Due to the low interest rates on the capital markets, it will in many cases no longer be possible to achieve positive real returns in the traditional external implementation channels of occupational pension schemes (bAV) in accordance with the German Company Pensions Act (BetrAVG). Thank God there are viable alternatives.
In the case of tax-subsidised or allowance-subsidised capital investments for old-age provision in the company or private sector (e.g. occupational pension scheme, Riester, basic pension), everything is taxable at the end – only in the case of the basic pension is this achieved in full only by the start of the pension in 2040. In the case of a corresponding private pension insurance from taxed income, the income up to the start of the pension is tax-free and the income from the start of the pension (because the consumption of capital itself must remain tax-free) is only taxable with the small income share.
Male policyholders will be disadvantaged by the EU-wide unisex tariffs from 2013 – but they can expect up to more than 20% higher pension benefits if they choose an insurer outside the EU, for example by taking out an annuity policy directly in Switzerland, in euros or in safe Swiss francs, without an intermediary.
Furthermore, annuities are not, in principle, investments but hedges against the risk of longevity. Until you have to hedge this, you don’t need them, you can invest capital elsewhere for a higher return.
Why life insurers are chronically low-yielding
As investors, German life insurers are at a disadvantage compared to any private investor. This is because they borrow the money against the guaranteed interest rate (which is still a good 3% on average, so very expensive) and have to make a balance sheet every year. The hundreds of billions of euros in actuarial reserves are in fact oppressive debts – which is why they are on the liabilities side. Therefore, they can hardly risk anything and cannot simply sit out a bear market like a private investor – rather, they could simply become insolvent due to their debts. As a result, they can only invest to a very limited extent in higher-yielding but riskier investments such as equities or real estate, but instead rely on the low interest from fixed-interest securities. However, even if insurers invest the assets created by policyholders’ premium payments predominantly in fixed-interest securities, this is not without risk, even in the case of German government bonds.
An alternative to annuity insurance – also with coverage of the biometric longevity risk – is the life annuity according to the German Civil Code, e.g. as consideration of a sale of a business, a sale of real estate or another transfer of assets – but it can also simply be bought for money from private individuals, companies or foundations. It is only taxable at the low rate of return and is not usually subject to social security contributions.
Avoidance of the GKV notification
Those who want to avoid compulsory statutory health insurance can ensure that there is no GKV membership, for example by moving abroad, or by switching to private health insurance. If the assets of the DP are invested with a Swiss insurer, for example, there is no obligation to notify this insurer. If a German lives in Austria but works in Liechtenstein, there is also no statutory health insurance obligation – in many cases there is even the option for a considerably reduced taxation of the income.
Compensation of the occupational pension by the employer
In addition, employees have the option of simply cancelling the occupational pension commitment – with retroactive effect – in agreement with the employer. In return, an agreement can be reached on a severance payment for the loss of the job – it would only be detrimental if this were structured as a severance payment for the occupational pension scheme. For the design of whether and the amount of social security and wage tax, it is important to optimally design the time of the inflow – in individual cases, for example, the income tax will be reduced by the so-called one-fifth rule and social security contributions will not be incurred at all. Of course, the parties could also seek the “gift” of a capital investment with a pecuniary benefit. The so-called “prohibition of severance payments” of the BetrAVG does not stand in the way of this in many cases – because one can always waive an occupational pension and severance payments for other reasons are not prohibited.
Employee share ownership and BGB annuities
Subsidised employee capital participation is often more favourable than occupational pension schemes, and not only from the point of view of returns. Retirement assets can be built up by committing the capital over the long term. At the start of the pension, this capital can then be transferred, for example, to the employer or to a foundation set up specifically for this purpose, for which a BGB annuity is promised. Since this is not an occupational pension, it is only taxable at the low rate of return and is generally not subject to social security contributions. Of course, an amount received from a severance payment can also be converted in this way into such an annuity outside the occupational pension scheme.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.schlossallee-Schwaben.de (Issue 2-2014, March-April 2014)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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