The pension contract will bring several significant changes with it for participants. The lump sum is one of them. This will allow you to withdraw 10 percent of your pension capital all at once as soon as you retire. How is that going to work? We asked the experts at APG.
1. Briefly: what is the lump sum?
It is a one-time payment. It is when you can withdraw a percentage of your accrued pension pot all at once. Every year you pay a premium and your employer also deposits money into your pension pot. After a number of years, a certain amount will have accrued and when you retire you will be able to withdraw a portion of that. It is expected that this will go into effect in 2022.
2. Why is the lump sum being introduced?
The pension plans already have various options, but being able to withdraw a lump sum is new to the Netherlands. In other countries this has been an option for some time. It allows people to better align their pension with their personal circumstances and needs. It is the government’s express wish to offer more flexibility so that you have more options for the first years of your retirement. For example, you may want to pay off your mortgage, or take a trip around the world at age 63 instead of working for a few more years.
3. Is the Netherlands happy with the lump sum?
A Netspar study, conducted by researchers of the Central Planning Bureau (CPB) and the University of Tilburg 2 years ago, showed that participants in pension funds want more options for their pension capital. It has to become easier to use a portion of the capital to, for example, buy a house or start working less, sooner.
4. So, basically it is a positive development?
It is great to get more freedom. But a lot depends on the conditions that are set for this. For many people, for example, retirement age is too far way. They want to retire sooner. Most people use the so-called retirement bridging for this; initially a bigger pension and later you can make do with a smaller pension because you’ll be getting the Old Age pension. In that case, you will not be able to get the one-time lump sum. The lump sum may also have tax implications for people with lower and medium incomes and lead to lower payments. You may therefore be wondering if the lump sum is only a good idea for the happy few. This is an issue regarding the rules as they are currently. It would be unfortunate if this opportunity for positive options is relegated to a dead letter. The upcoming discussion about this in the House of Representatives will be interesting. Incidentally, not all the conditions around the lump sum are negative. It is sensible, for example, that the maximum amount you can withdraw at once is 10 percent of the pension. This prevents the pot from emptying too fast. After all, you do want to be able to enjoy your retirement when you’re eighty-eight.
5. What should you watch for?
It sounds attractive, of course, to get 10 percent of your pension up front. And not worry about how much you’ll get later. But you need to stop and ask yourself how you envision that later part of your life. Will you have enough left for your regular expenses? Another condition for the lump sum is therefore that it must not bring the remainder of your pension below a certain limit. This is about 500 Euros a year. Taking up the lump sum should not result in your having to live on a pension of 350 or 465 Euros a year. So, if your pension capital is small, you may not be able to get the 10 percent lump sum.
With cooperation of Wilfried Mulder, senior policy manager at APG, and Debbie Kwanten, senior pension lawyer at APG.
You can find more information about the Netspar study by the CPB and the University of Tilburg here.