Private pension provision: You have these options

The most important thing in brief:

• There are various private retirement planning strategies to cover your financial needs in old age.
• Which option is best for long-term wealth creation depends on factors such as your individual life situation, your age and your willingness to take risks.
• You can save for your retirement with the help of endowment life insurance, private pension insurance or unit-linked life and pension insurance.

What exactly is endowment life insurance?

Capital life insurance always includes two contracts:

• term life insurance to protect relatives and
• a savings plan with a long term.

However, with many companies you will not be told how the contribution is divided between the two contract components. At the end of the term, the payout consists of a guaranteed sum and a non-guaranteed profit participation.

Customers of companies with low profits often experienced that the surpluses sometimes tended towards “zero”. For contracts that were concluded from January 1, 2005, there is no longer any tax-free payout at the end of the term. Capital life insurance therefore only rarely makes sense.

What do I have to consider with endowment life insurance?

• Consider whether you can hold out for the duration. If you are unsure, you should not take out endowment life insurance. Because canceling beforehand means loss.
• You can also increase survivor protection with significantly cheaper term life insurance.
• If you primarily want to save, it is better to choose other forms of savings. As a rule, you can use the paid-in capital at short notice. And this with better and more predictable profits.
• Capital life insurance can be useful as part of a company pension plan, for example as direct insurance. Then you can benefit from tax advantages.
• If you decide on endowment life insurance despite some disadvantages, you will pay the premiums annually. This saves surcharges. Do not include additional accidental death insurance. It is unnecessary and too expensive.
• Arrange the inclusion of the additional insurance “exemption from contributions in the event of occupational disability”. In the event of occupational or incapacity, the insurer will continue to pay the premiums for the entire contract. If you already have (self-employed) occupational disability insurance and the agreed pension is high enough to cover the contributions without any problems, you do not need the additional insurance.
• When you take out insurance, always choose high-performing companies. The experts from the consumer advice center and insurance advisors provide a market overview.
• Many consumer advice centers also offer computer-aided concrete price-performance comparisons.

What variants does private pension insurance offer?

Anyone who pays into a private pension insurance will receive a pension in old age. However, customers are only certain of part of the payout. The insurer can reduce the other, non-guaranteed part, the so-called “profit pension”, depending on, for example, its business success.

Two contract variants are usually offered for private pension insurance:

• the deferred pension, that is, the pension payment only begins at a later date, and
• the pension that begins immediately.

What do I have to consider with private pension insurance?

• If you have one deferred pension insurance take into account that you will face large losses if you terminate early.
• If you have agreed on a so-called lump-sum option for the end of the savings phase with the deferred pension insurance, you can decide shortly before the start of your pension whether you would prefer to collect the savings in bits every month or in one fell swoop.
• You should pay contributions annually. This saves surcharges.
• For the deferred pension insurance, agree on the inclusion of the additional insurance “exemption from contributions in the event of occupational disability”. In the event of occupational or incapacity, the insurer will continue to pay the premium for the entire contract. This is not absolutely necessary if you already have (self-employed) occupational disability insurance and the agreed pension is high enough to cover the contributions without any problems.
• As with endowment life insurance, you should only choose high-performing companies when taking out insurance. The experts from the consumer advice centers and approved insurance advisors will give you an overview of the market.
• If you enter the post in a Pension starting immediately If you pay a one-time contribution into the contract and immediately receive the monthly pension payment, you can no longer claim this contribution back. That's why you should only ever allow a portion of your assets to flow into the immediate pension in order to remain financially flexible.

What are unit-linked life and pension insurance policies?

The difference to other forms of life and pension insurance is that in the fund-linked variants the money paid in is invested in investment funds, for example stock, pension or real estate funds. Since you as a customer usually decide for yourself which funds you want to invest in, you can change your choice at any time. Danger: With this form of investment, you bear the risk alone.

There is usually no minimum payout, as with capital life insurance. What the fund has earned will be paid out, and that is initially uncertain. Fund policies with high-yield companies could perhaps once again become a recommendation for investors who are more willing to take risks.

What do I have to consider with unit-linked life and pension insurance?

• If you need a fixed amount at a specific time, you should avoid fund policies because the rate is not always the same.
• Before signing a contract, you should take a look at the so-called “zero line”. This is a development curve for the fund shares, in which a possible increase in value is not taken into account. If you compare the zero lines of several providers, you will get an indication of where the contributions are probably better invested.
• Pay contributions to be paid monthly. If you pay annually, there is a risk that you will buy when the fund price is particularly high.
• With unit-linked life insurance, avoid additional accidental death insurance. It is unnecessary and too expensive.
• However, agree on the inclusion of the additional insurance “exemption from contributions in the event of occupational disability” or take the contribution into account when taking out an occupational disability pension.

What applies to the taxation of life insurance?

The (expiration) benefits from life insurance completed before January 1, 2005 are tax-freeif

• the contract existed for at least twelve years and
• regular contributions have been paid for at least five years.
• Furthermore, a death benefit must be agreed that is at least 60 percent of the contributions paid.

If these criteria are met, the income from the life insurance remains tax-free.

Since 2005, you have had to pay the so-called withholding tax on all profits from investments. In other words: the state receives 25 percent of the profit – plus solidarity surcharge and, if applicable, church tax.

You can partially avoid this, for example, by taking the detour through a fund-linked life or pension insurance policy instead of investing directly in funds. If such a contract has existed for at least twelve years and the insured sum is due at the earliest at the age of 60 or, if the contract was concluded from 2012, at the age of 62, only half of the income is taxable.

These are subject to the personal income tax rate. This privilege applies to all life insurance policies and the one-off lump-sum payment option for private pension insurance policies. In this case, you should definitely seek detailed advice beforehand, as providers in this area in particular often work with meager funds and high costs.

State subsidy for pension provision

In addition to private pension provision, there are also state-funded options for retirement provision. These include company pension schemes (bAV) and Riester contracts.