Most citizens arrange something for their pension only with great reluctance. Dreaming away about the sweet life of pensioners from commercials, who calmly float from a boat looking out over the azure blue sea – yes, they like to do that.
But starting a journalistic story like this with the words “pension” and “investment annuity” is asking for a reader to scroll through. Many people have no idea what an annuity is at all. While an annuity is just a not so logically chosen word for a financial product where you save or invest for your retirement with a tax benefit, through an account that you are not allowed to access before the term ends. That end is usually the moment that someone receives state pension for the first time.
Both employees and the self-employed can take out such an annuity. For example, because they have a pension gap, or because they are their own boss and have to arrange their own pension. And make no mistake, in just about every pension there will be a gap or hole in the course of a career. This is because almost everyone experiences things in their life that (temporarily) affect their income – a divorce, a layoff or unemployment. And by no means all employers invest enough money to build up a decent pension.
Perhaps the reader’s reluctance will be lessened by mentioning the positive consequences of investing in annuities as a means of improving your retirement. One: people with an above-average income usually pay less tax as a result (see box). If you opt for an annuity in which your deposit is invested, it will also usually yield more pension than via the savings variant – provided you choose wisely. This section focuses on the investment vehicle. Investing simply provides a higher return in the long term (but is therefore also riskier) than saving. How do you choose a good investment annuity?
Better rules for self-employed persons
The range of investment-based annuity products is quite large since not only insurers are allowed to sell more. Banks (since 2008) and asset managers also do this now (since 2017). In total, about twenty parties are active, estimates financial advisor Jeroen Wolfsen, also founder of comparison site MoneyWise.
If the Senate adopts the new pension law on 30 May, it will become even more attractive to arrange a supplementary pension through an annuity. Certainly for the more than one million self-employed persons, who now have fewer tax benefits than employees if they put money aside for their pension.
If the bill passes, the self-employed can put a much larger amount into an annuity with a tax benefit. This will be allowed from 1 July with a maximum of 30 percent of your gross income, instead of the current 13.3 percent per year (the so-called ‘annual space’). Employees were already allowed to do that.
“Suppose you stop as a self-employed person with a gross annual income of 38,500 euros (average) 3,000 euros in an annuity policy. Then the tax authorities will refund 1,110 euros based on the new rules,” explains Joost Tieland, commercial director of Brand New Day, a major provider of annuities.
That percentage increases as you earn more and you fall under a higher tax rate. However, the annual margin may not exceed 13,500 per year. You reach that limit with an income of approximately 128,000 euros, says Wolfsen. But the new law also puts an end to the fiscal discrimination of the self-employed compared to employees, says Tieland.
The new Future Pensions Act also has advantages for employees who want to accrue extra pension. Complicated exceptions currently apply if people want to invest more in an annuity than their annual allowance allows. For example, because they receive an inheritance and want to put it into their pension in one go, after they have built up too little for years.
“A monstrosity”, financial advisor Wolfsen calls those rules. “Calculate what [boven de jaarruimte] mag, is now really complex.” Those complex calculations will disappear when the new pension law is adopted by the Senate.
Read also: The annuity is making a comeback
1 Pay close attention to the costs involved
Suppose you want to do more for your pension. How can you best select an investment annuity? The investment funds that such a provider invests your money in are important for your choice.
Most parties nowadays use fairly broad ‘ETFs’ (Exchange Traded Fund). These are listed investment funds that ‘passively’ follow an index. This allows you to invest in dozens, hundreds or sometimes even thousands of listed companies or bonds in one fell swoop. Think of it as a ‘basket’ containing all kinds of shares or bonds.
It is important that the ETF that an annuity provider buys has the largest possible number of stocks and bonds in that basket. It involves a good mix of companies from different market segments and sectors, emerging and developed economies, the US and Europe. There is therefore certainly profit to be made by selecting a provider on the quality of its ETFs.
The fact that most investment annuities work with ETFs is therefore positive. This is also cheaper than actively managed investment funds, the composition of which is actively managed by a fund manager who buys and sells shares and bonds himself. That costs money. Such a manager has a salary, which the investor in that fund ultimately pays through the costs.
The cost of an investment annuity product varies widely. From 0.4 percent per year on the assets under management to over 2 percent – if you do not include one-off or sporadic costs, such as for transactions or one-off purchases. Unfortunately, few providers are clear about the total costs. You often have to search for a long time on providers’ websites, in deeply hidden prospectuses, before you have gathered all the different cost items together. Often the name also differs, but you often come across terms such as management costs, ongoing costs and fund costs. Unfortunately, many providers do not list all costs neatly in one place.
Wolfsen of MoneyWise is disturbed by the unclear information. As a result, he cannot properly compare investment annuities on MoneyWise. His site does provide an overview, but to his frustration it is incomplete and does not answer the question of what the best product is – for example on the basis of the total costs and the investment policy. Comparison site Finner is also incomplete. That only compares on price.
The Supervisory Authority for the Financial Markets recognizes the problem. In a recent report, she called on the sector for more transparency and clearer information about annuity products.
But such a lenient approach doesn’t work, according to Wolfsen. “You have to impose clear guidelines that all providers must adhere to. Otherwise nothing will change.”
Also be aware that there are sometimes invisible costs, such as annually recurring subscription costs that the provider does not include in the calculation (prognosis) of the amount at the end of the term. Wolfsen: “Bright, for example, does that and charges high subscription costs of 210 euros per year.”
And: providers regularly assume too rosy a return (more than an average of 8 percent per year for shares is unrealistic in the long term) when they calculate the final yield of an annuity.
2 Do it yourself or outsource?
Hiring a financial advisor to choose and take out an annuity is an option. That is certainly sensible if you do not do anything about your pension otherwise, because you are dreading it, for example. With such an advisor alone you often do not end up with the party with the lowest costs. This is because advisors often recommend providers of annuities with whom they do business more often.
“In general, financial advisors do not look at which product has the lowest costs,” says Wolfsen of MoneyWise, an advisor himself, “but attach importance to convenience.” If a provider of annuities is not easy to find on Google, he will not include it in his consideration, for example.
Therefore, if you hire a consultant, always do your own online research. And look for someone who specializes in pensions and annuities. A professional who does not work for a bank or insurance company, but who is independent, is also an advantage. Or go to a financial planner, who can also accurately calculate the tax benefit of an annuity.
A version of this article also appeared in
the newspaper of May 27, 2023.