Unit-linked pension insurance can be the perfect retirement plan for you. Lifetime annuity payments combined with the security of an insurer and the returns that are possible in the stock market. Predictable old-age provision with high potential returns – if you do it right! In this expert article you will find out how exactly a unit-linked pension insurance works, what tax backgrounds you need to know and what you should definitely consider when taking out unit-linked pension insurance.
A unit-linked pension insurance combines the advantages of a share / fund savings plan with the advantages of a private pension insurance. By investing monthly contributions, for example in inexpensive ETFs (Exchange Traded Funds) in the form of insurance, high returns are possible on the one hand, but on the other hand you can also enjoy the advantages that a private pension insurance brings with it.
In contrast to the so-called “classic” private pension insurance, investments are made on the stock market, as already mentioned. There is no guaranteed interest here, as you might know from the contracts of mum and dad or grandma and grandpa. That also makes sense, because currently (2020) the guaranteed interest rate (discount rate) is just 0.9%. No retirement provision can be built up with this. The interest rate is even below the average inflation rate of around 2.5%. With a unit-linked annuity insurance, however, returns of 4-6% are absolutely realistic.
Long-term investment and broad diversification
You also bear the risk of the stock market, i.e. price fluctuations and (short-term) price losses. However, this is not a problem for a long-term investment, as the markets (also viewed historically) always go up.
However, if you spread your risk, for example through a global ETF or stock index, then you will also minimize fluctuations here.
In addition, good insurers also offer you what is known as process management in the years before you retire. This means that your money will be reallocated in safe investments (e.g. money market funds) approx. 5-7 years before your desired retirement date. This eliminates the risk that a large part of your capital will be destroyed by a stock market crash shortly before you retire. If that were the case, you would not have enough time to make up for it by the time you retire.
In short: You pay a monthly contribution of your choice (which you can adjust at any time). Your money is invested in the stock markets. And when you retire, you will receive a lifelong pension.
The pension factor – the Achilles tendon of your pension insurance
The amount of the monthly payments is based on the amount of capital saved and the so-called pension factor. This is stated per 10,000 euros of capital saved.
This means that if your (guaranteed) pension factor is 25 euros and you have 100,000 euros in your unit-linked pension insurance at the start of retirement, this would result in a monthly pension payment of 250 euros.
The pension factor must absolutely be guaranteed – 100%. This is immensely important. Otherwise the insurer can reduce this retrospectively. And if he does this, then of course your monthly pension will also be reduced.
Example of a guaranteed pension factor:
Furthermore, your pension factor should be as high as possible. This will vary depending on your current age, because it is calculated from the current mortality tables of the German Actuars Association and your age naturally plays a decisive role here.
Possible with or without a premium guarantee
Depending on the type of risk, a unit-linked pension insurance can also receive a contribution guarantee. For example, if your tariff includes a 100% contribution guarantee, this means that at least the contributions you have made will be available to you later at the start of retirement. But be careful: What sounds good at first has its pitfalls, because guarantees of this type always cost money. Translated, this means that the higher your premium guarantee, the less return your contract can generate, as the insurer has to invest a large part of your premiums very securely (current discount rate 2020: 0.9%). Therefore, in our opinion, this is not recommended. But the important thing is that you know that this option exists.
Smart precautions – even in a crash | Cost-average effect
Classic pension insurance vs. unit-linked pension insurance
As already briefly mentioned, classic pension insurance or life insurance and unit-linked pension insurance differ in the form of the investment. Unit-linked annuities invest your money primarily in the stock market. With classic pension insurance, colloquially also simply called life insurance (which leads to an enormous amount of confusion, especially in the media) there is always a fixed, previously promised guaranteed interest rate. With this your savings contributions will earn interest. That is why there is no pension factor here. There are no fund assets that have to be retired. Just a guaranteed interest rate. Relatively simple. And relatively pointless.
