Pension system in Germany may appear a bit complicated with its three-layer model. It was designed so, to meet the demands of all strata of the population; whether they are employed or self-employed, want to take advantage of the subsidies or save flexibly. Above all, public pension was in a state of crisis. Germany with serious demographic problems, like declining birth rate implies less workforce to finance for more pensioners in future. The Public Pension support takes a major chunk from the State coffers which is three times the Govt spending for national defense. The Government in its letter to the people every year reminds the inadequacy of Public Pension and encourages to go for other private pensions. One such is the Rürup/Basic Pension plan which we are going to understand in detail.
What is Rürup -Rente?
Tax deductibility Contributions are tax deductible. Currently 90% of the contributions to the basic pension can be deducted from tax as pension expenses. This will increase to 100% by 2025 i.e., up to 25,787€ can be earmarked as pension expenses in the tax return by 2025. Currently for 2021, it is 23,724€.
Lifelong annuity payment Ensures a lifelong, monthly payout provision after retirementas similar to statutory pension insurance. It protects you completely from the risk of longevity. The insurer has the mandate to pay the agreed pension even if your capital in the Rürup account gets exhausted.
Payout Phase Payment from the Basic pension can be withdrawn only in the form of pension. They cannot be inherited or transferred, cannot be used as collateral or sold. However, dependents may be covered under certain criteria. There is no provision for lump-sum payout. Thus, the benefits are personal, cannot be disposed or capitalized either.
Complete protection against you You cannot withdraw the capital or terminate the contract prematurely. In short, it safeguards the “future you” from the “present you”.
Diverse investment One can invest very flexibly with Rürup pension in ETFs or any actively managed funds. Choose an insurance provider who offers a basket of portfolios of ETFs and MFs which gives a very good returns in the long run.Also they must allow you to switch investments without any costs or taxes, because it is unlikely to maintain the same set of portfolios for decades.
Downstream Taxation Any tax-advantage during the pay-in phase will be subjected to taxation during the pay-out phase. The pension payment is taxed at your personal income tax rate when it is drawn. The tax rate as a pensioner will be lower than the tax paid as a working person which is an added advantage.
Hartz IV protected Your Basic pension is Hartz IV protected. Irrespective of whether one receives unemployment benefits or benefits from Hartz IV, the pension amount cannot be reduced.
Advantages of Basic Rente
Rürup/Basic Rente was conceived with the idea to increase the personal provisioning of every individual for their retirement life. So, most of its features cited above are its advantages as well:
Compulsory saving for your future By any cost, the contract cannot be terminated. Money invested in basic pension is protected against you and your fallacies.
Free from insolvency and seizure Claims from a basic pension cannot be attached, hence they are not accessible to the insolvency authority.If you do not have a private liability insurance (must-have insurance), and incur huge damage, then to settle the claim you may have to use all your savings. But thankfully, your basic pension cannot be touched.
No risk of longevity Your basic pension account will never run out of money unlike the brokerage account that can go empty if not saved enough. So, you are less burdened when it comes to managing your savings.
Disadvantages of RürupRente
If there are advantages, then there also will be disadvantages. In the end, it is the individual plans and aspirations that decide if this pension is beneficial to them or not.
Misleading high costs One must exercise great caution when choosing a provider for Basic pension. Providers with high costs will destroy your returns. This will greatly affect your pension payout. This is where we come in to support you.
Termination of the contract impossible It cannot be terminated early. Only a complete exemption from contribution is possible. Withdrawal is also not possible.
Do not cover dependents by default The insurance conditions, by default, state that in the event of death of the insured person, no benefits will be paid to the surviving dependents. This is irrational because the entire contributions paid till then will go in vain. To amend this, a clause should be inserted that in the event of death during the savings phase, the surviving dependents will atleast receive the contributions paid back up to that point. Almost all the insurance companies agree to the survivor protection clause.
Expat’s dilemma If you leave Germany before retirement, your assets will continue to be managed free of charge. It is not payable; can only be paid out as a pension post retirement. Hence, it is not suitable for those who do not have any clear-cut plan for their future. You can only receive it as pension where you retire.
Taxation during the retirement phase
As seen, a large chunk of the contributions in the savings phase is tax-free. In the retirement period, the payouts are then taxed.But the tax burden during the contribution phase will be higher than in the retirement phase.This gives a clear tax advantage to you.
Cohort Principle of taxation
The Basic pension is taxed as per the so-called cohort model. Thus, the tax-free portion of the pension is fixed at the beginning of the pension period and applies for life. From the year 2040, all the basic pensions are 100% taxable.
In 2020, the tax rate is 80% and it increases by 1% till 100% is reached by 2040. Therefore, if one retires in 2030,the taxable part of their basic pension will be 90%. This 90% does not increase and is fixed for the rest of their life.
Also, the taxable part of your basic pension is then taxed at your personal tax rate.
Who gains the most out of Basic pension?
Though it very much depends on the individual’s goal and plan to conclude if basic pension is worthy, there are some groups of people who can attain the most out of it. It was first conceived targeting these people, but later with its attractive features brought others into its ambit.
Self-employed and freelancers
They are extremely well positioned to opt this as they have the full flexibility to decide where they want to park their dear money.
