Private Pension Solutions for Expats in Germany

Private Pension Solutions

Almost every insurance company and bank in Germany offers a private pension scheme (Private Rentenversicherung). Such schemes are extremely flexible.

They not only offer you the possibility of investing in fund selections, both managed and individual, but also offer great flexibility and tax incentives. They are an obvious choice for expats living in Germany.

General Information

As a result, most private pension plans today are fund based offering you the possibility of a good return on your investment even in todays low- interest market. The returns of your investment depend on the amount of risk you take. Historically, returns have been between 3% and 9% after costs. The higher the risk you are willing to take, the higher the possible returns. There are at least 5 different risk classes to choose from, ranging from very cautious to very adventurous, so there is something for everyone’s risk profile.

However, the future can’t be guaranteed and although it’s very unlikely, you could lose money. There are guaranteed fund based saving schemes available that will offer you the guarantee of a minimum 1 % return even if the markets have crashed. Yet, it’s important to remember that though shares fluctuate, they have not lost money in the long term.

Thus, a private pension scheme should run for a long time and then before it reaches maturity (when the shares are at a high) to change to a very low-risk portfolio strategy. The insurance company or bank will manage this for you.

In case you believe it’s still too risky, some insurance companies will offer you a private pension plan with guaranteed interest, which stands at 0.9%/year at present. However, since the insurance companies invest the funds they have, they also offer performance-related profit participation, which means the overall return currently is approximately 2.25%/year (this would vary slightly between different companies based on how they perform).

You can also select between full or part capital payment or lifelong pension when it reaches maturity. It’s possible to draw money from it (typically, there should be a minimum balance of €2,500) at any time should you need to do so. You can even cancel the private pension fund scheme before it reaches maturity whereupon you’ll obtain the amount that has been saved up and until then. However, this has tax drawbacks.

Key Features of A Private Pension Scheme

A private pension plan (private rente) is a popular form of pension provision in Germany due to its flexibility. Contributions are made from net income, with the option to set monthly payments as low as €25 or as high as several thousand euros, depending on the insurance company. You can choose to make regular monthly contributions or pay a lump sum into the policy. The pension draw-down can start immediately or be deferred to a later date, offering substantial flexibility in how and when you access your funds.

What are the investment options and benefits of a private pension scheme?

Private Rente policies offer a variety of investment options, including fund-based products and managed portfolios. One significant advantage is the ability to switch between funds up to 12 times annually without incurring extra charges. There are classic schemes that guarantee a return of 0.9% plus a with-profits bonus, which currently ranges between 1.25% and 1.5% for most companies. This flexibility allows policyholders to tailor their investment strategy to their individual needs and market conditions.

What are the withdrawal and cancellation conditions?

Policyholders can make part withdrawals at any time, although the minimum withdrawal amount is typically €1,000, and at least €2,500 must remain in the policy. The contract can be canceled at any time, with the balance paid out. However, it’s advisable to avoid canceling the contract during the initial years due to potential negative impacts from costs. Additionally, the policy has a minimum contract length of 5 years, and pension draw-down can occur at any time after this period.

How is a private pension taxed and what are the options at the end of the contract?

Taxation on a Private Rente depends on whether the policyholder opts for capitalization or a lifelong pension. For contracts lasting at least 12 years and drawn at age 62 or later, capitalization is taxed at 50% of the returns, while a lifelong pension is taxed on the ‘Ertragsanteil,’ a value determined by the age at which the pension starts. For instance, if drawing a €1,000 pension at age 65, only €180 is subject to tax. At the end of the paying-in phase, policyholders can choose between a lifelong pension, capitalization or a combination of both.

What happens if the policyholder moves abroad or passes away?

If a policyholder leaves Germany, their Private Rente policy can continue running or be set to contribution-free. Ideally, they should maintain a forwarding address in Germany and hold a bank account in the EU or Germany to draw the pension. In the event of death during the paying-in phase, the accumulated amount is paid to the named beneficiary. If death occurs while drawing the pension, the beneficiary will receive payments for the arranged guarantee period, which can range from 5 to 18 years, affecting the monthly pension amount slightly.

You can even cancel the private pension fund scheme before it reaches maturity

Whereupon you’ll obtain the amount that has been saved up and until then. However, this has tax drawbacks. As long as the private pension fund has run for a minimum period of 12 years and you haven’t drawn on it until your 62nd birthday, you’ll pay significantly reduced taxes on the profits when it pays out. As long as you live, the pension will pay out. In case you die at an early age, there’s a guaranteed pay out for a period of up to 18 years, which would be paid to an individual of your choice.

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