When you're employed, your employer typically sets aside part of your salary to save for your pension. However, as a self-employed person, whether you run a limited company (BV) or a sole proprietorship (eenmanszaak), you are responsible for saving for your retirement yourself.
This is not a simple question to answer. You can put money in a savings account, invest your assets, grow your business and live off the proceeds, or you could save through a pension annuity. In this article, I will focus on what a pension annuity involves from a tax perspective.
A pension annuity is a payment you receive from a specific point in time or upon the occurrence of a certain event. For example, this could be when you reach the statutory retirement age or upon the death of your partner. The advantage of a pension annuity is that the premiums you pay are often deductible from your taxable income.
Can you simply deposit your money into a separate savings account and label it as a pension annuity? Unfortunately, that’s not possible. There are several conditions that must be met for something to qualify as a pension annuity:
- The annuity must be taken out with an authorised financial institution, such as an insurer, bank, investment firm, or a collective investment scheme.
- The annuity must entitle you to periodic payments, which are made if you are alive on a predetermined date or if you pass away before a predetermined date.
- The payments from the annuity must meet certain legal conditions – these conditions are further defined in the law but go beyond the scope of this article.
As mentioned, contributions to a pension annuity can be tax advantageous, as the contributions are deductible from your taxable income. This means that by contributing to your annuity, you lower your taxable income and, as a result, pay less tax. However, the contributions must be made into an annuity that meets the conditions mentioned above.
As noted, contributing to a pension annuity can be tax effective. But how much can you actually save in an annuity? Is there no limit to how much you can contribute towards your pension? Unfortunately, contributions are not unlimited. Or at least, you are only allowed to deduct a limited amount from your taxable income.The amount you can deduct depends on your annual contribution allowance (called "jaarruimte") and any unused contribution allowances from the past 10 years, which is known as "reserving space" ("reserveringsruimte"). When you first start saving for your pension, it’s wise to calculate how much you are allowed to contribute in total. In the first year, this could be a significant amount because the previous 10 years are also included in this calculation. Of course, I can help with this calculation.
How much should you contribute? Should you make the maximum use of your annual and reserving space? This question is not easily answered with a simple ‘yes’ or ‘no’, as it depends on many factors. The answer to this question will depend, among other things, on:
- Will you need the money soon? If you may need the money you want to contribute in the near future, it is not wise to put it into a pension annuity. Once you deposit money into a pension annuity, you generally cannot access it until you reach retirement age.
- What is your overall financial situation? It's always smart to diversify your assets and investments, i.e., to have multiple pots and different types of investments. For example, if you already have a certain level of security for your future, you may not need to fully use your annual and reserving space as much as someone whose pension provision is solely reliant on this annuity.
- Maximising the tax deduction for pension contributions: To make optimal use of the pension contribution deduction, you want to make the contribution at the highest tax rate (49.5%). For example, if your income is within the highest tax bracket for an extra €10,000, it would likely be most beneficial to contribute exactly that amount to your pension, but not more.
As you’ve read, contributing to a pension annuity, using both your annual contribution allowance and reserving space, is an excellent option for entrepreneurs looking to save for retirement. However, it’s certainly not advisable to simply contribute the maximum to your pension and assume that this will always be optimal. Whether it is optimal depends on many factors. Therefore, it is essential to seek professional tax advice each year regarding your pension contributions.
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