Fill your retirement gap with an annuity

There is good news for anyone who takes his or her retirement seriously. That's because with the new Future Pension Act, a number of changes have been made that allow you to build up extra pension through an annuity. An annuity is the way to build up personal wealth for retirement.

One important change is the increase in the annual margin. The annual margin is a way to put in extra money for your retirement and get tax benefits. It works like this: suppose you would like to save more for your old age than you already do through your job and/or the government, the annual margin is the amount you are allowed to put in extra each year. This is allowed in a tax-exempt account. This amount is calculated based on a formula that depends on your income and pension accrual.

What can annual space do for you?

Many people build up a pension through an employer, which is called the employer pension. However, this does not always mean that you build up a full pension. It may be that only part is built up, in which case you are responsible for building up the remaining part yourself. And let this be a smart way of saving. The exact calculations can vary, therefore it is important to consult the tax rules and guidelines, but here we present a simple example to show the impact of the annual margin.

The benefit of annual margin

Imagine someone has a taxable income of €40.000. The deposit that you are allowed in your annual margin has been increased from 13.3% to 30% by the Future Pensions Act. Before this new rule took effect, the calculation was as follows:

• Existing rule before 2023
  Annual margin = 13.3% of income
  Annual margin = 0.133 * € 40.000 = € 5.320

• New regulation 2023
  Annual margin = 30% of income
  Annual margin = 0.30 * € 40.000 = € 12.000

It is not a very difficult sum to see immediately that the difference is considerably more than before. So in this situation you are allowed to put in €6.680 more in the annual margin. This extra deposit into your annual margin offers a number of advantages:

1. Tax benefit: You pay less income tax because you can deduct more. You deduct the annual margin from your taxable income in Box 1. Therefore you can pay less income tax and you do not have to pay wealth tax on this accrued amount.

2. Pension accrual: It allows you to build up more money for retirement. This is useful if you think that the pension through your work will not be enough to live a nice life after retirement. So your chances of getting a good pension increase because you get to put more in. The €6.680 from the example can grow to almost €20.000 after 20 years at a return of 5.5%.

3. No tax on the growth in the annuity: The money you put into your retirement account can grow without paying taxes on it. That means your retirement pot grows faster. You may pay less tax in Box 3 (estate tax) because the annuity is not included in the estate tax calculation.

So it may be a smart choice to open a new annuity account or just deposit extra this year. The above sum is a simplified example and exact amounts will vary based on your individual situation. I will be happy to find out for you what amount you are allowed to deposit into your annuity based on your personal circumstances and the latest tax rules.