Agreement on the main features of the new pension system was reached at the beginning of July. Many details will be worked out and laid down in legislation in the coming months. In the meantime, here is a glimpse of what the new pension system could mean for you and your pension scheme at Zwitserleven.
1. The investment in the defined contribution scheme is going to change
With a defined contribution scheme, annual contributions are invested for your retirement income. And it is mainly the returns on the investments that affect the amount of your retirement income. The investment in the defined contribution scheme is usually a percentage of your pensionable earnings, which is the part of your salary on which you accrue pension. Usually the amount of this investment increases as a participant gets older. This will change with the new pension system. In the new system, the same investment percentage will apply for both young and older employees.
This change is expected to mean that you will receive up to 75% of your average salary in retirement income on your retirement date. This maximum is reached after 40 years of participation in a pension scheme and includes the state pension (AOW). For 42 years of participation in the scheme this would be a maximum of 80%. Because you pay less tax after reaching your AOW pension age, the difference between your gross and net salary will be less than when you did not yet receive an AOW pension.
2. Every pension scheme will become a defined contribution scheme
If you have a average pay or a final pay scheme, the pension pot that you have built up will probably remain as a guaranteed pension benefit. In the remaining years up to your retirement date, you will invest in a defined contribution scheme.
If you already have a defined contribution scheme, your employer can keep this scheme, also if the amount invested for older employees is higher than for younger employees. For new employees, your employer will be obliged to allocate a defined contribution scheme according to the new pension system. If you change employer, you will also have a pension scheme according to the new pension system. So with the same amount invested for young and older employees.
3. Up to 10% of your pension pot free to spend
Under the new pension system, you will be able to spend up to 10% of your pension pot when you retire without restriction. You will have to use the remainder to purchase a retirement income for as long as you live. Your retirement income may change annually due to returns on the investments of your pension pot. If the returns are positive, your pension will rise, if the returns are negative, your pension will be lower.
4. Partner's pension soon to be up to 50% of last-earned salary
If a pension scheme participant has a partner and the participant dies before their retirement date, their partner now usually receives a lifelong benefit of up to 70% of the participant's expected retirement pension. Under the new pension agreement, this will be a maximum of 50% of the last-earned salary. This new feature means that partners of participants on low incomes will benefit. Partners of participants on higher incomes may lose out. This very much depends on how their surviving dependants’ pension was arranged in the past.
5. Orphan's pension up to 25 years of age
Currently, the maximum age for an orphan's pension varies from scheme to scheme. Soon, all children of deceased participants will receive an orphan's pension until they reach the age of 25. And their orphan's pension will be a maximum of 20% of the deceased's last-earned salary or a maximum of 40% in the event of the death of both parents.
6. From 2024, the state pension age will rise to 67 years
In 2020 and 2021, the state pension age will remain at 66 years and 4 months. It has been agreed that this will then increase to 67 years in 2024. The AOW age may still be adjusted annually thereafter. For each year increase in life expectancy, the state pension age will increase by up to 8 months. This increase is less rapid than previously agreed.
When will the new pension system enter into force?
A lot of work is now being done to legislate the details of the new system. The Act can be adopted by both the House of Representatives and the Senate on 1-1-2022.
This means that in consultation with your employer, your pension scheme will be converted to a scheme under the new system from that date. As the proposals currently stand, the new regime will apply at the latest from 1-1-2026. We expect that by 2022 everyone will already be able to spend 10% of their pension pot freely on their retirement date, and that the new rules in the event of death will come into effect not long after that.
If you have questions about the new pension system and what it could mean for you, contact a pensions adviser.
This article is published on 10 September 2020