Classic life insurance is not recommended
The currently applicable discount rate / guaranteed rate is 0.9% (2020). It can be assumed that this will be further reduced. If you still take out classic pension insurance today, you really don’t need to be a math genius to find out that you can just put your money under your pillow. Because the costs of insurance and inflation are not even considered here.
There used to be attractive interest rates of 4% and more. A classic pension insurance was definitely worth it. But not today in times of low interest rates.
That is why the recommendation can only be very clear: fund-linked pension insurance with low costs and broadly diversified investments.
What are the advantages of unit-linked pension insurance?
The greatest advantage of a unit-linked pension insurance, especially in comparison with a pure share or ETF savings plan, is the lifelong annuity that the insurer guarantees you. In other words, no matter how old you get and no matter how much capital has already been paid out: you will always receive your pension payments for life. And only this type of retirement provision can really be planned for you as a (future) retiree. You simply cannot later pay for your pension from a pure ETF savings plan. That is simply not possible. You would then have to calculate your monthly payments yourself and assume a fictitious death date from yourself so that you can somehow determine the amount of the monthly payments. And even then, there is still the risk that you will live longer than planned and then your money will be used up.
Lifetime annuity payments
A unit-linked pension scheme, on the other hand, pays until you die. It does not matter whether only € 100,000 was available at the start of retirement and these would then be used up at some point. This is the enormous and unique benefit of a private unit-linked pension insurance.
A good unit-linked pension insurance is also extremely flexible. You can increase or decrease your contribution at any time. You can also make additional payments and withdrawals. Even changing your fund investment free of charge is included with good providers. You can also determine the start of the pension payments as required. This means that the unit-linked pension insurance – if taken out with a top provider – is a really very flexible product for your retirement provision.
There is also an automatic process management system (with good insurers). Here your money will be shifted to “safe havens” shortly before you retire. This means that a few years before you retire you can be sure that your capital will not be affected by a possible stock market crash shortly before you retire.
Unfortunately, it is often forgotten that you not only have to think about yourself, but also about any bereaved. I would like to address two points here:
Pension guarantee period
Your surviving dependents will continue to receive your pension payments. This can be determined via a pension guarantee period. For example, if the pension guarantee period in your contract is 15 years and you have already received your pension payments for 5 years and then you die, your surviving dependents will receive pension payments for a further 10 years
“Carefree old-age provision”
With this term I would like to make it clear that your surviving dependents do not have to worry about anything when you die – regardless of whether you retire after or before you retire. The insurer manages everything else here. He continues to pay pension benefits or pays out the capital saved up to now to your relatives. That is why it is always very dangerous when only one person in a family deals with finances and assumes that you will always be there yourself to manage everything. What happens when that person is no longer there? Who continues to manage the complex equity or ETF portfolio? Unfortunately, far too few people think of that …
In addition, a unit-linked pension insurance is treated extremely favorably when paying out the pension or the capital. There is relatively little tax payable when paying a monthly pension. There is also a tax advantage for you when choosing the one-time lump-sum payment. You only have to pay tax on half of your profits here. More about this under the point Taxation and tax benefits .
What criteria must a good unit-linked pension insurance meet?
In order for you to really take out very good unit-linked pension insurance, it must meet some important criteria. We have listed these for you below.
High, guaranteed pension factor
As you have already learned, a high and guaranteed pension factor is essential for a good unit-linked pension insurance. If your pension factor is not guaranteed, the insurer can lower it at any time. And this will automatically lower your subsequent monthly pension payments. You absolutely have to avoid that.
Improvement of the pension factor
On the other hand, there are also insurers who guarantee you a better pension factor than the contractually stipulated one, should the currently valid pension factor be higher at the start of your retirement. You should also have this component in your contract.
Yes. Insurance costs money. Administration, management of your system, etc. You also get the corresponding services for this. Lifetime annuity payments. Predictable old-age provision. Process management, etc. And there are actually insurers with extremely low actual costs. Because the lower the costs, the higher your chances of returns, of course. By investing in low-cost ETFs, for example, the fund costs of the contract can be reduced again.
