The Dutch Retirement System

Every country seems to have a different retirement system. In this article, I will explain how the system in The Netherlands works. Based on this system, I have to make certain choices regarding my (early) retirement. Below are the three pillars in the Dutch retirement system.

The Three Pillars of Retirement

Here in The Netherlands, there are three pillars to our retirement system. The first pillar is the government’s social security payment.

The second pillar is the retirement that you save for with or through your employer. This can be a defined benefits pension or a defined contributions retirement account.

The third pillar is everything you arrange yourself. Sometimes this can be a pre-tax retirement account, but usually it’s also after-tax savings, investments, or real estate.

Pillar One: AOW

The AOW (Algemene Ouderdomswet) is a government scheme that resembles a social security payout for people past a certain age. Everyone who has lived or worked in the country has built up rights to AOW.

During your working years you pay into the system through your income taxes, after your official retirement age (68 and counting…) you get a defined benefit for the rest of your life.

The AOW is designed to be enough to sustain a very modest and frugal lifestyle. Currently the net income from AOW is around € 1.100 when you’re single, or € 770 per person when you’re married or in an otherwise registered partnership.

This is not an income that you can live a luxury life with, however, it is guaranteed by the government as long as you’ve lived your entire life in The Netherlands. For every year that you don’t live or work in The Netherlands, your AOW will be cut by 2%.

Pillar Two: Employee Pension

The second pillar is the pillar where most people get the bulk of their retirement income from. In the past this would be a defined benefits pension, via your employer directly or negotiated via a labour union. These days, less and less employers offer defined benefits pensions. Instead, there are defined contribution plans that you and your employer can put money in. This money is then invested, and when you reach retirement age you buy a defined benefits income with this money.

These accounts are similar to the US 401k accounts, in that you can put money in pre-tax, and that your employer might contribute too. However, the amount of money you can put into a retirement account in The Netherlands is capped.

First of all, the maximum yearly gross salary over which you can contribute to your retirement income is about 105k euro. Anything over this salary doesn’t contribute to your maximum pre-tax retirement savings.

Second, from your gross salary you deduct the AOW franchise, which is in the order of 13k euro per year. Say your income is 50k per year, you can calculate your maximum retirement contributions by subtracting 13k from 50k, giving 37k.

The amount of money you can put in that year is a percentage of the retirement yielding income (in this case the 37k). This percentage is depending on your age bracket. For example, for the age bracket 20-24 this percentage is 3.5%, for 25-29 it’s 4.3%, for 60-64it.s 17.8%. The older you get, the more you can put into this retirement account.

Pillar Three: Individual Retirement Account

The third pillar in our retirement systems is what you can save yourself. This consists of two parts. In this pillar you could potentially save some pre-tax money, depending on how much you’ve put in your pillar two. Also, you can save post-tax.

The pre-tax option only works when you don’t save enough in pillar two to max out your retirement savings. This happens for example when you are allowed to put in 17.8% (at age 60-64) but you only put in 10% because that’s the employer’s choice. You are then allowed to save the difference (7.8%) in a personal pre-tax retirement account.

The second part is your after-tax savings. As always, you can put money in the bank, in an investment account, or buy rental properties that yield some income. When you retire, you can use this capital to pay for some of it.

The downside of saving for yourself is that you don’t get the tax benefits, since all of these investments are done with after-tax income. However, the positive side is that you can do whatever you want with this capital. The money in your pre-tax accounts is locked up until retirement, but in your post-tax accounts you are free to do all you want.

Optimise in Two, Save Extra in Three

The road to a great retirement, at least for employed individuals with an employer’s retirement account, is to optimise their second pillar and save extra in the third pillar.

At the moment I’m investigating how I can optimise my second pillar. Via my employer I put away 4% of my eligible salary (gross salary minus franchise) in a pre-tax account, which is invested in not so great funds. However, I believe there are  better investment options within this account. I will definitely blog about this when I properly researched and made the switch.

Next to that, of course, I’m saving my after-tax money. Currently, I save about 35-40% of my after tax money, putting it in low cost ETFs. Also, every year I review whether I should contribute some money to a pre-tax account to make use of the entire fiscal space I have. Via my employer I only save 4% of my eligible salary, where I could do a little more than that. However, since the pre-tax accounts are locked away it is not clear to me whether I should invest more in them, given that I want to retire early.

How do you save for retirement? Do you max out your pre-tax options every year? Let me know in the comments!

Subscribe to our mailing list

Fire The Boss will use the information you provide on this form to be in touch with you and to provide updates and marketing.

We use Mailchimp as our marketing platform. By clicking below to subscribe, you acknowledge that your information will be transferred to Mailchimp for processing. Learn more about Mailchimp’s privacy practices here.