High earners
Employees who earn around 60,000€ or more can take advantage of high tax deductions and can top up their statutory pension cleverly with basic pension. Because of its diverse investment options (ETFs, mutual fund) it is easy to build a high yield pension.
Married Couples
Even if the spouse is not a high earner, it is perfectly fine to take a basic pension for your spouse. Particularly, women lack adequate retirement provisions owing to maternity leave, parental leave and child rearing.So, this basic pension can top up their already existing meager retirement provision. Also, they may benefit from tax advantage as a married couple.
Public servants
People employed in special areas like doctors, architects and lawyers, where the guild of their professions offer special pension systems, can use Rürup pension plans to save that extra monies into their pension planning along with tax subsidies.
Disability income insurance
When basic pension is combined with disability income insurance (must- have), your whole premium will be tax-deductible. Thus, you can save more on taxes.
Finally, choose a product that offers low cost, with diversified investment portfolios. Remember the amount you saved up will determine your monthly pension, and rate of return is also a decisive factor. The insurance company must be financially sound and stable to consider all of these along with the increased longevity of the insured.
The following allowances are available every year:
- Basic allowance: 175€
- Child allowance for children born before Jan 1st 2008: 185€
- Child allowance for children born on/after Jan 1st2008: 300€
- One-time career starter bonus for young adults:200€(to encourage younger people)
The full allowances are only available if the corresponding contribution (either 4% of gross salary or 2100€) is made. So ideally a family of 4(husband and wife with two kids) are entitled to 950€/year as subsidies. This way, the Government incentivizes through subsidies, thus reducing the premium pay-in.
2100 – 950 = 1150€ (is the actual premium paid out of pocket), where the full premium paid(including the subsidy) can be offset against the tax.
What about tax breaks?
The contributions to the Riester pension can also be claimed via the tax return , that can go upto a maximum of 2,100€/year. All the contributions (including the bonuses) qualify as a special expense for tax purposes and are tax deductible. If the resulting tax advantage exceeds the amount of allowance, the tax office will recognize the difference as tax refund. The single and high-income earners get the most out of it.
Basic contribution
If you have a very low income, it is possible that your contribution to be paid (minus the allowances) would be 0 € or negligible. Nevertheless, at least 60 € per year must always be paid.
Who are eligible?
- Employees (also the trainees), students with mini jobs, federal volunteers
- Self-employed with compulsory insurance
- Civil servants, officials, judges, soldiers
- Recipient of unemployment benefits or sickness benefit
- Differently challenged people
- Spouses of people who are eligible for funding (working couples can separately enroll for this plan. However, child allowance will be most likely credited to mother’s account).
Is the Riester pension worthy?
The Riester pension is absolutely a sensible addition to your retirement provision. It generates an annual guaranteed return through bonuses and later pays a lifelong annuity. Hence it is worthwhile for a vast majority of the people provided they have taken a good Riester pension.
Advantages
- The monthly pension received is subjected to pensioner’s personal tax rate. The big advantage is that your tax rate as a pensioner will be very lower than the tax rate during your working period.
- Also, it does not require any additional social security contributions unlike some other old-age provisions.
- 30% of the capital can be received at one go at the start of retirement. The rest of the capital is then paid out as lifelong annuity.
- The Riester-Rente plans are strictly regulated by the German Government. Information about costs,benefits,agent commissions, fees and other details are transparent and fully available to the customers.
- Benefit payouts can begin at age 60 and are subject to only German income tax, excludes any kind of flat tax or capital gains tax.
- The entire money put into the plan is guaranteed to you at the end of the contract and is not subject to any legal claims or attachments.
- Most of these products are fund-based. The products offer a wide range of funds to choose from( Mutual funds, equity) including managed portfolios.
- Capital can be withdrawn at any time to finance a house for self-use only.
- It is possible to cancel/change your Riester pension at any time with an optimal cost. The entire process is hassle-free.
Disadvantages
- It is a complex insurance product. A bad Riester contract may end up in high costs, eventually lowering the rate of return.
- The Riester-Rente will be beneficial for those planning to retire in the EU. If one cancels on moving out then the person doesn’t receive the subsidies .
- Capital cannot be borrowed against a Riester-Rente.
- Cannot be used as a collateral for any other real estate investment except for house that too for self-use only.
- Pay income tax during pay-out period.
When it comes to pension, planning for long term is extremely important. A lot can happen in one’s lifetime – financial crisis, economic recession, bankruptcy of companies etc. Hence, it’s very important to get your Riester pension from one large, financially strong insurer who has been present for considerable period. Ensuring the financial strength of the insurer is one way to achieve the highest possible level of security for you in the long term.
Therefore, it is advisable to look for an insurance broker when choosing the right kind of product. There is no One-size fits all pension scheme, that can work well for all. One should consider his/her current financial status, life planning, future goals and expectations, decisions regarding migration, weigh down the pros and cons before arriving at a best suitable pension scheme. So, help from professional expertise is a must. The onus lies on the individual because financial success can only be achieved through financial education.
Last but not the least, Personal provisioning is the most important – If you want to be cared for, you have to take care of yourself.