Private Pension Solutions - For Expats in Germany

Private Savings 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 Private Pension Scheme

It’s one of the most popular forms of pension provision in Germany due to its flexibility.
A private pension contribution gets paid out of the net income and you can set the monthly amount as low as €25 or up to several thousand, depending on your insurance company.
It’s possible to pay a lump sum into a monthly contribution policy.
The pension draw-down can either start right away or at a later date.
You can select from a wide range of fund-based products, including managed portfolios. The advantage of these insurance products is the opportunity to switch funds at least 12 times annually, free of charge.
There’s a classic scheme, which offers a guaranteed return of 0.9% plus with-profits bonus that varies between 1.25% and 1.5% in the case of most companies at present.
You can borrow against a Private Rente but it can also be seized and used to calculate unemployment benefits.
A 5-year period is the minimum length of contract and you can draw a pension at any time.
You can make part withdrawals at any time. Usually, the minimum amount of withdrawal has to be €1,000 while at least €2,500 should remain in the policy.
You can cancel the contract at any time. In such a case, the balance will be paid out. However, it’s advisable not to cancel the contract during the first few years as the balance would get negatively affected by the costs
You can arrange for additional occupation disability insurance.
Once the paying-in phase ends, you’ll have a choice among a lifelong pension, capitalization, or a combination of both.
In case your contract runs for at least 12 years and you draw on it at the earliest age of 62, there are 2 different models of taxation that could become applicable. If you’ve chosen capitalization, the tax is paid (with a personal tax rate) on 50% of the returns. In case your choice is a lifelong pension, just the ‘Ertragsanteil’ will be taxed. The ‘Ertragsanteil’ is a set value that depends on the age at which the pension is drawn (62=21%, 63=20%, 64=19%, 65-66=18%, 67=17%). Thus, if you draw a pension of €1,000 at age 65, for instance, you will just be taxed (with your personal tax rate) on €180.
The pension is guaranteed for the rest of the beneficiary’s life.
If you die during the paying-in phase, the amassed amount will be paid to the named beneficiary.
In case of death whilst drawing the pension, the named beneficiary will be paid the pension for the arranged period (Garantiezeit).
The guaranteed payout time can differ between 5 and 18 years. This would have a small effect on the amount of monthly pension that can be drawn.
In case the policyholder leaves Germany, his policy can continue running or can be set to contribution-free.
Since his investment in funds continues, the balance will still work for the policyholder.
Ideally, the policyholder should still have a Germany-based post forwarding address.
The policyholder will need a bank account in the EU or Germany to draw the pension.

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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