Life assurance rather than pension contribution | 01


PENSION INSURANCE THROUGH EMPLOYER & ALTERNATIVES

PENSION INSURANCE THROUGH EMPLOYER

The granting of Dutch approved pension rights by the employer remains tax free. Therefore, if the employer provides a pension contribution of € 1,000 with an approved pension insurer, accrued pension rights will amount to € 1,000, whereas the future benefits will be taxable; we refer to variant I in the overview below.

ALTERNATIVES

There are three tax beneficial alternatives by using a life assurance/bank savings scheme rather than a pension assurance scheme. In the enclosure we elaborate the differences between life assurance and bank savings schemes.

Alternative A

The employer grants a bonus of € 1,000 to the employee rather than a pension contribution, to enable him to conclude his personal approved life assurance/bank savings scheme. The bonus payment nets the employee € 654 (70% of € 1,000 taxable at 49.50% amounts to € 346 of tax). However, the employee may deduct his entire contribution into the life assurance policy from his taxable income. His contribution may be € 1,294, to be financed for € 654 from net salary and for € 640 from the income tax refund (€ 1,294 @ 49.50%). Accrued life assurance/bank savings rights will amount to € 1,294 at employer’s costs of the same € 1,000, also with future benefits taxable. We refer to variant II in the overview below.

Alternative B

The employer grants a bonus of € 773 to the employee rather than a pension contribution of € 1,000. This bonus payment nets the employee € 506 (70% of € 773 is € 541, taxable at 49.50% amounts to € 267 of tax). However, the employee may deduct € 1,000 to pay into the life assurance policy/bank savings scheme and deduct this from his taxable income. This will result in a tax reimbursement of € 495. As such the employer realises a cost reduction of 24% while the employee has the same accrual for old age purposes of € 1,000 without additional costs compared to the regular pension assurance. We refer to variant III in the overview below.

Alternative C

The employer grants a bonus of € 1,000 to the employee rather than a pension contribution, to enable him to conclude an approved life assurance/bank savings scheme. If the employer’s cost should remain the same and the amount of the accrual as well, the employee retains € 149 in net salary, that can be spent on improvement of current life while having taken care of future life. We refer to variant IV in the overview below. This example is of course based on assumptions, the most important being a taxable salary that reaches well into the 49.50% bracket and no other pension rights accruals for a number of years consecutively. Further tax consequences, for example those upon emigration and upon receiving the benefits, fall beyond the scope of this memo. The above example shows that the 30% ruling provides for an opportunity for a tax assisted accrual of “pension” rights, of course entirely within the framework of the law.

There are three tax beneficial alternatives by using a life assurance/bank savings scheme rather than a pension assurance scheme.

The calculation can be depicted as follows (in €, rounded):

The above example can be implemented dependent on personal circumstances and in accordance with restrictive rules, of which some are:

  • The maximum contribution into the life assurance/bank savings scheme depends on the employee’s (Dutch taxable) salary (in previous and current employments) and (Dutch recognised) pension rights accruals in the current and previous 7 years;
  • The premiums base for life assurance contribution purposes is maximised at € 171,864 or, if you are born after 30th of September 1960, €87,048.
The maximum contribution into the life assurance/bank savings scheme depends on the employee’s (Dutch taxable) salary.

NEXT: Legal attention points | Protective tax assesment

OTHER MEMOS IN THIS ISSUE

Salary split

Directors' remuneration

Dutch tax facilities for innovative companies

Legal obligations of recognised sponsors