The second and third pillar W.A.M. Rasing BSc B.A.J. Welman BSc

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13 The second and third pillar W.A.M. Rasing BSc B.A.J. Welman BSc

14 Meet Johan born June 16, 1944 is married to Anja has no children is very sporty and loves to travel

15 Pension worries

16 Pension worries

17 Why are pensions a hot topic? The Netherlands in top 3 EU of ageing society Shrinkage force Increase life expectancy Recently raising pension age with small steps from 65 year till 67 year in 2023 in The Netherlands

18 Agenda The Dutch pension system Johan s career employee entrepreneur retirement

19 Dutch pension system

20 Importance of the 2nd and 3th pillar in Europe 100% Breakdown of national benefits by pillars 75% 50% 25% 0% PL TR IT FR FI ES BE PT SE DK CH NL GB 1st pillar 2nd pillar 3rd pillar 2nd and 3rd pillar

21 Johan as teacher Geography teacher Pension fund

22 Johan as teacher If continue working as a teacher until the retirement date

23 An offer from Shell

24 Switching jobs Teacher ABP Released from obligation Researcher Shell pension fund Gains the obligation

25 Johan as a researcher for Shell If continue working as a researcher until the retirement date

26 Types of schemes Defined benefit - final pay plan - average pay plan Defined contribution - defined contribution pension scheme

27 Defined benefit Teacher salary 30,000.- Shell salary 55, % of 55, % of 42,500.- final pay plan average pay plan

28 Johan becomes an entrepreneur Employee to Entrepreneur Second pillar to Third pillar

29 Johan as an entrepreneur Annuity Periodic payment Ends at death Minimum death risk of 1% Premium contribution Year space: 15,5 % in 2014 (before %) Premium base: minus contributions in the second pillar

30 Johan as an entrepreneur

31 Johan reaches his retirement and moves to Germany Total pension plan 1st pillar 2nd pillar 3rd pillar Tax treatment of pensions The Netherlands EET Germany EET

32 Ice climbing

33 What about Anja? I II III < 65 General Surviving Relatives Act > 65 General Old Age Pensions Act Surviving dependants pension

34 Are there any questions?

35 Propositions for discussion - The Dutch pension system is an example for the rest of the world. - Everyone is responsible for their own retirement and must provide for retirement in the third pillar.

36 Pim Vossen en Siem Huijbregts Crossborder Pensions

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67 The Dutch pension system under the new treaty between The Netherlands Germany: is it an improvement? { Laetitia Wall Li Shao Wu Sophie Kallen

68 Content Old and New Most important changes Consequences for the pensioners Transitional arrangements Dutch Treaty Policy Conclusion

69 Introduction Both Germany and The Netherlands raise taxes Old Treaty of 1959 is preplaced by a new Treaty Enter into force on the first of January 2015

70 Old and New Public pension Compensation for damages Old Treaty Source State Tax under art. 12 par. 2 Source State Tax under art. 12 par. 2 jo. par. 3 sub 2 New Treaty Source State Tax under art. 18 Source State Tax under art. 17 par. 4 Public pension: important is where the pension is accrued, not who pays the benefits.

71 Most important changes Pension > 15,000 also taxed in the Source State according to art. 17 par. 2 jo. 22 New Treaty Germany: ordinary tax credit The Netherlands: Exemption with progression Transitional arrangement according to art. 33 par. 6 New Treaty Sourcing rule according to art. 17 par. 5 Value funds transfers to another state continues to be taxed in the Source State Pension or annuity, paid in a lump sum Source state has the tax jurisdiction according to art. 17 par. 3. Limit of 15,000 not important

72 Consequences for pensioners No distinction between state pensions and private pensions In principle, the State of Residence has the exclusive taxing right with regards to state pensions Reduction in the administrative burden

73 Consequences for pensioners(2) Shared taxing right; source state may also tax Pensioners may be taxed in the source state with regards to their private pension provided that the pension income (private and statutory pensions and annuity income) 15,000 May have great influence on the income of pensioners

74 Consequences for pensioners(3) German Resident; Pension < 15,000 SP PP German Resident; Pension> 15,000 PP SP

75 German resident, pension < 15,000 Example: AOW (state pension) = 13,500 New Old Treaty SP Tax in NL Tax in DE

76 German resident, pension > 15,000 Example: AOW (state pension) = 13,500 Private pension = 30,000 New Old Treaty SP 5966 PP Tax in NL Tax in DE

77 German resident; pension > 15,000 (2) Total tax Old This group will be the most effected New Only 18% of private pension income taxed in DE Dutch resident with the same pension pays 6,028 in tax

78 Dutch residents with German pension Total pension of less than 15,000 income will not decrease (significantly) Total pension > 15,000 will experience an improvement; tax rates in Germany are generally lower than in the Netherlands if the income is higher Mixed pension (part Dutch, part German) effects depend on the situation

79 Transitional arrangement Old treaty can be applied for one year art. 33, par. 6, Treaty (new) Deemed to be too short; additional transitional arrangement of 6 years Only for existing cases For certain pension income the tax rate is maximized If the old treaty was applied in the first year, the transitional arrangement can only be applied for 5 more years

80 Transitional arrangement (2) Maximized tax rates 10% 10% 15% 20% 25% 30% Year 1 Year 2 Year 3 Year 4 year 5 Year 6

81 Example AOW (state pension) = 13,000 Private pension = 28,000 Average rate in similar situations = 14.25% In the first year the old treaty can be applied In the second year, the transitional arrangement can be applied; with regards to the private pension the tax rate will be maximized at 10% ( 2,800)

82 Example (2) 35% 30% 25% 20% 15% 10% 5% 0% Year 1 Year 2 Year 3 Year 4 year 5 Year 6 Maximized tax rates Average rate

83 The Dutch treaty policy Does the new Dutch-German Treaty adhere to the Dutch treaty policy? 11 February 2011: New policy was published New aim: Resident state exclusive taxing rights to source state Compromise on shared taxing rights

84 The Dutch treaty policy What was the reasoning behind this change? Secretary of State: Demographic changes Continued internationalization of the labor market increase in the migration of pensions The Netherlands has a substantial financial interest given the facilities provided in the Dutch pension system.

