Gross and net pension: how to explain it to your employees
"My pension statement says €1,500 a month, but how much of that do I keep net?" It is the question HR gets asked most often. This article gives the answer in plain language, so that you explain it right the first time.
Why pensions are always shown gross
A pension is deferred salary. Your employee pays no tax on the contribution now (the reversal rule: contributions untaxed, benefits taxed), but pays tax on the benefit later. That is why pension providers and mijnpensioenoverzicht.nl show gross amounts: what someone keeps net depends on their personal situation at that time.
What is deducted from the gross pension?
- Wage tax. From the state pension age, an employee no longer pays state pension (AOW) contributions. As a result, the rate in the first tax bracket is around 18 percent instead of more than 35 percent before the state pension age. Anyone who retires earlier therefore pays the higher rate until the state pension age.
- Healthcare insurance contribution (Zvw). The pension provider withholds the income-related healthcare insurance contribution (Zvw) from the pension, more than 5 percent up to a maximum.
- Tax credits. The general tax credit and the elderly person's tax credit reduce the tax. The pension provider applies them only if the employee asks for this, and only on one source of income (either the state pension (AOW) or the pension).
Rule of thumb for employees. Of a gross employer pension of up to around €3,000 a month, together with the state pension (AOW), roughly 75 to 80 percent remains net after the state pension age. Before the state pension age, it is more like 60 to 65 percent. An exact calculation requires the personal situation.
The employee contribution: what does a pension cost net?
Many schemes include an employee contribution. Because that contribution is deducted from the gross salary, every euro paid in costs around 60 cents net at a tax rate of 37 percent and around 50 cents at 49.5 percent. This is the argument that persuades employees to take part in voluntary extra savings: the tax authorities chip in.
How HR answers the question right the first time
- Refer to mijnpensioenoverzicht.nl: it shows the total of the state pension (AOW) and all employer pensions, including a net indication.
- Explain the difference between before and after the state pension age; that accounts for the biggest surprise when retiring early.
- Provide a gross-to-net card with the annual pension statement (UPO) listing the three items above.
- Offer a personal consultation to employees aged 55 and over or in the event of a reorganisation.
Frequently asked questions from employees
Is the state pension (AOW) also gross?
Yes. Wage tax is also withheld from the state pension (AOW). The Sociale Verzekeringsbank (the Dutch social insurance bank) applies the tax credits by default; in that case, do not have the pension provider apply them as well, or you will face a back-payment assessment.
Why do I receive less net if I retire early?
Until the state pension age, you pay the normal tax rate including state pension (AOW) contributions. After that, the state pension contribution no longer applies and the net amount rises.
Can I have my pension paid out gross and pay the tax myself?
No. The pension provider is obliged to withhold wage tax. You can, however, choose which benefit the tax credits are applied to.
Pension adviser since 1990, Wft-certified (Dutch Financial Supervision Act) for pensions and income. Advises employers, works council members, DGAs and private individuals from Pensioenhart in Hoofddorp.
This article provides general information. Rates and percentages change every year; check the current figures from the Dutch Tax Administration (Belastingdienst).
Read next: Future Pensions Act for employers · Setting up a pension scheme
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