Doubling of the tax burden due to private and occupational pensions

– When Social security and tax administration charge the citizen twice ? –

The Regional Social Court of Rhineland-Palatinate (LSG Rheinland-Pfalz, judgement of 03.12.2015, ref. L 5 KR 84/15) ruled that when reinvesting the capital benefit of a company direct insurance by purchasing a private immediate annuity, compulsory contributions to the statutory health (GKV) and long-term care insurance are incurred twice if the pensioners are voluntarily insured in the GKV: Once for the capital benefit received, and another time for the pension financed from it.

If the lump-sum life insurance payment were invested in the capital market, however, only the interest received would be subject to contributions, whereas in the case of a regular withdrawal plan all payouts would also be subject to contributions.

Voluntarily insured pay more

Only who was in the second half of the professional time, at least 90% of the months a member in the GKV (no matter whether voluntarily insured or compulsorily insured), becomes as a social pensioner to the obligation member in the health insurance of the pensioners (KVdR): Thus he pays contributions on legal pensions, achievements of the operational old age pension (bAV) including such Riesterrenten, pensions of civil servants, payments of the pension funds, as well as earned income.

Voluntarily insured persons in the GKV also pay contributions on income from rent, from capital assets, as well as private pensions (e.g. Rürup) including (private) Riester pensions.

Only on application, also for PKV-insured persons, the statutory pension insurance (DRV) pays a subsidy for the KV costs of the pensioner in the maximum amount of half of the KV contribution.

Double pension taxation due to the Retirement Income Act?

The Federal Constitutional Court (BVerfG, decision of 18.06.2006, file no. 2 BvR 2194/99) has already ruled that there is no principle of halving income tax and trade tax, which means that the legislature is not obliged to limit the tax burden to 50%.

The Retirement Income Act (AltEinkG) has been in force since 2005, according to which 60% (rising by 2% annually – 2016: 82%) of up to EUR 20,000 (2016: up to EUR 22,766) paid into statutory pensions can be deducted for tax purposes as special expenses.

Since 2005, all pensions starting in 2005 and before are taxable at 50%. Since 2006, the tax-free portion has been decreasing by 2% p.a.. (2016: 38%) to 20% in 2020 – thereafter it will decrease by 1% p.a. so that 100% will be taxable in 2040. However, pension increases have been fully taxable since 2005.

Avoiding double taxation means that the tax-free pensions paid out should not be lower than the taxed contributions, calculated over the lifetime of typical individual insured persons. So it is clear that with 100% (except for the small pensioner allowance) taxation from 2040 this could never be the case if contributions were taxed. However, the target is well met if, as has been done, the tax exemption of health insurance contributions paid by pensions is also taken into account. Of course, this was known and it has also been noted that, to a small extent, for some pension cohorts, this does not quite add up. Furthermore, in less typical individual cases, some of which have already been dealt with by the BVerfG, which, however, allowed a typified view of the legislator.

In general, it appears more promising to attack the taxation (also) of pensions “due to a structural enforcement deficit or unconstitutional erroneous taxation” (cf. BFH, judgement of 24 April 2013, ref. II R 17/10), after the overwhelming part of the domestic value creation of corporations remains de facto – legally and/or illegally – almost tax-free.

Voluntarily insured persons often need more design advice

If you are to receive EUR 120,000 from a direct insurance policy as a voluntarily KV-insured person, you must pay 1/120th = EUR 1,000 per month. pay full KV and PV contributions for 10 years, approx. 180 EUR per month.

If you don’t have the money paid out, but use it for an annuity that starts there immediately – e.g. with a monthly pension. 500 EUR pension – must pay on this pension in addition GKV contributions (thus e.g. again approximately 90 EUR), additionally, this even lifelong!

Contributions are not only levied on the share of earnings, but on the entire pension, because according to the German Social Code (SGB) V, the tax classification is of no interest and even the consumption of capital is subject to contributions.

Only if an annuity option is used in good time in the identical insurance contract is social insurance payable not on the EUR 120,000 capital but only on the annuity paid.

GKV obligation also for bank payout plans?

