What should you do if 10 percent of your pension is suddenly deposited into your bank account? That is a question many Dutch people will be asking themselves when they are able in the future to withdraw a part of their accrued assets at once.
The new pension agreement will probably enter into force as of January 1st, 2022. One of the alterations is that people are allowed to withdraw up to 10 percent of their accrued assets at once as soon as they retire. This so-called lumpsum offers more opportunities for pension participants to enjoy their free time sooner. More freedom of choice also entails more questions. For example, if you choose to withdraw a lumpsum, your future pension payments will decrease. And who knows what will happen financially or health-wise in a couple of years?
Trip around the world
Bart Kuijpers, senior researcher at APG Asset Management, investigated the way people are best helped making those choices. The main thing should be, according to him, that this important change is clearly communicated. Opting for a lumpsum now has major consequences later on. “You could use the money to pay off a mortgage or even for a trip around the world. That is great, as long as it doesn’t lead to a pension payment later on that is too low. If you withdraw too much from the pension pot, you might not be able to maintain your desired standard of living in the future. Some participants can afford it, for others it is better not to opt for the lumpsum.”
Kuijpers can imagine that participants with poorer health are more likely to choose for an amount at once. The same applies to people who want to donate money to their (grand)children. “Participants with a good health and no immediate spending purpose are less likely to opt for a lumpsum. They benefit more from a higher pension payment in the longer term.”
The choice to withdraw a lumpsum is indeed entirely different for every participant. After all, we all have different financial needs and possibilities. That is exactly why it is so important for people to be accurately informed. According to Kuijpers, that information can in the first place be found at portals such as mijnpensioenoverzicht.nl and the ‘My’ environments of pensions funds. There are several financial planning tools for a customized advice, such as Helder Overzicht & Inzicht. “These tools allow you later on to easily see the impact of a lumpsum on your future pension payment”, Kuijpers says. “It is obviously also possible to combine those tools with a personal conversation with a pension advisor - always a recommendation.”
The lumpsum may be new to the Netherlands, people in, for example, Great Britain already have five years of experience with this phenomenon. The tax authorities allow the Brits to withdraw a payment up to no less than 25 percent of their pension assets. Smaller pension assets are usually withdrawn at once and people with larger assets often withdraw amounts gradually, Kuijpers knows. “Many participants follow the offered standard option of gradual withdrawal or opt for a lumpsum. Young participants choose for a lumpsum more often, probably because that allows them to stop working sooner or partially prior to the retirement date.”
The Brits mainly use their lumpsum to save (32 percent) or to invest (20 percent), but also for home improvement, a car or vacation (25 percent) or to pay off debts (14 percent). In short, sensible use in the majority of cases. “There are a few examples of people squandering the lumpsum to then rely on social welfare, but that does not happen on a large scale.”
Now or later?
The word squandering is a bit of a delicate subject: to what extent are people capable of making wise financial choices for their future? They are not, is the conclusion of behavioral scientist Dan Ariely. Upon the release of his book Geld en Gedrag (2018) he said in newspaper Trouw: “Unfortunately people are built in a way that we have far less consideration for our future selves than we have for our current selves, that we rather spend money instead of saving it.”
However, the opposite also occurs. Kuijpers knows that Australians, for lack of lifelong payments, often draw upon their pension assets (too) carefully out of fear for an old age in poverty. He furthermore sees most participants in other countries spending their money wisely. “There are always exceptions, and that is why the lumpsum in the Netherlands is maximized to 10 percent and can only be withdrawn on the pension date.”
It continues to be difficult to convince people to think about their pension on time, that is a known fact. We usually only think about it later on. That later awareness is slightly less severe for the lumpsum, Kuijpers explains. “The lumpsum can only be withdrawn on the retirement date. And although we advise not to postpone your choice until the very last moment, there is also no point in choosing years in advance. All kinds of things could still change prior to your retirement, like relocation, illness or divorce.”
The side effect of the introduction of the lumpsum could possibly lead to participants showing more interest in their pension, Kuijpers believes. “They are given a bit more control on the payment thereof.” And, in any case, that is a positive development.