First of all: The post has become longer than I had originally planned, sorry for that!
I've been toying with the idea of posting something here for a while now... apart from unqualified comments under the painstakingly crafted posts, I've been very quiet in this (mostly) great community so far. 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 (in a rather simplified way) for the community.
But now to the content:
Most people have no desire for insurance. And then in combination with one of those ETF things? Devilish stuff, best to give these things a wide berth!
I'm not like most people, I like insurance - that's probably why I'm an insurance broker. I like to explain to my customers what they have. I like it when people know what they're signing up for and understand the products.
I'm not going to talk about traditional private pensions or any of the other varieties - they're neither fun nor useful. What I would like to explain to you in more detail is the private fund pension. Why do I want that? I'm happy if I can provide some transparency and clarification.
AdditionI design private pensions differently from most of my colleagues in the insurance industry. But more on that later.
1. what is private pension insurance?
In simple terms, a private pension insurance (here: fund pension) is nothing more than a fund/ETF savings plan in the "protective cover" of an insurance policy. In other words, you save in an ETF with monthly contributions. This is not new territory for anyone here - almost everyone here has ETF savings plans.
2. difference to the ETF savings plan
In contrast to a normal ETF savings plan, you generate lower returns here - the insurance company also wants to earn something. However, you do have tax advantages in the payout phase. However, you only receive these tax advantages under two conditions: Contract term min. 12 years, payout not before the age of 62.
In addition, monthly payouts are subject to deferred taxation of the income portion (depending on age). As I design the pensions in a somewhat unusual way, only part 1 is important for us, i.e. a minimum term of 12 years and 62 years of age.
3. what payout options do I have in old age?
Option 1: Lifelong pension. X amount is paid each month. Do I like that? No. Why don't I like it? Because it usually takes 25+ years for the monthly pension payments to pay out the value of your portfolio at the age of 67.
paid out. No further information is needed.
Option 2: Full capital payout. Taxation according to the so-called "half-income method". This means that you have to pay tax on half of your income. You all know the 26.375% (capital gains tax + solidarity surcharge) - that doesn't apply here. Your individual income tax rate at retirement age is relevant here, which for most of us is below this 26.375%. Sounds better, but I still don't really like it - it's still a "decent" amount of tax if you get paid a large sum.
4. what bothers me about most pension insurance policies
Imagine you've 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 fallen considerably. Too bad you didn't turn 67 earlier. ☹ In most cases, your saved capital is reallocated in old age so that everything is safe - which makes perfect sense. Which is a shame: safe = little/no return. Even though your portfolio has reached its highest level at the start of your retirement. It would be a shame if you pulled everything out right there, it's only now that it's really 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 structuring the contract as usual. I do it as follows:
Point 1: A pension insurance policy with a late start date and a shorter contribution payment period. Contributions are only paid until (usually) 67, after which you pay nothing more and the money remains in the portfolio, where it generates returns (you can of course still reallocate - if you want more security than before). However, your "actual start of retirement" is set further back - to 85-87 years (depending on the respective company, sometimes 90 years is also possible). This has the following consequences: If the rates don't suit you at 67, or you don't need the money right now, you leave it
leave it.
Point 2: You can make (free) partial withdrawals (= payouts) in old age. Several times a year. This means you can pay out exactly as much money as you want/need. Most people will not need a payout of 200,000 or more when they retire. By then, everything is usually paid off and you are no longer planning to buy property. This allows you to compensate for financial bottlenecks, take advantage of price jumps and remain flexible in old age.
6. what about taxes then?
If, as described under 5, you don't pay yourself 6-figure sums a year, but only improve your statutory pension to the desired extent. This also reduces the tax burden considerably. The whole thing works as follows:
The entire income (100%) is not taxed as in the normal portfolio. The so-called half-income method applies here. This means that not 100% of the income is taxed, but only 50% at the income tax rate applicable at retirement age. There is also the partial exemption - but for the sake of simplicity, we will leave this out here.
7. is there an example of this? I don't get it!
Sure, here are a few examples to help you do the math (partial exemption and tax-free amount not taken into account, pension starts in 2040 (= FULL taxation of the pension), no inflation taken into account, no estimate for increasing the basic tax-free amount, transaction/deposit management fee also not taken into account):
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.
Amount 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 costs of 0.5% for insurance+ETF, €200/month, contribution payment period 37 years.
Amount 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 in final capital: €20,160
What average payout amount do I assume? I am planning (unless otherwise requested) a complete consumption of capital at the age of 90 with payment starting at the age of 67.
Monthly withdrawal from custody account: €1,951
Monthly insurance payout: €1,773
This results in the following after taxes:
Deposit1,951 - 1,951 x 0.705 x 0.26375 = 1,588.22€ (tax=362.78€)
Pension insuranceSlightly longer calculation, as we have to assume a tax rate in old age. The average pension (gross, as of 01.07.2022) is €1620.90 (yes, actually that little. For information: for a full pension point in 2023 you will probably need €43,142 gross/year).
In our example, we assume a tax rate of 13% (e.g. of €25,000).
1,773 x 0.5 x 0.684 x 0.13 = €78.83
This results in the following: 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 a term of 23 years: €29,407.80.
Example 2Analogous to the above, but shortened: As mentioned above, often only a term of up to 85 years is possible, then either payment of the remaining capital or monthly annuity. I would prefer the former, or (due to the presumably lower capital requirement in old age) a complete capital consumption at the age of 85.
If the capital is used up 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 for a term of 18 years: €36,365.76
Example 3Highly simplified representation of the tax burden:
Deposit: Interest income 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 in tax burden: €55,953.77 - €12,479.16 = €43,474.61
8. and that is correct?
My examples are model calculations that are intended to show approximately what the potential of the insurance is. How the whole thing looks from an individual point of view naturally depends on other factors and must be decided on a case-by-case basis. Among other things, I have also disregarded the partial exemption here. Likewise the tax-free allowance of currently €1,000. I won't even start on future tax benefits, increasing the basic tax-free allowance and inflation... because that's still written in the stars. I suspect that most people here won't retire before 2040, so I'm assuming that the pension will be taxed at 10% to the detriment of the insurance company. My aim in this article is simply to explain how it works as clearly as possible. Experience shows that this happens little or not at all in most consultations.
9. conclusion
I personally believe that a well-designed private pension insurance policy makes perfect sense - I have one myself. I recommend a combination of the insurance and a normal custody account as a supplement to the statutory pension. This also makes sense for early payouts, which should preferably be made from the normal custody account. Apart from that, home ownership/investment properties for those who are interested. Another thing that should not be underestimated is the psychological factor that pension insurance offers. You have in the back of your mind "no, that's for my old age, I'm really not going to go there!" - With the normal portfolio, the threshold for selling is much lower. Please note: GRV naturally only applies to employees. If you are interested, I can explain in another article what the situation is like for the self-employed and why Rürup is completely underestimated. That depends, among other things, on the response to my "first work" 😊
If you have any questions about the calculations, if anything is unclear or if you would like to criticize me, just let me know in the comments! If I have a mistake in a calculation somewhere, just shout at me and I'll correct it as quickly as possible. But keep in mind: This is not supposed to be a doctoral thesis. I do not intend to create mathematical derivations and proofs here. But I hope that's clear to the masses 😊
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 every day.
On the subject of taxes @TheAccountant89 hopefully something to the best, I'm looking forward to it!
@SHDDY and @Finanzios also intend to write a few posts on the subject of insurance. They can tear me apart as soon as a mistake appears!
