As from January 1 2001 the Dutch tax system has been changed drastically. Remarkable is the reduction of the basic fiscal room for private annuities. Because cap tariffs for income tax have also been lowered from 60% to 52%, 2000 was probably a banner year for Dutch insurance companies offering private annuities. Last year this industry achieved a turnover of nearly €6.3 bn, a 30% increase compared to 1999. This implies that every Dutch household set aside an average amount of €1,100 in private annuities – the maximum tax deduction per household ammounted to about €5,600.
The new regulations on private annuities comprise the following features. Besides a basic tax deduction of €1,034 per person, an additional tax deduction in case of a so-called fiscal pension gap is included in the new regulations. By means of a formula the amount of the gap can be determined. Unfortunately, this formula more or less automatically results in a substantial gap during younger ages. To determine the gap, pension funds are required to communicate the ‘annual pension growth’ to their participants. The pension growth over 2001 will be communicated by the pension fund at the earliest in February 2002 and according to the regulations must be communicated at the latest by October 2002. The new regulations therefore allows for a tax deduction for 2001 to be handed in up to December 2002.
Employers can opt for a profitable alternative for the restrictions on private annuities for their employees however. Since 1997 Dutch employers are entitled to offer their employees a voluntary additional pension module. The employer has to offer all facilities (for example, setting up rules and a contract, deductions on gross salaries etc). The employee will make payments from gross income or using the value of spare time. On June 1 1999, regulations on fiscal aspects of pensions were laid down in detail in Dutch legislation. These regulations are more flexible and extensive than the recent regulations on private annuities and will remain unaltered in the new system.
These developments, combined with a tight labour market, will result in a strong growth of the number of voluntary pension schemes, as well as an increased use of existing ones. As has already become apparent, the schemes will become an increasingly important part of employee benefits. As a result several billions of euros will be transferred from private annuities to pensions in the coming years.
Therefore pension funds and employers now face the tremendous challenge of shaping voluntary pensions schemes in an attractive form without putting in too much time and effort. A consolation for Dutch insurance companies – most voluntary additional pension schemes will be put out to insurance companies while employers and pension funds will merely act as an information desk.
Elvin van den Hoek is with Consultas in Zwolle, part of the MGAC network