12 thoughts on “The Dutch Retirement System”

  1. Dear B,
    I recently reviewed my possibilities related to retirement and I came to the conclusion that pre tax savements are just the right thing to do if you want to retire early. Because you’ll not build up pension anymore in pillar two if you retire early you can (partly) compensate that with pre tax savements (at the earliest age possible).

    • Hi D, that’s definitely true. However, the problem is a bit more complex than just maxing out your pillar 2 (pre-tax) savings. The thing is, if you want to retire at 40 or 50, you cannot take out money from pillar 2 just like that I believe. That means you need quite a bit of money in an after-tax account as well.

      The earlier you want to retire, the more you are solving for a safe withdrawal rate that lasts you indefinitely on your after-tax savings (pillar 3) and the later you want to retire the more you should max out pillar 2. Then if you only retire five years early, you can pay for that with just 5 years saved up in an after-tax account, no need for a withdrawal rate and such.

      • Hi B,
        Yes, I believe we are on the same line. You need both. Use pillar two to compensate the years that you’re not building up in your supposed to be working period (as you cannot withdrawal that before retirement age) and pillar three to compensate the years before official retirement age.

  2. Nice overview B. You can always invest without taxes through a DeGiro pension account. But like you said, you cannot access it until your pension date.

    I am a loan slave regarding my regulat pension arrangements ;-)

  3. Nice Post. I’m Dutch, but living abroad. Less impact on taxes.. With all the taxes and complications in Holland it seems unlikely I would ever live in Holland again, but its good to know the options out there. Such low contribution percentages though… If you miss a year you forfait the contribution I assume?

    Cheers Dan

    • Hi Dan, indeed the contribution percentages aren’t that great. The amount you can contribute is rising though as you get older.
      If you miss a year of contributions, or contribute less than your maximum allowed amount, you can contribute the difference from up to seven years back I believe. This is called “reserveringsruimte”.

      With a lot of employers (mine included), you contribute less than the maximum allowed amount every year. You can either choose to do nothing or to add to your contributions. If you do nothing, you can setup a personal retirement account in which you can contribute the difference, tax-advantaged.

      In which country do you currently live/plan to stay?

  4. Thank you for the articles, I have some questions though that I can’t find answers for so far:

    1. About pillar 2, you mentioned that I am allowed to take some money (pre-tax) on top of what I contribute to my employer’s pension fund and you called it “personal pre-tax retirement account.” How do I learn more about that? What are they? and where can I start?

    2. What happens when you retire early? let’s say I am 50 now and I don’t want to work anymore. I decide to retire relying on whatever investments I have (away from any Dutch pensions). Now what happens to my Dutch pension? I know I have to wait till 68 or whatever retirement age is then but who will keep contributing? etc. etc.

    Thanks a lot!

    • Hey! I am by no means in the position to advise you on this, so what I write here is just what I think happens.
      1. You are allowed to do this (look up pensioensparen, pensioenbeleggen) but it depends on how much your pension is growing. If you build up the maximum pension through your employer you can’t put anything in. You can calculate this via the jaarruimte, this is the amount of money that you can put into a pension but didn’t do it via employer.
      2. If you stop working, nobody will contribute. You can’t take distributions that early I think, the money will just sit (and hopefully grow) there.

      Good luck!

      • Ok so about:

        1. You mean it’s how much I can actually contribute myself to the SAME PENSION FUND that my employer is already contributing to from their own bucket? cause that part I know but I thought there’s something else I can claim pre-tax and invest in myself outside the pension fund my employer signed me up for.

        2. So I will never lose any pension benefits if I don’t contribute in NL? it’s just that my money will be “less”? And you can’t keep contributing if you are not working? For me e.g. what is the point of contributing to that fund that I can only get when am 68 if I can’t grow it more. If my investments outside in ETFs or other investments will get me enough money to retire earlier, I am practically just wasting this money and not getting the chance to grow it further after I stop working and worst of all, I have to wait till 68 to get anything out of it.

        I am just being critical here to validate with others if my thoughts of what I can / can’t do (not what I should / shouldn’t do) are valid.

        • On 1. you are wrong, you have a yearly maximum you can contribute to any pension/retirement plan depending on your income. If you put in less than the maximum through your employer you have “jaarruimte”. You can then invest the jaarruimte amount in a dedicated retirement account and claim that as a deduction.
          2. I don’t know these details and I suggest you speak with a specialist on this topic. Looking for a certified financial planner is the key here. People in NL with these credentials are indicated with the title “FFP”.

          • Good to know. Thank you! I am exploring the options and trying to get in touch with some FFPs :)