There are now suggestions that it would be better to invest the money in securities instead of in a pension, because then only the interest would be subject to contributions, but not withdrawals of capital. On closer examination, this is often probably a legal error: for example, in the case of a bank payout plan over 20 years of regular withdrawals for living expenses, the entire amount – interest and return of capital – is just as subject to contributions, just as in the case of a pension. Not only with Riester funds or Riester bank savings plans.

The aim of the contribution system is to take into account the entire economic performance, so that only irregular capital withdrawals can remain exempt from contributions. In individual cases, however, irregular withdrawals or even one-off withdrawals of capital may also be subject to contributions if they are (or can be) used for living expenses. Even those who only “save” for old age with gold bars or a stamp collection must contribute the proceeds from the successive sales – to possibly finance their living expenses. This is because, according to the statutory wording, it concerns “income and funds which are or may be consumed for subsistence purposes, irrespective of their tax treatment”.

Thus, in principle, it does not matter how the EUR 120,000 from the direct insurance is invested. After the inflow at the end of the direct insurance was used for the assessment of the contribution, every income including the income from the direct insurance is also taken into account for the voluntarily insured pensioner. Capital reflux almost without exception from any investment of the 120,000 EUR additionally to contribute, §§ 299, 240 SGB V.

Only if the 120,000 EUR are completely “spent”, nothing additional is to be contributed. The term “funds” next to “income” could suggest that even those who put the EUR 120,000 under their pillow and take EUR 500 of these funds each month must pay additional contributions. The fact that this is not income for tax purposes is irrelevant under SGB V.

Exemption from contributions to voluntary GKV insurance?

Profits from private sales transactions (e.g. securities, real estate, rights) are always subject to contributions. The same applies to income in the case of partial retirement during the release phase of the shareholder-managing director. However, inheritances, lottery winnings, maintenance to spouses who are not (yet) separated, loans and withdrawals from business assets remain non-contributory, which allows for individual arrangements.

Avoid voluntary GKV membership?

Anyone who works beyond the standard retirement age – without claiming a pension – is credited with a monthly increase in pension of 0.5%, as well as with further payment of compulsory contributions. This results in a pension increase of 17% for two years of continued work under average circumstances. If you continue to have more than one mini-job as a pensioner anyway, you regularly remain subject to compulsory insurance in the GKV without having to take out voluntary insurance – this can save you considerable health insurance contributions.

A frequent option for increasing the pension: an early pension with a lifelong deduction can be converted into a later full pension without an additional earnings limit and deduction by earning sufficient additional income (also as a self-employed person) before reaching the standard retirement age. As a result of the additional earnings, the early pension is no longer applicable and can then be applied for again later as a standard old-age pension without deductions.

Thanks to the Nahles pension without deductions, earlier early pensions with deductions can be converted into early pensions without deductions even at short notice before the standard retirement age.

In addition, self-employed persons can still increase their pension noticeably in the last few years – until they apply again – by voluntarily paying in up to the maximum contribution.

Since then, if a pension is already being drawn, contributions to pension and unemployment insurance are no longer payable – as is also frequently the case with the settlement of an occupational pension scheme, even before the start of the pension. In the case of compulsorily insured persons in the GKV, this severance pay can be used to optimise future contributions by investing it in such a way that it results in future GKV contribution-free income, for example from renting or from capital assets.

Optimise private pension provision via life insurance?

On average, Germans own more than one life insurance policy, with the prospect of a lump-sum settlement or annuity payment. Increasingly, beneficiaries are finding that the convenient way of accumulating wealth through life insurance means getting back (often not just nominally) less than was previously paid in.

To hedge the longevity risk, it would have been sufficient to agree on a considerably cheaper pension insurance with payout starting on the 80th birthday – and to invest the remaining assets in an optimised manner and, for example, in a tangible asset.

Tax optimisation with an annuity from the foundation

In individual cases, a foundation transaction combined with the reservation of a life annuity may also be considered for tax reduction or succession planning purposes. A charitable endowment contribution less the equivalent value of the reserved life annuity, which is low for tax purposes under the Valuation Act, can be claimed as a charitable endowment contribution for tax purposes spread over 10 years as desired. The annuity paid by the foundation, on the other hand, is only taxable at the income share. In this way, together with the so-called 1/5th rule, taxes on one-off payments from direct insurance or severance payments can be reduced to zero. This more than compensates for the burden of health insurance contributions.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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