If you are about to retire, you will be interested to know that the Pensions Act was amended in 2016. The introduction of this new legislation (“Wet verbeterde premieregeling”) has led to the emergence of an alternative to the traditional guaranteed pension based on the interest rate. The persistently low interest rate means that the level of stable pension income is disappointing for many people.
You now also have the option of purchasing your lifelong pension in the form of a variable pension based on investments. If you opt for this variable pension, your pension income will be determined annually. The amount of your variable income depends on the investment yields, the change in life expectancy and the change in the interest rate.
WHAT INCOME CAN YOU EXPECT WITH A VARIABLE PENSION?
Because various factors are uncertain, we cannot predict in advance how much you will receive from year to year. However, we can calculate your income in the first year if you opt for continued investment. The insurer also provides a forecast of your income after 10 years. We will be happy to discuss the possibilities with you and request quotations on your behalf, without any obligation on your part.
If you want to benefit from the possibilities of continued investment but do not want to invest your entire retirement capital, you can combine both products. Part of the capital can be used to purchase a guaranteed income, and the remainder can be invested to provide a variable pension. This gives you the security of a fixed income, combined with a potentially higher-yield income element.
CAN I PERSONALLY CHOOSE THE INVESTMENTS?
No. The insurers currently offering an investment-based pension do not offer freedom of choice in the investment mix. There are, however, major differences between insurers in terms of the product terms and conditions and where the money is invested.
WHERE IS THE MONEY INVESTED?
The insurers have opted for a lifecycle investment mix. This means that the composition of the portfolio and the associated risk change over time. We will be happy to discuss your personal situation so that we can assess which products may be of interest to you. The quote we send you subsequently identifies exactly where your money will be invested.
WHAT RISKS ARE ASSOCIATED WITH A VARIABLE PENSION?
Your pension income is re-determined each year. Your income may be higher, or possibly lower. Three uncertain factors influence this calculation.
1. The amount of available capital.
Obviously this capital fluctuates in line with the investment yield.
2. The life expectancy.
If you decide in favour of a stable pension, your income is fixed. The risk of people living longer, meaning that their income will have to be paid out for longer, is borne completely by the pension fund. If you choose to continue investing, your income is affected by this risk. This is because the annual calculation of your income is based on the life expectancy at the time. If people generally live longer, this extended life expectancy will have a negative impact on your income.
3. The interest rate.
The interest rate is a third variable that will continue to have an impact. This is because the current interest rate is used for the annual calculation of your income.
CAN I SWITCH TO A GUARANTEED INCOME LATER ON?
Unfortunately, the new legislation makes no provision for changing to a guaranteed income scheme at a later time. A missed opportunity in our view! If you opt for a variable pension, you cannot change your decision if the interest rate rises.
AUTOMATIC CONVERSION TO A GUARANTEED INCOME
A number of providers have chosen to convert the investments to a guaranteed scheme during the term of the arrangement. Various options are possible. One example is a product where, after 20 years, the remaining capital is converted to a fixed guaranteed income scheme. This conversion is made based on the interest rate/life expectancy applicable at the time. If you would rather continue to invest for life, that is obviously also possible.
It is not possible to combine a high-low pension, where the amount of income is somewhat higher in the first few years, with a variable income arrangement. The high-low feature is only permitted in combination with a fixed and guaranteed pension.
QUESTIONS OR ADVICE
If you have any questions after reading the above, or if you need advice about your personal situation, please contact one of our experts by telephone. You can reach us on +31 (0)20 4700920.
If you have no further questions and would like to receive a quote for a variable pension, please request one via our website. Use the button below to request the quote.