Banksparen: for mortgages and pensions
18th April 2008, 0 comments
- If you have pension savings or a mortgage, you may have heard that in 2008 a new ‘bank savings’ (banksparen) type of saving scheme has been introduced in addition to the existing insurance-based saving scheme and investors accounts.
Before January 2008, the only way to save money in a fiscally-advantaged way for your pension or your mortgage was through an insurance policy. Consequently insurance companies and bank-related insurers virtually had a monopoly on these widely-used products. This fiscal advantage consisted of the possibility to deduct the premiums for an individual pension or an annuity from your taxable income, or in the case of mortgage related savings, the possibility to accrue an amount of tax-free savings to pay off the mortgage.
You pay a monthly premium with the above-mentioned insurance policies, and, at the maturity date (typically after 30 years or at the pension date), you receive a payment or a pension. Often death coverage is implemented in the policy so an extra amount is paid out should you pass away during the term of the insurance. The fact that this type of insurance often comes with relatively high related costs, and the discovery that with the majority of these policies the accruement of the capital was – to say the least - not on schedule after the slump of the stock markets in the years after 2001, triggered a broad discussion on these products.
For these reasons, the tax authorities facilitated the development of new products for growing a pension or savings to redeem your mortgage. So commencing 2008, within limits, a straightforward savings account is also a permitted form for tax-free capital accrual within the mortgage or as a pension scheme. This form of growing capital is known as ‘banksparen’ or bank savings. When mortgage-related savings are concerned, the product itself is called a ‘SEW’ (spaarrekening eigen woning – savings account for primary residence) or ‘BEW’ (beleggingsrekening eigen woning – investment account for primary residence).
In the case of mortgage-related banksparen, it is interesting to compare the new SEW with the old-style savings insurance (KEW – kapitaalverzekering eigen woning – savings policy for primary residence). The monthly yield of both forms is determined by and equal to the mortgage interest rate of, for instance, 5 percent.
The big advantage of the SEW is that the net interest rate on the balance of the accrued savings is virtually the same as the interest rate you pay on the mortgage (5%), whereas the net interest rate on the KEW savings policy is considerably lower than the mortgage rate due to costs that include policy administration charges, administrative expenses, any life assurance premium, etc. The actual return differs from KEW to KEW, but it is not uncommon that it is hardly a 3.5 percent net during the first phase with costs for death coverage not even taken into account. This is especially so when the monthly premium is not very high.
In the case of a mortgage-related savings product, where the monthly premium is calculated by the actual net yield, a lower net yield naturally leads to a significantly higher monthly premium, and thus to higher monthly costs for your mortgage.
In our view, because of its low-cost structure, the new SEW is a very good solution if you want to accrue a guaranteed capital sum for redeeming a part or the entire mortgage in due course. The Consumer Association has also advised people to start a SEW or BEW rather than take out a savings insurance. The only advantage of the old-style KEW compared to the SEW / BEW is that, in case of death, it is quite easy to avoid inheritance tax over the proceeds. With a SEW or BEW one is deemed to take out separate death coverage insurance, which leaves the value of the SEW / BEW subject to inheritance tax. By the way, it is very well possible that the Dutch inheritance tax laws will be amended next year.
SEW, BEW or KEW?
Especially for expats who do not have a particularly long-term stay in the Netherlands in mind, the SEW can be an attractive option for a tax-free and risk-free accruement of capital, and this with an acceptable yield. During your stay in the Netherlands, this product provides a fixed spread between the net mortgage interest rate (with a marginal tax rate of 52 percent, the net interest amounts to something less than half of the gross interest) and the yield on your savings (equal to the gross mortgage interest rate).
The only downside is that your money is permanently tied up with the lender for the duration of the mortgage. In addition, in order to benefit from the tax free accruement, there are a number of conditions on the use of the SEW or BEW, such as:
- only possible when there is a property and a mortgage;
- the SEW and the BEW must be frozen;
- at the end of the term, the savings must be used for paying off the mortgage;
- payments must have been made into the account for a period of at least 15 years;
- the highest payment may never exceed 10 times the previous payment;
- the maximum payment exemption will be EUR 145,000 (after 20 years) and EUR 32,900 (after 15 years).
If you emigrate within 15 or 20 years, you obviously don’t meet the last condition and the tax authorities will consider the SEW or BEW as having been paid out. Fortunately, based on article 3.118 of the income tax law, there is an exemption even if you emigrate before the minimal period of 15 years has passed. This means that the SEW or BEW could be terminated before the 15 years are over. If the proceeds of the SEW or BEW exceed the exemption, there will be a protective assessment for this amount. This assessment will only be collected at the very moment that your house stops being your primary residence.
