to their regular salary. As a retiree, you are in principle also entitled to vacation pay, only the method of payment may be different from what you were used to during your working life.

Two ways of paying vacation pay during retirement

There are two common ways you can receive vacation pay during retirement, depending on your pension provider:

Option 1: Once-a-year vacation pay
You get your regular retirement pay 12 times a year, plus a separate vacation pay once a year (often in May, just like it used to be with your salary). So this feels similar to how you used to get it when you worked: a set amount every month and an extra in May.

• Advantages: You get a larger amount at one time, which can be handy if you're planning a big expense or trip in the summer, for example. It also feels like a bonus, just like you were used to during your working life.
• Disadvantages: You have to have discipline yourself to manage this large amount properly. In addition, your other monthly benefits are a little lower than they would be if the vacation pay were spread out, because "withholding" is done to provide that annual benefit.

Option 2: Monthly payment of vacation pay
Your vacation pay is paid each month along with your pension benefit. So you receive twelve equal pension payments per year, with no separate extra payment in May. Here, your monthly amount is a bit higher than in option 1 (because the vacation pay is divided).

• Benefits: You get a slightly higher income each month, which can help spread your expenses evenly throughout the year. You don't have to wait for May for the extra, and you also don't have to set aside a portion yourself each year for vacations.
• Cons: Vacation pay feels less "special" because it doesn't come as a separate bonus. You miss that one festive moment in May. Also, if you were used to vacation money being for your vacation, now you have to set aside an amount for vacation yourself in your budget since it's already in your monthly amount.

No AOW yet, but pension

Suppose you retired (through an early retirement plan or your own means, for example) before reaching the state pension age. You then already receive pension benefits from your pension fund or insurer, but no AOW yet. Are you entitled to vacation pay at this stage? Yes, usually you are. How much you get and when, depends on your pension provider's scheme. Often a pension fund pays vacation pay annually, but it is wise to check with your pension fund or insurer. The amount is usually similar to 8% of your annual pension benefit, but the exact calculation and timing of payment may vary from one provider to another.

Tip: Ask your pension fund how they handle vacation pay before your AOW starts, so there are no surprises. Each fund has 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 AOW age and receive AOW (General Old Age Pensions Act benefit), you will also receive a vacation pay on your AOW. The Social Insurance Bank (SVB), which pays AOW, pays this vacation money once a year - usually in the month of May.

• Payment: The AOW vacation pay is calculated over the period from May to April before and comes in May each year.
• Amount: The amount of this vacation pay over your AOW depends on your AOW situation. Do you have an AOW for singles or for cohabitants? Do you get full AOW or part of it (for incomplete AOW accrual)? Payroll tax credits are also taken into account. In your AOW specification you can see how much vacation allowance has been accrued.

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

Pension fund versus pension insurer

Stepping aside, there are several ways your pension is received that can affect vacation pay:

• Pension fund: This is a collective pot (for example, from your industry or former employer) from which your pension comes. Pension funds often pay out in a manner similar to salary. With many pension funds, vacation pay is paid out separately (annually). They reserve a piece of your pension each month to be combined into your vacation allowance in May. The exact policy varies: some large funds do it monthly inclusive, but usually it is separate annually.
  Example: ABP (large pension fund) pays pension 12x a year and an additional vacation allowance in May.
• Pension insurance (also called annuity payment from an insurer): This is an individual plan, often through an insurer or bank, where you have built up your own pension pot (e.g. as self-employed or through additional contributions). Here the vacation pay is usually already included in the monthly benefit. The insurer calculates your annual benefit and divides that by 12 equal monthly amounts; you don't receive a separate vacation pay in May, but your monthly amount actually includes vacation pay.
  Example: If you have an annuity payment through a bank or insurer, you receive the same amount each month and no separate vacation pay. So your "vacation pay" you actually receive spread out over the whole year.

Note: It's good to know which category your pension falls under so you know where to expect your vacation pay. 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 self-employed people who arrange something themselves, or modern pension solutions). With Vive - where you deposit and invest yourself for your retirement - you invest for retirement as you see fit, but you can only invest for your retirement, not arrange a retirement benefit. In such cases, the word "vacation pay" does not appear as a separate component. Instead, at benefit stage (when you retire and have your pot paid out), you decide how you want to receive the money. You then knock on the doors of various banks or insurers that provide retirement benefits and arrange payouts with them. Often, you then simply choose monthly payments of a certain amount over a certain period of time. Your vacation pay is included in this, similar to how pension insurance companies work.

Most importantly: know how your retirement benefits are structured. If you are through an old-fashioned pension fund, read their information about vacation pay. If you have your own pot or insurance structure, realize that you have to take care of your own "vacation bonus" if desired.

What can you do now?

Whether you choose an annual vacation payout or monthly additions to your pension, it's important to know how it works and which option best fits your financial planning. At Vive (and our retirement partners), we're happy to help you make your financial future worry-free and manageable. Check with your pension fund or insurer how they handle vacation pay, so you know exactly when and how much you can expect. After that: enjoy your pension and your well-earned vacations!