What can (unit-linked) private pension insurance do? Does it make sense?
In advance: The post has become longer than I had originally planned, sorry for that!
For a long time I have been playing with the idea to post something here... apart from unqualified comments under the painstakingly designed posts, I have been very quiet in this (mostly) great community. The topic of insurance is occasionally touched on here and often leads to pleasant discussions and conversations in the comments section. This gives the impression that there are a lot of questions and a need for clarification. I'll try my luck with one of the more complex products and try to explain it (rather simplified) for the community.
But now to the content:
Most people don't like insurance. And then also in combination with one of these ETF things? Devil's stuff, best to give such things a wide berth!
I'm not like most, I like insurance - I guess that's why I'm an insurance broker. I like to explain to my clients what they have on hand. Because I like people to know what you're signing up for and understand the products as well.
I'm leaving out the classic private pension and any varieties here - it's not fun, nor does it do any good. What I would like to explain to you in more detail: the private fund pension. Why do I want it? I am happy if I can provide some transparency and clarification.
Addendum: I design private pensions differently than most of my colleagues in the insurance industry. But more about that later.
1. what is a private pension insurance?
In simple terms, a private pension insurance (here: fund pension) is nothing other than a fund/ETF savings plan in the "protective shell" of an insurance company. In other words, you save for an ETF with monthly contributions. This is not new territory for anyone here - almost everyone has ETF savings plans.
2. difference to the ETF savings plan
In contrast to a normal ETF savings plan, you will earn a lower return here - the insurance company also wants to earn something. However, you will have tax advantages in the payout phase. However, you will only receive these tax benefits under two conditions: Contract term min. 12 years, payout not before the age of 62.
In addition, the monthly payout is subject to deferred taxation of the income share (depending on age). Since I design the pensions somewhat unusually, only part 1 is important for us, i.e. min. 12 years term and 62 years old.
3. What are my payout options at retirement?
Option 1: Lifetime annuity. Sum X is paid monthly. Do I think this is good? No. Why don't I think this is good? Because it usually takes 25+ years for the monthly annuity payments to pay out your deposit value at age 67.
has been paid out. There is no need for more info on this.
Option 2: Full capital payment. Taxation according to the so-called "half-income method". Means: You have to pay tax on half of your income. You all know the 26.375% (capital gains tax + soli) - that's not here. What's relevant here is your individual income tax rate at retirement age, which for most of us is below that 26.375%. Sounds better, but I still don't really like it - it's still a "decent" tax if you get a large sum paid out.
4. what bothers me about most pension insurances
Imagine you finally turned 67 in 2022 and your insurance is "due". Due to well-known problems, the situation on the stock market is rather unpleasant and the value of your shares has dropped considerably. Too bad you didn't turn 67 sooner. ☹ In most cases, your saved capital is restructured in old age so that everything is safe - which makes sense. What's a pity: safe = little/no return anymore. And that, although your portfolio has reached its peak at the beginning of retirement. It would be a pity if you pull out everything right there, it's just starting to be fun! In addition, many contracts have volume-dependent costs, which I don't find cool at all.
5. how does it all make sense?
By not making the contract the usual way. Here's how I do it:
Point 1: An annuity insurance with a late pension start and a shortened contribution payment period. Contributions are only paid until (usually) 67, after which you pay nothing in and the money remains in the portfolio, where it generates a return (of course, you can still shift funds - if you want more security than before). However, your "actual retirement date" is set further back - to 85-87 years (depending on the respective company, sometimes 90 years is possible). This has the following implications: If the courses don't suit you at 67, or you don't need the money right now, you leave it
leave it.
Point 2: You can (free of charge) make partial withdrawals (= payouts) in old age. Several times a year. I.e. you can withdraw exactly as much money as you want/need. Most will not need a payout of 200,000 or more at retirement age. By then, everything is usually paid off and you don't plan to buy any more real estate. This way, you can compensate for financial bottlenecks, take advantage of price jumps, and remain flexible in old age.
6) What about taxes?
If as described under 5. you do not pay out 6-digit sums per year, but only improve your statutory pension to the desired extent. Thus, the tax burden is also much lower. The whole thing plays out as follows:
Not the entire income (100%) is taxed as in the normal depot. The so-called half-income method applies here. This means that only 50% of the income is taxed at the income tax rate applicable at retirement age, rather than 100%. In addition, there is the partial exemption - but for the sake of simplicity we will leave this out of account here.
7. is there an example for this? I don't get it!
Sure, here are a few examples to calculate with (partial exemption and tax-free allowance not taken into account, pension start date 2040 (=FULL taxation of the pension), no inflation consideration, no estimate to increase the basic tax-free allowance, transaction / custody account management fee also without consideration):
Normal custody account: ETF savings plan, completely blunt MSCI-World, 6% return p.a. 200€/month, contribution payment period 37 years, less 0.2%TER/year.
Total paid in: 37 x 12 x 200€ = 88,800€.
