Enjoying an early retirement
Going on an early retirement is a wish of most employees which will often remain ungranted. After all, any early retirement scheme, in which employees stop working and receive payment which will help them cover expenses until entitled to their pension, is usually subject to a financial penalty. Most employers therefore refrain from such schemes. However, the 2019 agreement on pensions (the ‘pensioenakkoord’ in Dutch) has made early retirement schemes an interesting option again.
At the start of this century, the average age at which Dutch employees decided to retire from work was 61. Today – just a meagre 21 years later! – the average Dutch employee retires at age 65, 66 or even 67. There are of course many reasons for this quick increase in average retirement age, but the implementation of the ‘RVU-eindheffing’ (the levy imposed as a penalty on payments part of an early retirement scheme) and the increase in state pension age have played a major part. Especially the ‘RVU-eindheffing’ has been the main reason for why employers no longer enter into an early retirement scheme with employees. After all, just like for employees, it is not mandatory for employers to do so.
What exactly is an early retirement scheme? Any financial arrangement between an employer and employee aimed at terminating the employment contract will be regarded an early retirement scheme by Belastingdienst (the Dutch revenue service) if the respective arrangement meets various objective conditions and objective characteristics. The objective conditions relate to the reason for contract termination. Belastingdienst will check if the termination is intended to allow an older employee to go into an early retirement by means of resigning and receiving payment to bridge the gap between contract termination and reaching state pension age. Whether or not the contract termination is age-dependent is therefore important. The latter means that the Belastingdienst will not regard a financial arrangement an early retirement scheme if the reason for contract termination is bad performance on the part of the employee or a disagreement between the employee and the employer (i.e. reasons that have nothing to do with age).
Bridging the gap
The objective characteristics relate to the amount in payment received. Belastingdienst will check per employee whether the payment received through the financial arrangement with the employer is enough for the employee to financially bridge the gap between contract termination and reaching state pension age. The ‘70% test’ will be used for this. This test is complicated. Simply put, an arrangement is not regarded an early retirement scheme if when the payment is converted into a notional periodic benefit it does not exceed 70% of the employee’s last regular annual salary. The notional benefit period used in the 70% test starts on the day the employment contract is terminated and ends on the day the employee in question reaches state pension age or an age 24 months prior to retirement age (whichever comes first).
Any actual benefits the employee is expected to receive within this period, such as unemployment benefits (‘WW-uitkering’ in Dutch), must also be included in the calculations. If the payment through the financial arrangement is received by the employee within 24 months before reaching retirement age or state pension age, Belastingdienst will regard the arrangement an early retirement scheme.
Subsidy to partly finance an early retirement scheme
Together with the ‘Wet pensioenbedrag ineens, RVU en verlofsparen’ (Act on Early Withdrawal of Pension, Early Retirement Scheme and Accrual of Paid Leave), the ‘Maatwerkregeling duurzame inzetbaarheid en eerder uittreden’ (Customization Scheme Sustainable Employability and Early Retirement) was implemented on January 1, 2021. The latter allows your organization to indirectly apply for subsidy to partly finance an early retirement scheme (the subsidy is at most 25% the costs of the scheme, except in those instances where the subsidy is differentiated for larger and smaller organizations). Why indirectly? The scheme provides subsidy for cooperation in activities pertaining to sustainable employability between different organizations in the same industry. Through such cooperation, the subsidy can end up in your organization. Despite this subsidy, a large share of the early retirement scheme must still be paid for by the employer.
The Ministry of Finance has decided that employers will receive a financial penalty for entering into an early retirement scheme with an employee. If Belastingdienst concludes that you are helping employees to bridge the gap between their contract termination and reaching state pension age through a financial arrangement, the aforementioned ‘RVU-eindheffing’ (the levy imposed as a penalty on payments part of an early retirement scheme) will be imposed. This means you must pay a levy of 52% over the total payment. Take into consideration here the fact that the levy may not only apply to payment the employee receives after contract termination. Any salary the employee received prior to contract termination during a period when (s)he was temporarily relieved of active duty may also be subject to the ‘RVU-eindheffing’.
Example to illustrate the early retirement scheme threshold amount
Employee ‘John’ will reach state pension age on April 1, 2014. John would like to retire at an earlier age and subsequently he and his employer enter into an early retirement scheme starting on May 15, 2021. The scheme will allow John to bridge the gap between contract termination and reaching state pension age. The payment John receives through the early retirement scheme is € 80,000, to be paid in one installment on May 15, 2021. The period between receiving this payment and reaching state pension age is 34 months and 16 days. This period may be rounded up. In this example, this will result in a period of 35 months. The threshold amount applicable to John will thus be based on a period of 35 month and is € 64,645 (i.e. 35 x € 1,847). John’s employer now only has to pay an ‘RVU-eindheffing’ (the levy imposed as a penalty on payments part of an early retirement scheme) of 52% over the amount paid to John above € 64,645.
Part of the 2019 agreement on pensions is taking away any obstacles for people to go into an earlier retirement, so that employees can retire in good health. In order to achieve this, the ‘Wet pensioenbedrag ineens, RVU en verlofsparen’ (Act on Early Withdrawal of Pension, Early Retirement Scheme and Accrual of Paid Leave) implemented on January 1, 2021 includes the ‘RVU-drempelvrijstelling’ (a threshold amount on payments part of an early retirement scheme which is exempt from a levy). This threshold amount applies to any organization and is not specifically linked to agreements in the collective labor agreement of so-called ‘arduous professions’. The following conditions must be met in order for a threshold amount to be applicable to an early retirement scheme:
- the payments are made in one installment or periodically within a period between January 1, 2021 through December 31, 2025 (with an extended deadline possible until December 31, 2028 if the early retirement scheme in question was started on December 31, 2025 at the latest).
- the payments start at most 36 months immediately prior to the employee in question reaching state pension age. In other words, the threshold only applies to employees who will reach state pension age within three years.
- the total in payments does not exceed the grossed up version of the net state pension received by people who live alone (in 2021: € 1,847) multiplied by the (rounded-up) number of months between contract termination and reaching state pension age.
If both the first and second condition are met but the total in payments exceeds the amount dictated by condition three, the ‘RVU-eindheffing’ of 52% must only be paid over the excess amount. Moreover, it is good to know that the threshold amount is the same for any employee, regardless of working hours or salary.
As a result of the threshold amount, a total payment of at most € 63,612 gross (i.e. 36 x € 1,847) can be paid to an employee through an early retirement scheme without it being subject to the ‘RVU-eindheffing’. However, this amount is often considerably lower than the total in salary the employee in question would have received in the same period of 36 months. Moreover, when the employee’s contract is terminated, his/her pension accrual also stops. In other words, there are disadvantages to an early retirement scheme. With respect to being a good employer, it is advisable to discuss these disadvantages with employees so that they know what they ‘sign up’ for.
Is extra pay possible in an early retirement scheme? Yes, it is. One option is to allow an employee to take out his pension at an earlier moment. However, this will mean that the pension money turned out each month will be considerably less, which can be disadvantageous in the long run. The other option is to apply for an unemployment benefit. It appears employees receiving pay through an early retirement scheme are still eligible for an unemployment benefit. This combination of an unemployment benefit and an early retirement scheme is especially appealing financially and could even result in the employee making more money than through regular salary. However, in order to avoid abuse of this option, the government will check more thoroughly if all conditions for eligibility for an unemployment benefit are met. This means that until reaching state pension age, the employee in question will have to actively keep searching and applying for work (albeit not with the intent of actually getting a job).