Broadly scattered plant
A unit-linked pension insurance is a long-term investment with terms of 30, 40 or even more years. Nevertheless, you should spread your risk widely. You can do this, for example, with a broad equity fund or ETF. They then invest, for example, in various companies around the world and not just in the DAX.
Arrange process management
I’ve mentioned this a few times now. Your contract should include automatic process management. This eliminates the risk of capital destruction shortly before retirement due to a stock market crash. Your money has already been shifted into safe investments.
Financially strong insurer
And last but not least, you should of course take out your private pension insurance with a large and financially strong insurer. It must be ensured that this company will also exist in 50, 60 or 70 years. You should not choose an insurer that is too small or a “StartUp”. The investment horizon is simply too long and your retirement provision is too important for that.
Taxation and tax benefits
Of course, we also have to discuss the taxation of a unit-linked pension insurance in the payout phase, as well as tax advantages that a unit-linked pension insurance brings with it.
During the premium payment
Contributions to unit-linked pension insurance, such as a Riester pension, cannot be deducted for tax purposes. Still, there are some tax benefits that are extremely convenient. These depend on whether you want to have your pension insurance paid out later as a monthly pension or whether you want to call up the entire capital at once.
Payment as a lifelong annuity (life annuity)
Here your age at the start of retirement determines what percentage of the unit-linked pension insurance is taxed (so-called income share). At 67, for example, it would be 17 percent and at 69, 15 percent. This does not mean that you have to pay 17% tax on your pension insurance if you retire at the age of 67, but that your personal tax rate is due on only 17% of the pension payment. This is also called income share taxation.
Payment of the entire capital at the start of retirement
If your private pension insurance has run for at least twelve years and did not end before the age of 63, you only have to pay tax on 50% of the income generated. Your personal income tax rate also applies here. In other words: you only have to pay tax on half of your profits and that only with your “pensioner tax rate”. No capital gains tax is payable on full profits, as would be the case with a pure equity savings plan, for example. That makes a huge difference in terms of the tax burden. This is only due if you have not met the above-mentioned requirements with your contract (at least 12 years duration and payment not before the age of 63).
Who is a fund pension suitable for?
For many people, unit-linked pension insurance is probably the perfect product for long-term, predictable old-age provision. Very good potential returns combined with a lifelong pension.
The earlier you start here, the more the compound interest effect comes into play for you, as the profits generated are reinvested directly in the stock markets. A 20-year-old today therefore has to save much less per month than a 30-year-old today in order to have the same capital at 67.
Long investment horizon
If you are going to retire in 10 years, unit-linked pension insurance will no longer be really attractive to you. The term is simply too short for that. The longer the investment horizon, the better the product can show its strengths.
Retirement vs. Wealth accumulation
Yes, old-age provision and wealth accumulation are two different topics. Both are happily thrown into the same pot. That is of course not correct. If you only want to build up your wealth, e.g. you have a clear savings goal like a car or house, then a unit-linked pension insurance is not suitable for this. The focus here is clearly on pensions.
A pure equity or ETF savings plan then makes more sense for pure asset accumulation. This in turn makes little sense for pure old-age provision.
Where should you take out unit-linked pension insurance?
If you’ve read this far, you’ve probably found that private unit-linked pension insurance is a relatively complex product. There are many individual factors to look out for. If only one of these points does not fit, your entire retirement provision can go wrong.
Unlike car insurance or liability insurance, unit-linked pension insurance cannot simply be concluded with a few quick clicks on the Internet.
Get an expert with you
It is therefore advisable to get a competent advisor on board who will navigate you through the tariff and insurance jungle. Your advisor should do that too independently can act and not only offer 1-3 companies.
Should you still be looking for one Retirement Experts then you are very welcome to be one free online advice book with us (there may currently be a little waiting time for new appointments).
With us you can be sure that we will give you a optimal retirement provision will help. But our previous customers can confirm this even better than we can:
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