As of January 1, 2014 the tax relief for accrued pension rights will be scaled back. You must review all your pension plans to check whether they are acceptable for tax purposes and, if necessary, amend them. This must be done before January 1, 2014, otherwise you may risk a substantial penalty. The scaling back of accrued pension rights is the result of the Raising of the State Pension Age and Standard Pension Retirement Age Act (Wet verhoging AOW- en pensioenrichtleeftijd), which took effect on January 1, 2013, and the fact that ,as of 2013, the state pension age will be raised annually by one, two or three months. In principle, the pension plans concluded between employers and employees will not have to be amended, but it is advisable to amend employment contracts.

Changes as of 2014

In 2014, the standard pension retirement age will be raised to 67 years (was 65) and will be linked to life expectancy. The maximum accrual rate for a final pay plan will be reduced from 2% to 1.9%. The same applies to average pay plans, the rate will be reduced from 2.25% to 2.15%.

Pension plans must be amended on time

Why is this so important? If the accrued pension is considered excessive for tax purposes or no longer qualifies for tax relief (i.e. no longer meet the conditions of the Payroll Tax Act), then the entire pension entitlement will be progressively taxed. Moreover, deemed interest of 20% will also be levied. This will result in the fair market value of the entire pension being taxed at a rate that could be as high as 72%.

Employers

Employers need to be aware of the fact that if one employee so much as accrues in excess of EUR 1 in pension rights, the entire pension plan is at risk; the entire pension entitlement of all employees may be progressively taxed and 20% deemed interest may also be levied.

The DMS and self-administered pension plans

Director-major shareholders (DMS) need to be aware of the fact that, as a result of all the limitations that have been placed, for tax purposes, on self-administered pensions, the amount recorded on the balance sheet as a provision for pension commitments will often fall considerably short of the commercial value of the pension entitlements.

Yet, according to the applicable legislation, any tax payable to the Dutch Tax and Customs Administration if the pension plan is not amended on time will be based on the commercial value of the pension entitlements! All the more reason to review your pension plan on time and make the necessary changes.

Quick scans, amending your pension plan or obtaining approval from the tax authorities: KPMG Meijburg & Co would be pleased to provide any assistance needed.

Click here to download the memorandum in pdf format