Private Pension Scheme, Plans & Fund

Insurance in Germany - MW Expat- Private Solutions Savings

Almost every bank and insurance company offers a private pension scheme (Private Rentenversicherung). These schemes have the advantage of being very flexible. In the past they used to offer guaranteed returns of 4% and over – this is no longer possible due to the low interest rates available on the market today, so most are now fund based savings. If all goes well (and it has done until now), fund-based savings offer you a good return on your money, normally well over 3%. There is however no guarantee that this will be the case in the future, and it is also possible, although very unlikely, that you can lose money. Shares fluctuate but viewed over long periods of time do not lose money. It is important for the scheme to 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. This is managed for you by the bank or insurance company. Should you feel that is still too much of a high risk, some insurance companies will still offer you a scheme with guaranteed interest, which presently lies at 0.9%/ year. However, because the insurance companies invest the money they have, they also offer performance related profit participation, meaning that the overall return at the moment is around 2.25%/year (this varies slightly between the different companies depending on how they perform).

You can also choose between full or part capital payment or a lifelong pension when it reaches maturity. It is possible to draw money from it (a minimum balance of €2,500 usually has to remain) at any time should you need to do so. It is also possible to cancel the scheme before it reaches maturity whereupon you will receive the amount that has been saved up and until then. This, however, has tax drawbacks.
As long as the scheme has run for at least 12 years and you do not draw on it until your 62nd birthday, you pay greatly reduced taxes on the profits when it pays out. The pension pays out for as long as you live. Should you die at an early age, the payout is guaranteed for a period of up to 18 years and will be paid to a person of your choice.

Key Features

  • A private pension plan is the most popular form of pension provision in Germany because of its flexibility.
  • A private pension contribution gets paid out of the net income and the monthly amount can be set as low as €25 or up to several thousand, depending on the insurance company.
  • It is possible to pay a lump sum into a monthly contribution policy. 
  • The pension draw-down can either start immediately or at a later date.
  • Most of the products are fund-based. The products themselves offer a wide range of funds to choose from including managed portfolios. The advantage that insurance products have is that you can switch funds at least 12 times a year free of charge.
  • A classic scheme is also available. This has a guaranteed return of 0.9% plus a with-profits bonus which lies between 1.25% and 1.5% with most companies at the moment.
  • It is possible to borrow against a Private Rente but it can also be seized and used in the calculation of unemployment benefits.
  • The minimum length of contract is 5 years and a pension can be drawn at any time.
  • It is possible to make part withdrawals at any time. Normally the withdrawal has to be a minimum of €1,000 and at least €2,500 have to remain in the policy
  • It is possible to cancel the contract at any time. The balance will be paid out. It is not advisable to cancel the contract during the first few years as the balance is still negatively affected by the costs.
  • An additional occupation disability insurance can be arranged.
  • At the end of the paying-in phase, there is a choice between capitalization, a lifelong pension or a combination of both.
  • If the contract runs for at least 12 years and is drawn at the earliest with age 62, then there are 2 different models of taxation. If capitalization is chosen then the tax is paid (with a personal tax rate) on 50% of the returns. If a lifelong pension is chosen, then only the ‘Ertragsanteil’ gets taxed. The ‘Ertragsanteil’ is a set value depending on the age at which the pension is drawn (62=21%, 63=20%, 64=19%, 65-66=18%, 67=17%). If you for example draw a pension of €1,000 at age 65 you will only be taxed (with your personal tax rate) on €180.
  • Should the above criteria not be met then the total amount will be taxed with the ‘Abgeltungssteuer’ (with-holding tax). This rate lies at 25%.
  • The pension is guaranteed for the rest of the beneficiary’s life.
  • In case of death during the paying-in phase, the amassed amount is paid to the named beneficiary.
  • In case of death whilst drawing the pension, the pension will be paid out to the named beneficiary for the arranged amount of time (Garantiezeit).
  • The guaranteed payout time can vary between 5 and 18 years. Obviously it has a small effect on the amount of monthly pension that can be drawn.
  • Should the policy holder leave Germany, his policy can carry on running or can be set    to contribution free.
  • The balance will still work for the policy holder as his investment in funds continues.
  • Ideally the policy holder should still have a post forwarding address in Germany.
  • To draw the pension the policy holder will need a bank account in Germany or the EU.
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