Working Life > Retirement Arrangements > Pension Insurance > Private Pension Insurance

Private Pension Insurance

Definition, Explanation

For pension insurance, there are the two alternatives of statutory pension insurance and private pension insurance, in Germany. Private pension insurance is a benefit paid by private life insurance. Thus, for employees, it complements the old-age provisions of statutory pension insurance and company old-age provision. For self-employed and Freiberufliche, it is one way of obtaining any pension entitlement, for old age, at all.

Prior health examination is not required, since no death cover is included.

Private pension insurance is not only a good way of caring for one’s old-age provision, but is also a tax-less form of investment with which one can secure one’s real estate financing.

Kinds of pension insurances:

• Instantly starting pension, or instant pension
  After once a certain sum has been paid, say 50,000 Euros, one is paid a monthly pension for one’s lifetime
• Delayed starting pension, or delayed pension
  One pays in contributions over several years. Once one reaches the age of 60, or 65, one is paid either a one-time lump sum or a monthly-guaranteed pension until the end of one’s life (policy with lump sum option)

Amount of pension benefit payments:

• Constant pension
• Dynamic pension, being in the beginning only the guaranteed amounts with a rate of increase of 2 to 5 %, depending on the surpluses generated
• Partly dynamic pension, being benefits above guaranteed level with lower increase rates than for dynamic pension

For instant pension, frequently used are severance payments, or cash-value life insurances, or direct insurances, or saved assets.

Tax:

If you obtain benefits from the insurance at the age of 65, then 18% of them will be paid as tax. The earlier you retire, the higher the rate will be. The tax rate will refer to the so-called “Ertragsteil”, being the interest yielded by your contributions.

Tips, Checklist

• Most insurances are quite rigid regarding benefits, contribution payments and pay-outs, and hardly allow any changes after contracting. Therefore, when you compare different insurances, also mind their degree of flexibility. Most important, here, is that you will be allowed to postpone the starting date of benefits being paid to you
• Cancelling the contract is only possible with accepting a financial loss. Normally, though, you are allowed to pause your paying of contributions
• Use opportunities of being supported by Riester-pension (“Riester-Rente”)
• Comparing different insurances, pay special attention to the one-time lump sum, or the monthly benefits, that will be paid to you
• Distinguish guaranteed benefits and benefits based on surplus-shares. The latter can only be promised by estimation and is not reliable
• Consider that, for the first 2 to 3 years after you have contracted the insurance, your contributions will be used for financing commissions and administrative expenses. This means that effectively, only 80 per cent, roughly, of your contributions will be yielding interest at all
• For private pension insurance, you do not have to pay any health- or nursing care insurance contributions
• Consider whether instead of instant pension, the alternative of bank pay-out plans might be better suited. This capital will not be lost in case of death
• Contract a contribution refund while you are in the saving phase. Then the money will not be lost in case of your death but will be transferred to your heirs
• Contract a pension guarantee period for the benefits-paid phase. Then the insurance will have to pay benefits for a defined period of time, potentially to your heirs
• Financial securing of surviving members of your family in case of your death is not advisable to do by pension insurance. Better suited, here, is temporary life insurance
• Consider when you have your contribution level increased, there will be new contracting expenses to pay for salesman commission
• Contract a private pension insurance the earliest possible. Then your monthly contributions will be the lowest
• Mind an inflation rate of 3 to 4 per cent a year. You should take it into account when making your choice of the amounts to be paid out
• Annual contribution totals of 2,000 to 9,000 Euros (depending on your age) are protected against distraint

Information Sources

• Tarifcheck24 - Rentenversicherung

Last update: 03/30/2010