Retirement for entrepreneurs, the answers to your questions
Your pension. Sometimes you’ve already got your hands full dealing with today. However, it can be wise to take some action for your pension as soon as possible. Something about interest over interest? Thomas van der Heijden of Brand New Day tells us all about saving up as an entrepreneur for when you’re old and grey.
Why is it so important for freelancers and entrepreneurs to think about their pension early on?
There’s a seemingly simple reason for that, that goes for everyone. The sooner you start, the more capital you build up. It may seem like a no-brainer, but there’s a mechanism behind it: the interest over interest effect. Because you receive interest or return on the amount you put in, your money doesn’t grow in equal steps (linear), but in larger steps each year (exponential). The longer you can profit from this exponential growth, the larger the steps will be each year. Which means an increase of pension.
Besides this, freelancers and entrepreneurs don’t automatically build up a pension. While people in employment usually profit from a collective pension, entrepreneurs are on their own in building a pension.
How can you build a pension as an entrepreneur?
Every Dutch person between 15 and 67 years old builds a state pension (AOW) as long as they’re living in the Netherlands. At your 68th birthday this pension is paid through a monthly allowance. This is based on the minimum salary, so it’s not a lot. You can live off it but for most people it’s not enough. Therefore as an entrepreneur especially it’s important to arrange your own retirement plan. The tax authorities want you to have a good retirement plan. That’s why there is a tax advantage for pension plans. Everything you put into a pension plan is free of tax. With a pension plan you save up annuity. This is a financial product you can apply for at a financial institution like Brand New Day. According to your personal preference you can either choose to invest or just save up your money.
What’s the benefit of saving for your pension using annuity? You could just put the money in a savings account, right?
A big benefit of an annuity account is that you’re able to deduct the money you put in from your taxable income, as long as it’s within the annual fiscal capacity. So you profit from a tax advantage while saving for your pension. Contrary to a normal savings account you’re not allowed to access the money until you’ve reached your retirement age. Another advantage is you don’t pay wealth tax over the money in an annuity account, while you do when you have over € 50.000 in your savings account.
What exactly is annual fiscal capacity or ‘jaarruimte’?
Jaarruimte is the maximum amount the tax authorities (de Belastingdienst) allow you to put in your pension account. There’s a maximum to it, because you can deduct the money you put in from your taxable income when your tax return is filed. The amount of annual fiscal capacity is determined by your age, your income and whether or not you’ve saved up for your pension through an employer. Calculate your annual fiscal capacity.
How does it work when the money you save up for pension is used to invest?
You can build capital for your pension in two ways at Brand New Day using annuity: with an annuity savings account or an annuity investment account. You get an interest of 0,40% over a savings account. If you feel this return is too low, you can consider an investment account.
Most people have an image in their heads of fast guys actively trading on stock price changes and making money off it. That’s not the way Brand New Day operates. We invest in index funds. Index funds are large groups of different shares. By investing small amounts in a lot of different shares instead of investing everything in just one specific share, Brand New Day spreads the risk. This way, with an index fund, you’re actually following the world economy with your pension pot. It’s not without risks, because investing is always risky to some degree. In fact, there will be years you’d rather not look at your pension account. But the bad years will be compensated by the good years in the long haul. Last year we achieved a return between 20 and 25% for instance.
What are the alternatives to save up some money for your pension?
Next to the traditional options: AOW, a collective pension and saved up annuity, there are three usual suspects. One: selling your company, although that doesn’t apply to most freelancers, because oftentimes they are the company. Two: investing in real estate. Buy a house, pay off the mortgage and make sure you pay close to nothing by reaching your retirement. With a bit of luck you will even have some equity on your house. Three: saving or investing yourself without the tax advantage of an annuity, but with the benefit of access to your money at all times.
Bitcoin reached an all-time high and even traditional media report on crypto related news. Is crypto currency a serious investment option for your pension?
For now crypto currency is investing in a kind of dream of which it’s unsure whether it will someday become a reality on a larger scale. It’s unwise to consider cryptocurrency as an investment for later. If you have some money to spare and you’re into taking a gamble with a change you might accidentally become filthy rich? Of course, let’s go. But keep in mind the difference between the money you really need in the long haul and extra savings you can use in the short term for speculating in very risky crypto investments.
Suppose you suddenly have an extra € 20.000. What’s the best decision you can make for your pension?
I’d compare the amount to the total amount of my savings. Depending on that you can decide the amount you want to invest. We talked about annual fiscal capacity before. If you don’t have a lijfrente account to save up for your pension and you didn’t build up a pension through an employer then you can use the annual fiscal capacity until eight years back!
Are you an entrepreneur and do you have questions about your pension? It is possible to plan a consult a Brand New Day.
Written by: Sidney Steinmann