Early retirement? Here's what you need to know

The AOW age continues to rise, but did you know that you don't have to wait until this age to retire? AOW, the General Old Age Act, is a benefit you receive as soon as you are entitled to it. That is at 67 years if you were born before January 1, 1961. For people born between January 1, 1961 and October 1, 1962, this is at 67 years and 3 months. For those born after October 1, 1962, the AOW age has not yet been determined. Pension, on the other hand, is a savings pot that you build up yourself and that you can withdraw even before your AOW 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 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 state pension age. This means that if your state pension age is 67, for example, you can in principle start enjoying your pension at the age of 57.

With early retirement, there are several ways to flexibly adjust the pension to your wishes. For example, you can often opt for a full or partial withdrawal of your pension.

• Full early retirement: this involves using the full pension amount to stop working earlier.
• Partial retirement: with partial retirement, you can, for example, continue to work three days a week, while you take your pension for the remaining days. This helps to make the transition to full retirement more gradual and at the same time draw on your pension pot less quickly.

Retiring early sounds attractive, but of course it does affect the amount you receive per month. After all, the amount you have to live on is spread over a longer period. In addition, the period in which you build up your pension is shortened when you retire earlier, which means that your return will ultimately be lower (see also the return-on-return effect).

Old pension accounts have a little more room

If you have been building up a pension for a long time, you may have old pension accounts that offer more flexibility than newer schemes. In the past, many pension funds offered the option of an early retirement pension or even a pre-pension. This means that with some schemes you could start drawing part of your pension earlier to fill 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. At mijnpensioenoverzicht.nl you can easily see what you have accrued with different employers. You will have to go to the websites of the individual pension funds for the specific structure and regulations. 

Accessing pension assets built up through 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 that you have built up through your employer via the second pillar. This form of accrual offers you the possibility to supplement your pension assets flexibly, so that you can stop working earlier without being directly dependent on your regular pension pot.

Those who accrue pension capital in the third pillar can benefit from attractive tax advantages that regular savings or investment products do not usually offer. With regular savings and investment accounts, you pay wealth tax on your savings or investments above a certain threshold. This means that part of the return is skimmed off by tax. In the third pillar, on the other hand, you build up your pension capital without this annual wealth tax. Moreover, you receive a tax refund on your contributions, 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 contributions: The annual tax refund effectively lowers your net contribution, resulting in a more advantageous accumulation of your pension assets.
• No wealth tax: The assets in your pension pot are exempt from wealth tax, unlike a regular investment or savings account.
• Lower tax upon withdrawal after state pension age: Due to the lower tax rates for those entitled to state pension, you can withdraw your accumulated capital more favorably later, which increases your net income.

Taking your pension assets in one go: What is the impact?

Recently, it has become possible to withdraw your pension capital in one go when you retire. This seems attractive, especially if you plan to retire early and need extra resources for, for example, a major expense or an investment. But there are important considerations with this choice.

If you withdraw your entire pension amount in one go, this can lead to a significant tax burden in the year of withdrawal. In the Netherlands, a pension that is withdrawn in one go is taxed at your highest income tax rate, which means that you will have less net income from the total amount. In addition, a one-time withdrawal means that you will not have a monthly pension income later on, which requires well-thought-out financial planning for the years thereafter.

Lower income tax after state pension age

An important consideration for early retirement is that once you reach the state pension age (AOW-leeftijd), you pay less income tax and social security contributions. This means that you will have more net income from your gross income once 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 a few years before your state pension age and draw from your pension assets, this may lead to a higher tax burden. Early withdrawal of pension income means that this income is taxed at the regular rate for employed people, which is generally higher than the rate that applies after your state pension age. It may therefore be more beneficial to draw additional income from other sources (such as savings or investments) for as long as possible and only draw more from your pension assets after your state pension age.

Tax benefits after state pension age:

• Lower rates: The tax rate on income decreases once you reach the state pension age, resulting in a higher net income.
• Social security contributions: After the state pension age, social insurance contributions are lower, which further increases your net benefit.

By making smart use of these tax benefits, you can better align your pension assets with your future needs. It pays to create a financial plan in which you optimally utilize the benefits of a lower tax rate after your state pension age.

Are you going to retire early or not?

Retiring early offers a lot of flexibility, but also requires careful financial planning. By carefully considering your options within the third pillar and taking advantage of tax benefits, you can structure your income so that you can enjoy your early retirement without surprises. Old pension schemes may offer additional options, and considering a one-off withdrawal of your pension assets may be attractive, provided you properly calculate the tax effects.

Also consider the benefits of lower tax rates after your state pension age, so that you can develop a strategy that makes optimal use of your accumulated capital.