If you are nearing retirement, you might be interested to learn that the Dutch Pensions Act 2016 was recently amended. The introduction of the Premium Schemes (Improvements) Act (Wet verbeterde premieregeling) in 2016 provided us with an alternative to the traditional guaranteed pension. Owing to the continued low interest rates, the amount of the guaranteed pension benefits has been lower than expected for many people.
You now also have the option to purchase your life-long expiring pension benefits in the form of a variable pension based on investments. If you opt for the variable pension, your pension benefits will be determined annually. The amount of these variable payments depends on the return on investments, trends in life expectancy, and interest-rate movements.
HIGHER BENEFITS FROM THE START
The new Act provides that insurers are permitted to offer gradually lower benefits for investment pensions. Beneficiaries who choose this option receive significantly higher benefits at the outset than they would if receiving a guaranteed pension. This difference may run as high as 40%.
For many people entering retirement, the benefits they receive when entitled to a fixed pension are too low.
The option of receiving gradually lower pension benefits is designed for this category. They receive higher pension benefits right from the start; the insurer will then gradually adjust the amount of the benefits over time, at which point it remains to be seen whether the payments received are actually declining. The underlying idea is that benefits can be maintained at the same level if returns on investment are high.
Whether the option of gradually lower benefits is a sensible one depends on the individual. For those whose guaranteed benefits are too low to survive on, it is doubtful in the first place whether an investment-based pension is really the right choice. If returns are weak, the benefits may end up falling substantially below the guaranteed benefits.
WHAT IS THE AMOUNT OF THE BENEFITS FOR A VARIABLE PENSION?
Since a number of factors are unclear, we are unable to predict in advance how much you will receive from one year to the next. However, we can calculate for you how much you would receive in benefits during the first year if you were to opt for continued investment. The insurer will then also provide a forecast of the benefits after 10 years. We will be happy to review the various options available with you and to apply for no-obligation proposals.
COMBINATION BETWEEN INVESTMENT AND GUARANTEED PENSION
If you would like to take advantage of the opportunities provided by continued investment but do not want to invest all your pension capital, you have the option of combining these two products. You can then use a portion of the capital to purchase guaranteed benefits while using another portion to buy a variable pension. This gives you the security of a fixed pension while at the same remaining eligible for higher payments.
You have the option to continue investing while retaining the security of a fixed surviving dependants’ pension for your partner. In this case, you only invest the capital for the retirement pension, and the amount of the partner’s pension is fixed from the start. Your partner may also opt for variable pension payments. Bear in mind that these choices must be made at an early stage.
DO I GET TO CHOOSE HOW MY INVESTMENTS ARE ALLOCATED?
No: the Dutch insurers that currently offer investment pensions do not offer freedom of choice as far as the investment mix is concerned. However, there are significant differences between the various insurers providing these services. The ratio between shares (equity) and fixed-income securities, for example, varies depending on the insurance provider.
HOW ARE MY INVESTMENTS ALLOCATED?
The insurers concerned have opted for what is known as a ‘lifecycle investment mix’. This means the composition of the portfolio and the associated risk levels will change during the investment term. We will be pleased to discuss your personal situation with you, so we can determine what products might best suit your needs.
The proposal you will subsequently receive will specify how your funds will be allocated.
WHAT ARE THE RISKS ASSOCIATED WITH A VARIABLE PENSION?
The amount of your benefits will be determined annually; this amount may be higher or lower than the previous year. There are three uncertain factors at play in this calculation, as listed below.
1. The amount of the available capital. This capital obviously fluctuates based on the return on investments.
2. Life expectancy. If you opt for a fixed pension, the amount of your pension payments is fixed. The risk of people living increasingly longer lives and, by corollary, an extension of the period during which they receive pension benefits is borne fully by the insurer. If you opt for continued investment, you will personally bear this risk, as the annual calculation of the pension payments is based on the life expectancy at that time. If general life expectancy is higher, you will receive a lower amount in benefits.
3. Interest rates. A third variable which will continue to have an impact is the interest rate. The annual calculation of the benefits is based on the interest rates at that time.
CAN I SWITCH FROM A VARIABLE TO A GUARANTEED PENSION BEFORE THE TERM IS UP?
No, unfortunately this is not possible, as the new legislation does not provide for the option to switch to a guaranteed pension at a later stage. We regard this as a missed opportunity. If you opt for a variable pension, you can no longer change your mind once interest rates start rising.
AUTOMATIC CONVERSION TO GUARANTEED PENSION
Some providers have opted to convert the investments to a guaranteed system during the term. There are several options available. One example is a project where the available capital is converted after 20 years into a fixed guaranteed benefit. This conversion is subject to the interest rate applicable at that time. Another insurer chooses to convert one-twentieth portion of the capital into a guaranteed pension each year. In addition, you have the option of continuing to invest throughout your life.
It is not possible to combine a Dutch high/low benefit, where benefits are higher the first few years, with a variable benefit. This type of pension may exclusively be combined with a fixed, guaranteed pension.
CONVERTING A PARTNER’S PENSION
As with the fixed pension, the partner’s pension may be exchanged for a higher retirement pension if you have opted for an investment pension. If your partner is not interested in receiving a partner’s pension, he/she can waive this option and your retirement pension will be increased instead.
QUESTIONS OR ADVICE
If you have any questions regarding the above information or require advice on your personal situation, you can contact one of our experts by phone. We are available at +31 (0)20 470 0920.
If you have no further questions and would like to receive a pension proposal, please request this through our website. You can click the button below to calculate the amount of your guaranteed pension and can indicate that you would like to receive an alternative proposal based on investment.