Pension gap: How does it arise and how do you cover it?

Many people think that they automatically build up sufficient pension for when they stop working. After all, you receive a state pension and you also build up a pension with your employer. However? Not entirely true, because there are many reasons why you may not have saved enough pension in the future. And then that dream about retirement suddenly becomes a nightmare. This article simply explains what a pension gap is, how it arises and how you can cover it.

What does a pension consist of?

In the Netherlands we assume that you continue working until you are 65. After that you stop working and you have to be able to live off what you have saved for pension. We generally assume that someone needs 70% of their last earned income to be able to enjoy the future in a pleasant and relaxed way after stopping work. The pension you receive after retirement is basically made up of the following two components:

AOW Pension

AOW stands for General Old Age Pension Act. In fact, AOW is an insurance and not a provision. Anyone who lives and has worked in the Netherlands is eligible for compensation from AOW and is automatically insured. You build up 2% AOW pension for every year you have worked. This means that if you have worked continuously from the age of 15 to the age of 65, you will receive the maximum compensation. This is 100% AOW reimbursement. However, that means that:

  • If you do not have a partner, you receive 70% of the net minimum wage
  • If you do have a partner, you will receive 50% of the net minimum wage

Employers’ Pension

The net minimum wage is of course very low. The pension is therefore supplemented to a higher sum via the employer. Sometimes the premium for this is paid in full or in part during your working life and sometimes the employer reimburses the full premium so that you can have an acceptable pension later. There are different types of schemes that an employer can offer. It is important to know that not all schemes supplement up to the desired 70% of the last earned salary. For example, lately there has been a lot of work with an average salary scheme, where you are not saving 70% of your last earned income, but of your average income over your entire career.

What is a pension gap or pension deficit?

A pension gap is the difference between what you need to receive 70% of your last earned income during your retirement and what you would receive now, looking at the combination of AOW and employer pension. What you lack is colloquially called the pension gap.

How can a pension gap arise?

A pension shortage can easily arise for many different reasons, so you can “incur” a pension gap if you:

  • You change or have changed employers during your career
  • You are or have been insured with multiple pension insurers during your working life
  • Have saved several types of supplementary pension
  • Have received income that does not count towards your pension (thirteenth month, lease car, etc.)
  • Have not worked full time
  • Have worked as a self-employed person or self-employed person
  • Have worked for less than the required number of working years (e.g. been unemployed or disabled)
  • Have worked abroad temporarily as an expat
  • Are you divorced somewhere in your life?
  • Stop or want to stop working sooner

How can you build up a supplementary pension?

If you have discovered that you have a pension deficit, you can do things yourself to reduce it. You will therefore have to provide your own supplement to your pension. A good start is to ensure that you no longer have to pay a mortgage and that you therefore opt for a mortgage type in which you slowly pay off the principal amount in full. You can also save extra income through an annuity, savings or single premium policy , which will pay out a certain amount monthly when you reach retirement age. This is the supplement to your pension and can therefore be paid out every month as “supplementary income”. Saving and investing are also options for building additional capital. There are different variants for this, but the most suitable are schemes where you tie up the money for a longer period of time, save annually or monthly and that guarantee the deposit (you can never lose your money). You can also make additional contributions to the employer’s pension scheme. Please inquire with your own employer, because this is not always possible and there are conditions for this.

Familiarize yourself with the different options available from different providers, because your pension is really important to be able to enjoy your old age without any worries. So don’t delay and really check whether your pension is properly arranged at the moment.