What is a pension gap in the Netherlands (and how do  you close it)?

A relaxing holiday, trying out that new restaurant, sticking with the organic greengrocer even when prices go up. You work hard for your financial security, and you enjoy the freedom it gives you now. But what happens once you reach pension age? Will your pension be as comfortably "on track" as your life is today? Or are you looking at a pension gap — known in Dutch as a pensioengat?

Thinking about your pension can feel dull and complicated. But your financial future is too important to put off. Working out whether you have a pension gap is step one. Closing it is step two. And if you catch it early enough, there's usually a lot you can do about it.

What is a pension gap?

A pension gap is the shortfall between the pension income you're on track to receive and the income you'll actually need to maintain your lifestyle after retirement.

As a rule of thumb, a workable "target pension" is around 70% of your last-earned salary. If your expected income falls below that, you have a pension gap. Some people take a looser definition: for them, a pension gap is only real once it forces them to actually cut back after retiring.

How you define it is a personal call. Either way, calculating your pension gap lets you make an informed decision about your own pension strategy.

How does a pension gap happen?

Several common situations can leave you with a pension gap:

• Self-employed (zzp'er) years. If you're a zzp'er (the Dutch term for a sole trader or freelancer), you're responsible for building your own pension — something that's easy to put off in the tough early years of self-employment, or never quite get round to at all.
• No employer pension scheme. Even as an employee, you don't automatically build up pension — for example, if your employer doesn't offer a pension scheme.
• Switching employers. Pension schemes don't always link up seamlessly when you move from one employer to another.
• Time spent living or working abroad. This is a big one for expats: if you've lived or worked outside the Netherlands, you won't have built up AOW (the Dutch state pension) for that period — and depending on your employer at the time, possibly no workplace pension either.
• Career breaks, for example time taken out to raise children.

Any of these can create a pension gap. The only way to know how big — or small — yours is, is to actually do the maths.

How to calculate your pension gap

Head to mijnpensioenoverzicht.nl — the Dutch government's official pension overview portal — and with a few clicks, you'll see your expected income after reaching pension age. This is made up of your AOW (state pension) plus any pension you've built up yourself.

You don't need to track down the pension figure yourself: the site pulls it from the same UPO (Uniform Pensioenoverzicht, or "Uniform Pension Statement") that your pension provider sends you every year.

Compare this estimated annual income with your current income to see whether you're on track to hit that 70% target pension.

If your projected income comes in lower, you have a pension gap. If that's the case for you, it's worth checking whether there's a silver lining to be found — starting with the tax benefits below.

Tax benefits for closing your pension gap

You can use two Dutch tax allowances — your jaarruimte and reserveringsruimte — to (partly) close your pension gap while building extra pension tax-efficiently.

What is jaarruimte (annual margin)?

Your jaarruimte, or "annual allowance," is the amount you're permitted to set aside each year for your pension with a tax advantage from the Dutch government. Here's how it works: whatever you spend on retirement provisions within your jaarruimte (or reserveringsruimte) gets deducted from your taxable income — so you pay less tax overall.

How much jaarruimte you get depends on your income and on any pension you already build up through an employer. If you're enrolled in a pension fund through work and pay premiums, your individual jaarruimte will be lower than if you had no employer pension at all.

Within your jaarruimte, you can save or invest for retirement yourself, with tax relief.

What is reserveringsruimte (reservation margin)?

Your reserveringsruimte is whatever's left over from years when you didn't use up your full jaarruimte — for instance, because you couldn't set money aside at the time, or simply weren't thinking about your pension. You can catch up on unused jaarruimte from up to 10 years back — that's your reserveringsruimte.

How to calculate your jaarruimte and reserveringsruimte

Fair warning: this isn't the most exciting task on your to-do list. Gathering everything you need up front will make it much faster.

What you'll need

• Your income details for the year you're calculating your jaarruimte for. Tip: if you don't have your payslips and annual statements to hand, you'll find all your submitted income tax returns at mijnbelastingdienst.nl — the Dutch Tax Administration's (Belastingdienst) personal portal.
• Your Factor A — the pension accrual you've built up through your employer(s). You'll find this on your UPO. Not sure who holds your pension? Log in to mijnpensioenoverzicht.nl, then download or request the UPO (with Factor A) from your pension provider's portal.
• Any amounts paid into an annuity (lijfrente) or bank-based retirement savings account (banksparen) during the relevant year. If you're self-employed and have an oudedagsreserve (a retirement reserve for freelancers), have that figure ready too.

Calculate using the Belastingdienst's tool

Go to the "Hulpmiddel lijfrentepremie vanaf 2016" (Annuity Premium Tool from 2016) on the Belastingdienst website and answer the questions — that's it.

If the tool shows you have jaarruimte and/or reserveringsruimte left, you can save or invest that amount for your pension with tax relief.

One thing to watch: there's a yearly cap on how much reserveringsruimte you can use. Start by catching up on your oldest missed year first, so you don't waste any of it.

Calculate using Peaks' annual margin tool

Don't fancy a trip to the Belastingdienst website? Peaks has built its own tool to calculate your jaarruimte. Access it below.

That's it — you now know exactly where you stand, and whether your pension could use an upgrade. All that's left is deciding: low-maintenance or high-maintenance retirement?