85 The Dutch treaty policy Factors taken into consideration: - finances primary argument Departure from the OECD Model Convention

86 The Dutch treaty policy Other considerations: Practical issues foreseeable when pension is formed in different states. Compromise for small pensions German- Dutch treaty 15,000 threshold no differentiation between statutory and private pensions

87 The Dutch treaty policy Financial implications of the compromise to introduce a threshold of 15,000 With the implementation of the new treaty 12,856 of the 17,066 German residents with a Dutch pension have a pension income below 15,000 This amounts to total pension income of 65.6 million and the Netherlands will forgo around 1.5 million in tax income annually

88 The Dutch treaty policy Conclusion: What was the aim? At least a shared taxing right on pension distributions New treaty: shared taxing rights when the threshold of 15,000 is exceeded The majority of the distributions of pensions arising in the Netherlands are now also taxed in the Netherlands New treaty is an improvement in line with the aim of the treaty policy and is a better match to the workings of the Dutch pension system

89 Conclusion The group that experiences the most disadvantage as a result of the new treaty are the German residents with a Dutch pension > 15,000 Consequences are justifiable because it s a reversal of an unjustifiable advantage. The adverse effects are partially mitigated by the transitional arrangement of 6 years. New treaty is an improvement in line with the aim of the treaty policy and is a better match to the workings of the Dutch pension system

90 Questions? Thank you for your attention!

91 The European pension landscape Why are pensions so important? Prof. Gerry Dietvorst

92 Topics Pensions in Europe Differences in pension systems Is taxation a problem? What is the role of Brussels? What are the solutions?

93 State Pension Not funded Supplementary pension Schemes Funded Private Pensions Funded 93

94 Differences in pension systems Method of financing Providers Balance between the three pillars Tax frame work Transferability: inbound and outbound Vesting periods Pay-out phase

95 Benefits in 1st pillar almost everywhere dominant Breakdown of national benefits by pillars 100% 80% 60% 40% 20% 0% PL TR IT FR FI ES BE PT SE DK CH NL GB 1st pillar 2nd pillar 3rd pillar 2nd and 3rd pillar

96 What are the problems? 88% not funded Politicians Subsidiarity

97 Longivity Life excpectancy at birth will increase with 7 years by 2060 compared with 2010 The balance between working life and pension life 25%-30%-33%-40%

98 EmploymenLabour participation older employees t rate eldery workers 55/64 Titelpresentatie in Footer

99 Is taxation a problem? Current situation private pensions In general: EET in second and third pillar Three categories No deduction for contributions Fixed amount deductible Deductibility of contributions depends on the pension gap Conditions in the pay out phase differ 99

100 Is taxation a problem? Minor problems Taxation in cross-border situations Transferability EET versus TEE

101 From The Netherlands to Luxembourg EET TEE EEE? 101

102 From The Netherlands (EET) to Luxemburg (TEE) Art. 18 Treaty 2001:state of residence However source state if and insofar: Source state has EET and Benefits are in the state of residence not taxed at the general taxe rate for employees and Benefits (pensions, annuities, state pension) per year are > % Result: no double non-taxation

103 From Luxembourg to The Netherlands TEE EET TET? 103

104 From Luxemburg (TEE) to The Netherlands (EET) Art. 18: state of residence Dutch Income tax act 2001: Benefits are taxable in The Netherlands unless and insofar it is acceptable that contributions were not deducted from income Result: no double taxation, only the accrual is taxed

105 White paper*) Aging is a major challenge to pension systems, unless we stay longer in employment and safe more for retirement MS are primary responsible for designing their pension system White paper respects the responsibilities of the MS and offers better support to pension reform efforts: legislation,financial incentives, policy coördination, bestpractices White paper reflects common concerns and sets out an agenda for the long term *)Brussels, COM(2012) 55 final) Titelpresentatie in Footer

106 White paper Life expectancy at birth will increase by 2060: 7,9 years (m) and 6,5 years (f) Working population begins to shrink Retirement baby-boomers has far-reaching economic consequences: reducing economic growth Economies and societies are more and more integrated: pensions are a matter of common concern Titelpresentatie in Footer

107 Recommendations for pension reforms 1. Link the retirement age with increases in life expectancy 2. Restrict acces to early retirement schemes and other early exit pathways 3. Support longer working lives 4. Equalise pensionable age between men and women 5. Support the development of complementary savings Titelpresentatie in Footer

108 What are the solutions Brussels must stimulate and facilitate There is not one solution Extending working lives by linking the retirement age with increase in life expectancy Support longer workng lives Shift from pay-as-you go to funded Stimulate second and third pillar pensions with taks incentives

109 How? Open coördination method Learn from best practices Restore credibility pension providers Make small steps

110 Conclusion Brussels must take the lead in the reforms There is not one solution Politicians must no longer be an obstacle Shift from pay-as-you go to funded is necessary We have to work longer Tax is not the real problem

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