Still, it is an option for expats to not make use of the tax free facility. If you don’t opt for the SEW or BEW clause, your savings or investments are taxed in box 3 of the income tax system. This results in a 1.2 percent (wealth) tax over the average value of your savings and assets -/- non tax deductible debts. Also in this box 3 there is a tax-free amount, a mere EUR 20,000 per person.
In other words, if your bank savings account is your only asset apart from your house, you are not likely to pay any tax over the value of your savings at all in the first 5 to 10 years. Also, expats who enjoy the 30 percent ruling do not owe taxes in box 3 anyway (except real estate in The Netherlands that has been rented out). In other words, there is no need to take out a SEW, BEW or KEW to avoid this wealth tax, at least during the term of the 30 percent ruling.
To this we have to add that not that many banks have introduced a mortgage-related bank savings product yet. The banks that did (Rabobank, Obvion, Florius) have also imposed a number of restrictions, such as no contribution of insurance-based savings that already exist, no high initial contributions or extra contributions, and no possibility for putting the bank savings account in box 3 of the income tax system.
We expect though that these restrictions will be removed in the second half of 2008, and that most banks will launch a bank savings product shortly.
As mentioned in the introduction of this article, if you are self-employed and want to build up a pension, or if you want to build up a pension aside from the pension that has been arranged via your employer, your only option before 2008 was to take out a savings insurance policy with an insurance company. The premium for this savings insurance policy was and is tax-deductible and in the future the annual payments will be taxed. Since the introduction of banksparen in January 2008, it is also possible to build up your pension this way with a bank, but then only through ‘banksparen’. As mentioned earlier, the cost of this type of savings is less than the cost of the average savings insurance policy with an insurance company.
However, for expats, there are some fiscal consequences of saving up a pension through either of these products of which you should be aware. As is the case with the mortgage-related bank savings, leaving the Netherlands in the relative short term has a number of implications.
If you make use of the option of deducting the pension contributions, and if the pension savings are continued until the pension date, the end-capital will be converted into monthly or yearly payments. If you live in the Netherlands, these payments will be taxed against the progressive tax rates in box 1 of the income tax system. The most common option to choose from regarding the annual payments on the pension date is the retirement annuity. The following conditions apply to this type of annuity:
- the taxpayer in question must be the beneficiary;
- the payments must start at the latest when the beneficiary reaches the age of 70;
- there are at least 20 years between the first and the last payment.
If you do not live in the Netherlands as of your pension date, then most likely taxes are due on the annuity payments in your country of residence. This is depending on the applicable tax treaty. This applies to both a pension scheme based on bank savings as to a scheme with a savings insurance policy.
What you have to take into account are the consequences of commutation and other international aspects. If you emigrate, then you will most likely want to take the funds with you. In order to transfer the value of the annuity insurance or the annuity savings to another country, this insurance or savings scheme will have to be terminated. However, the fiscal consequences of doing this are so severe that you will probably need to continue the annuity insurance or annuity savings in the Netherlands. The option of commuting an annuity savings without fiscal consequences is limited to a one-time amount of EUR 400. There is no such commutation option for annuity insurances. Consequently you are more or less forced to leave the funds with the bank or the insurer. Since you will probably not make any contributions anymore, it is not sure what the result is at the date of pension.
Therefore, if you plan to leave the Netherlands within the next few years and still want to save for a pension, then it may be more attractive to save for a pension by means of a regular savings account or investment account and not deduct the contributions from your taxable income. This way you avoid a multitude of complex regulations and unattractive consequences. In addition, the payments in the future are free of tax.
For people who already have a savings insurance policy for their pension, it may be recommendable to convert this into a bank savings pension scheme. This may have a positive influence on the end capital, especially if you have taken out the pension savings insurance policy relatively recently.
In general we can conclude that these new mortgage or pension savings products are an improvement compared to the old/existing solutions, especially from a cost angle.
Still, as an expat, you should not let the cost and tax advantages lure you into the fiscally-advantaged way of saving for a pension, at least not without having checked the tax implications of emigration. In case of a mortgage, the option of a non-SEW or non-BEW bank savings product is in many cases advantageous, or at least worth considering. In the end it is always the duration of your stay in The Netherlands that proves to be a key factor when making these decisions.
The shorter your horizon, the more we recommend to focus on flexibility rather than on long term tax advantages.
Source: Finsens give advice on tax, mortgages, investments and pensions.
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