Taking early retirement? Here's what you need to know

The state pension 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 Pension Act, is a benefit you receive as soon as you become entitled to it. That's at 67 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 state pension age has not yet been set. Pension, on the other hand, is a savings pot that you build up yourself and that you can withdraw before your AOW age. What are the options if you want to retire earlier? Find out in this blog.

How much earlier can you retire?

If you're considering retiring before your state pension age, it's good to know that this is possible with most pension plans. Depending on the plan, 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.

In early retirement, there are several options for flexibly adjusting your pension to suit your needs. For example, you can often choose to withdraw all or part of your pension.

• Full early retirement: here you put in the full pension amount to retire early.
• Part-time retirement: part-time retirement allows you to continue working three days a week, for example, while drawing your pension for the remaining days. This helps to make the transition to full retirement more gradual while at the same time making your pension pot less likely to be drawn on.

Retiring early sounds appealing, but of course it affects the amount you get per month. After all, the amount you have to live on is spread over a longer period of time. In addition, the period in which you build up your pension is shortened when you retire early, which ultimately also reduces your return(see also the return-on-return effect).

Old retirement accounts have slightly more room

If you have been accumulating pensions for a long time, you may have old retirement accounts that may offer a bit more flexibility than newer plans. In the past, many pension funds offered the option for a so-called early retirement pension or even a pre-pension. This meant that with some plans, you could take part of your pension earlier to fill an income gap. While not everyone still has these options, older pension plans can sometimes allow for early retirement benefits that are taxed differently than regular retirement benefits.

Old retirement pots can also be valuable when planning an early retirement strategy. It's smart to find out what plans you've built up in the past and what options they offer. On 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 accruals and schemes, though. 

Address pension assets accumulated through the third pillar

In the Netherlands, you can build up pension assets through the third pillar of the pension system. This is separate from the pension pot you have built up through your employer through the second pillar. This form of accrual allows you to flexibly supplement your pension capital so that you can stop working earlier without directly depending on your regular pension pot.

Those who build up assets in the third pillar pension can enjoy attractive tax benefits that regular savings or investment products usually do not offer. With regular savings and investment accounts, you pay capital gains 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 retirement assets without this annual capital gains tax. Plus, you get tax refunds on your deposits, which can make your wealth grow faster (provided you reinvest it, of course, otherwise it's a nice retirement cashback).

Benefits of third-pillar retirement investing:

• Annual tax benefit on deposit: The annual tax refund effectively reduces your net deposit, resulting in a more advantageous accumulation of your retirement assets.
• No capital gains tax: The assets in your pension pot are exempt from capital gains tax, unlike a regular investment or savings account.
• Lower tax when withdrawing after state pension age: Lower tax rates for state pension recipients allow you to withdraw your accumulated wealth more favorably later, increasing net income.

Withdrawing your retirement assets all at once: What's the impact?

It has recently become possible to withdraw pension assets in one lump sum when you retire. This seems attractive, especially if you plan to retire earlier and need extra funds for a major expense or investment, for example. But there are important considerations when making this choice.

When you withdraw your entire pension amount in one lump sum, it can result in significant taxation in the year of withdrawal. In the Netherlands, pension that is withdrawn in a lump sum is taxed at your highest income tax rate, which means you are left with less net of the total amount. In addition, a one-time withdrawal means you won't have a monthly retirement income later, which calls for thoughtful financial planning for the years that follow.

Lower income tax after state pension age

An important consideration with early retirement is that once you reach state pension age, you pay less income tax and social security contributions. This means you will have more net left over from your gross income once you receive AOW. For many people who want to retire early, it is helpful to factor this tax benefit into their financial planning.

For example, if you stop working several years before your state pension age and draw from your pension assets, this may result in a higher tax burden. In fact, drawing pension income early means that this income is taxed at the regular working rate, which is generally higher than the rate that applies after your state pension age. As a result, it may be more advantageous 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 retirement age:

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

By making smart use of these tax benefits, you can better match your retirement assets to your future needs. It pays to create a financial plan that maximizes the benefits of a lower tax rate after your state retirement age.

Will you or won't you retire early?

Retiring early offers a lot of flexibility, but it also requires careful financial planning. By looking carefully at your options within the third pillar and taking advantage of tax benefits, you can arrange your income so that you can enjoy your early retirement without surprises. Old retirement plans can offer additional options, and considering a one-time withdrawal of your retirement assets can be attractive, provided you carefully consider the tax effects.

Also consider the benefits of lower tax rates after your state retirement age, so you can develop a strategy that makes the most of your accumulated wealth.