Wat does lump sum payment means, and what if you choose this?
You may have already heard about it: the lump sum payment. The exact conditions are not yet known at present. Currently, the Act is set to enter into force on 1 July 2024. But what does ‘lump sum payment’ actually mean? And more importantly, what are the implications if you avail yourself of this option?
Free disposal of up to 10% of the old-age pension
The Lump Sum Payment Act allows you to withdraw up to 10% of the old age pension as a lump sum on your retirement date. That sure sounds appealing. The big advantage of withdrawing a lump sum is the flexibility it gives you when you retire. After tax, you may spend this money as you see fit. You may want to renovate your home, repay some of that mortgage or go on your dream trip. But don’t count your chickens before they hatch. There is a lot more to it.
More flexibility, but also disadvantages
The lump sum payment offers more flexibility, but also brings the risk of financial disadvantages. What disadvantages exactly and the scale of their impact depend on your personal financial situation. These disadvantages are as follows:
- Lower pension income. If you opt for a lump sum payment, the amount left for your pension income will be lower. You will have to make ends meet with less money per month.
- More tax. Bear in mind that you are also required to pay tax on the lump sum payment in the year the payment is made. The tax rate may be higher as well, for example if the lump sum payment increases your income that year to such an extent that a different tax bracket applies. You also pay more tax if you retire before your state pension age (AOW age). More information is given below.
- Loss of entitlement to allowances. Do you receive allowances at present? In that case, if you opt for a lump sum payment, the amount received will be added to your annual income. Because of this temporarily higher annual income, you may lose all or some of your entitlement to allowances such as rent allowance or care allowance.
Lump sum payment – the basic rules
Have you weighed the pros and cons and are you interested in receiving a lump sum payment? If so, these are the basic rules known at present. The Lump Sum Payment Act is not yet final.
- You may withdraw up to 10% of your old-age pension in one go.
- You may also withdraw less than that, for example 5%.
- Withdrawal of the lump sum may not reduce the remaining old age pension to less than the commutation limit. In other words, your gross pension must be at least €520.35* per year. (*amount in 2022)
- You cannot combine the lump sum payment with the high/low option. High/low means that you receive higher benefits in the first years of your retirement and lower benefits in the years thereafter. This option is cancelled if you opt for a lump sum payment.
Lump sum withdrawal before or after state pension age – different tax rates
You can choose to withdraw the lump sum on the retirement date. How much tax you must pay on the lump sum payment depends on your age. If you have reached the state pension age, your income is taxed at a lower rate. This is because your employer or benefits agency no longer needs to withhold old age pension contributions as from the month you reach the state pension age.
Example 1: lump sum withdrawal after state pension age
Retiring at age 70, Charles has already reached the state pension age. If he opts for payment of the lump sum on his retirement date, he will pay the lower tax rate.
Example 2: lump sum withdrawal before state pension age
Marjory wants to retire before her state pension date, at age 65. The lower tax rate applies only from the state pension age. If she opts for payment of the lump sum on her retirement date, she will need to pay tax at a higher rate than would have been the case if she had already reached the state pension age.
Need advice on your choices?
We are happy to help you make choices for your pension. These choices may have major financial implications. Our guidance covers only your pension scheme with Zwitserleven. Whether a choice is right for you obviously depends on your whole personal situation, now and in the future.
Perhaps you should consider contacting an adviser, who can give you an overview of all your financial affairs and help you to make the most suitable choices.