Faulty design in Rürup and occupational disability pensions end with welfare application

Two new decisions of the Federal Court of Justice (BGH) of 03.12.2009 (ref. IX ZR 189/08) and of 15.07.2010 (ref. IX ZR 132/09) show that occupational disability pensions may also be attachable. The reason for this is mostly to be found in a faulty design by insurance companies and their intermediaries. Later necessary social welfare is then pre-programmed with it!

In case of doubt only the subsistence minimum remains unattachable

Well-insured occupational disability (UI) results in an annuity payment from an insurer. Such private pensions are only “conditionally attachable”. According to § 850 b I No.1 ZPO, this also applies if the insurer only begins its payments years after the occurrence of the BU and first serves the arrears. This is because customers usually have to struggle for a long time to get payment before they are successful – around one in three benefit cases ends up in court.

In the case of conditionally attachable BU pensions, any normal creditor, as well as their own insolvency administrator, can apply to the court for an equitable decision as to what amount thereof is attachable. It is recognised that the debtor and insurance customer must not become in need of social assistance as a result – the subsistence level is therefore left. This rule applies equally to employees, civil servants and the self-employed. However, if the debtor has other income, the occupational disability pension may end up being fully attachable.

Insurance pensions of self-employed persons and freelancers fall into the insolvency estate

In principle, all attachable pensions fall within the insolvency estate, in particular those relating to old-age pensions, as the Federal Court of Justice (BGH) has already ruled in its decision of 15 November 2007 (Ref. IX ZB 34/06). If the insurance claims are attachable, the objection that there is a special hardship according to § 765a ZPO (German Code of Civil Procedure), because one would become a social welfare recipient as a result, is regularly no longer helpful. Only old-age pensions of civil servants and employees as well as employees similar to employees are protected against seizure “like earned income” – but not unseizable, because the pension often remains only partially protected against seizure, at the level of the subsistence minimum.

Typical design errors in occupational disability pensions lead to garnishability

The limited garnishment protection for a so-called garnishment-protected retirement plan of self-employed persons under § 851 c of the Code of Civil Procedure requires, among other things, that it be a substantially constant “benefit at regular intervals for life.” An isolated occupational disability insurance policy, with a typically agreed final age for benefits, i.e. without an old-age pension commencing after the end of the occupational disability pension, is therefore not protected by § 851c ZPO.

However, Rüruprenten are also not protected against attachment by § 851 c ZPO if the benefits do not remain essentially the same, e.g. because a higher occupational disability pension than the old-age pension is insured. There is also no protection in cases where the occupational disability pension ends and is followed months or years later by the old-age pension.

This is quite typical of contracts with gaps in benefits, often with (renewed) obligation to pay premiums in a phase after the end of the occupational disability pension and before the start of the old-age pension.

A contract that provides for a lump-sum option, e.g. for the old-age pension, is also “fatal” for garnishment protection for self-employed persons, because this means that the already limited garnishment protection of § 851c of the Code of Civil Procedure also ceases to apply to the occupational disability pension that is paid upstream in time.

Tax debts due to garnishment of the BU pension

The BU pension insured under Rürup is taxable for the most part at the personal income tax rate. However, this is of no interest to anyone at first – the occupational disability pension is first seized gross without tax deduction. However, although the debtor can no longer dispose of his occupational disability pension, he still has to pay tax on it at the tax office. What he will pay those taxes out of when everything above the welfare rate is garnished is left to his ingenuity. If necessary, the tax office will join the ranks of the creditors and also help itself from the BU pension.

Ways out for the self-employed (tradesmen and freelancers)

Self-employed persons can, for example, pay into the statutory pension insurance or a suitable pension scheme in order to build up garnishment-protected pension entitlements in the savings phase, §§ 7 SGB VI, 54 IV SGB I.

With life insurance companies, on the other hand, self-employed persons can only save between 2,000 and 9,000 euros per year (depending on age) in a way that protects them from seizure. In the highest age bracket, one may only have accumulated a total sum of 238,000 Euros, § 851c ZPO. In practice, this means at best a “Rürup small pension” to cover the subsistence minimum, be it as an occupational disability pension and/or a private old-age pension. So in the end only the social welfare office is to be relieved – nothing else – thus also no benefit for self-employed persons – wanted the legislator.

Even more insignificant is the possibility of building up an attachment-free Riester pension, because in this respect only the parts of the premiums actually subsidised by allowances are protected, which in practice can at best mean a very small pension with questionable profitability in old age.

In the payout phase, these payments can regularly be seized like earned income, so that the single person will currently only have 990 euros per month left in the insolvency from all income that can be seized like earned income. In order to shorten this phase to one or two years, insolvency proceedings abroad are sometimes an option.

Furthermore, it can be an option to legally secure assets abroad – by means of a few possible arrangements – effectively against the access of creditors and insolvency administrators.

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