Final capital: 300.947€
Interest income: 212.147€
Income share: 212,147/300,947 = 0.705 or 70.5%.
Private pension: MSCI World, 6% p.a., total cost 0.5% for insurance+ETF, 200€/month, premium payment period 37 years.
Sum paid in: 37 x 12 x 200€ = 88.800€.
Final capital: 280.787€
Interest income: 191.987€
Income share: 191.987/280.787 = 0,684 or 68,4%.
Difference final capital: 20.160€
What average payout amount do I assume? I plan (unless otherwise requested) a complete consumption of capital at the age of 90 when the payout starts at the age of 67.
Monthly payout deposit: 1.951€
Monthly payout insurance: 1.773€
This results after taxes as follows:
Deposit: 1.951 - 1.951 x 0,705 x 0,26375 = 1.588,22€ (tax=362,78€)
Pension insurance: Somewhat longer calculation, since we have to assume a tax rate at retirement. The average pension (gross, as of 01/07/2022) is 1620,90€ (yes, actually so little. For your information: for a full pension point you will probably need 43,142€ gross/year in 2023).
We assume in our example a tax rate of 13% (z.v.E. of 25.000€).
1,773€ x 0.5 x 0.684 x 0.13 = 78.83€.
This results as follows: 1.773€ - 1.773€ x 0,5 x 0,684 x 0,13 = 1.694,17€.
Difference pension insurance/deposit: 1,694.77€ - 1,588.22€ = 106.55€/month, or 1,278.60€/year. Difference with term 23 years: 29,407.80€.
Ex. 2Analogous to above, but shortened: As mentioned before, often only term up to 85 years possible, then either payout of remaining capital, or monthly annuity. I would prefer the former, or (due to the presumably lower capital requirement at a high age) a complete consumption of capital at the age of 85.
If the capital is consumed within 18 years, the monthly payout is as follows:
Deposit: 2.176€
Insurance: 2,030€
After tax:
Deposit: 2,176€ - 2,176€ x 0.705 x 0.26375 = 1,771.39€
Insurance: 2.030€ - 2.030€ x 0,5 x 0,684 x 0,13 = 1.939,75€
Difference pension insurance/deposit: 1.939,75€ - 1.771,39€ = 168,36€/month, or 2.020,32€/year. Difference with term 18 years: 36,365.76€.
Ex3Strongly simplified representation of the tax burden:
Deposit: interest income in the amount of 212,147€, tax burden: 212,147 x 0.26375 = 55,953.77€.
Insurance: Interest income of 191.987€, tax burden with annual payout of 13%: 191.987€ x 0,5 x 0,13 = 12.479,16€.
Difference tax burden: 55.953,77€ - 12.479,16€ = 43.474,61€.
8. and this is true?
My examples are model calculations, which should show approximately, how the potential of the insurance lies. How the whole thing looks individually, of course, depends on other factors and must be decided in each individual case. Among other things, I have also disregarded the partial exemption here. Also the tax allowance i.H.v. currently 1.000€. I don't even want to start with future tax advantages, increase of the basic tax allowance and inflation... that is still written in the stars. I assume that most people here will not retire before 2040, so I assume a taxation of the pension in the amount of 10% to the disadvantage of the insurance. In this article, I only want to show how it works in a way that is as understandable as possible. Experience shows that this happens little or not at all in most consultations.
9. conclusion
Personally, I believe that a well-designed private pension insurance makes perfect sense - I have one myself. I recommend a combination of the insurance and a normal deposit as a supplement to the statutory pension. Also makes sense for early withdrawals, which should preferably be made from the normal deposit. Apart from that still home/return properties for those who are interested. What should also not be underestimated: the psychological factor that pension insurance offers. You have in the back of your mind "no, that's for my age, I'm really not going for that!" - With the normal deposit, the threshold for selling is much lower. Please note: GRV of course only applies to employees. How the whole thing is with self-employed & why Rürup is absolutely underestimated, I can explain in another post if interested. That depends, among other things, on the response to my "first work" 😊
If questions arise about the calculations, something is unclear, you want to take me apart with your criticism, just write it to me in the comments! If I should have a mistake somewhere in a calculation, just yell at me, then I correct it as soon as possible. But keep in mind: This should not be a doctoral thesis. I do not intend to create mathematical derivations and proofs here. That is the mass but also clear I hope 😊
Where the numbers come from:
Values for the standard pension, "Pension insurance in figures 2022): https://www.deutsche-rentenversicherung.de/DRV/DE/Experten/Zahlen-und-Fakten/Statistiken-und-Berichte/statistiken-und-berichte_node.html
Calculations: Withdrawal plan, performance, etc.: App "Rechenknecht". By the way, absolute download recommendation! I use it almost daily.
On the subject of taxes @TheAccountant89 hopefully still what to the best, waiting anxiously for it!
@SHDDY and @Finanzios Have also the intention to write a few posts on the subject of insurance. They may tear me here immediately in the air if a mistake appears!
