*by Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer for Civil and Insurance Law (BA Heidenheim, Univ. of Cooperative Education), (www.fiala.de) and Dipl.-.Math. Peter A. Schramm, expert for actuarial mathematics (Diethardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de)
There are things that seem unbelievable to most people who have not studied mathematics.
(Archimedes, mathematician, engineer, technical advisor to the tyrants of Syracuse)
The new law, which was discussed by the German Bundestag in its first reading on 11 May 2006 and which is intended in particular to secure private old-age provision for the self-employed, came into force on 31 March 2007. For self-employed entrepreneurs, the question arises as to what economic consequences and opportunities are associated with this new regulation.
Initial situation: In the case of company pension schemes, among others, numerous entrepreneurs have already noticed that exactly “zero-point-zero” remains of their supposedly “bankruptcy-proof” pension scheme. In 2005, such a case was dealt with by the Petitions Committee of the Bundestag, as can be read in its report. Affected here are therefore not only GmbH managing directors and AG board members, but also freelancers and self-employed persons, as well as partners in a partnership.
A look across the border: In some countries there is sustainable asset protection, especially for insurance products taken out privately and/or by companies – the interests of creditors are subordinate there to the legal and socio-political goal of almost complete protection of old-age provision. Examples of such schemes can be found in Liechtenstein and Switzerland. A similar scheme is being discussed in Gibraltar. In Germany, there are around 35,000 business insolvencies every year: potentially, those affected are often candidates for applications for Hartz IV, social benefits or a place under the bridge. However, asset protection for assets abroad in the event of insolvency is usually not achievable if the contract was concluded through a German “intermediary”. In this respect, it is advisable to pay close attention to the rules of the game in international insurance law. So “capital flight” alone does not mean security, because there are international agreements in place so that the insolvency administrator could retrieve the money transferred abroad in the event of insolvency.
Previous garnishment protection: Monthly 990 euros for a single person and 1360 euros for a married person are basically exempt from garnishment as income – also in the case of pensions. This also applies in the event of private insolvency. In addition, there are special allowances, including those on application, as well as those in the case of a maintenance obligation, in particular towards children. The new law does not increase these limits – for private life insurance policies that have recently been exempted from seizure, these limits apply equally in the benefit phase.
Domestic innovation only for one “layer”: The expert knows that, from a tax point of view, since 2005 there has been a layer 1 (statutory or similar pension and the private provision known as the “Rürup pension”), a layer 2 (occupational pension and the options known as the “Riester subsidy”), and a layer 3 (practically the remaining private provision). The newly inserted § 851c of the ZPO provides for regulations which are reminiscent of layer 1 in the context of the so-called “Rürup pension”. The amount of the garnishment-protected pension capital is limited according to the age of the beneficiary: thus, one should be able to accumulate assets in a life insurance policy without garnishment, according to age groups and further in increasing amounts. In the seizing protection pensions from tax-subsidized age precaution fortunes are to be included; explain the judicially certified insurance consultant Alfred Jani (www.vb-jani.de) in its information letter 1/2006.
Continuing danger for managing directors and board members: Insurance intermediaries like to describe the provision of managing directors and board members as insolvency-protected: Presumably, however, the vast majority is not in practice of an insolvency of the corporation (GmbH/AG). The new law does not apply to this group of persons, as it does not address layer 2 (occupational pension schemes). In its justification and according to its wording, the law does not focus on the paid-in contributions, but on their result (actuarial reserve or surrender value of a life insurance policy including the surpluses), which is then exempt from seizure ! The legislator speaks of a maximum garnishment-free asset i.H.v. altogether and depending upon age up to 238,000 euro, which may be accumulated as result of the saving procedure. These assets, i.e. the accrued actuarial reserves (with all interest and surpluses) are limited by law. These assets themselves are limited on a graduated basis according to age, to a total of 238,000 euros at the final age of 65. In individual cases, a person concerned will not be able to avoid having to calculate exactly how to optimise his contract and his payments in accordance with the new statutory provision.
Only 600 euros of private pension protected on average? Insurance consultant Jani calculated in May 2006 (Tables 1 and 2) what, for example, a 48-year-old self-employed person can build up “privately” for himself – about 600 euros p.m. pension in old age with the “best” providers in each case. The younger the insurance saver, the more pension he is allowed to save without garnishment. This is surprising, since the insolvency proceedings currently last “only” 6 years, and then attachment protection is no longer required. If you file for insolvency at the age of 60, from then on you can save for your old age with a monthly pension of less than 200 euros with insolvency protection.
Questionable unconstitutionality? Can it be called “social” when younger people with the prospect of a job and further working life can save up many times over “protected by seizure”? Constitutionally, the state objective of the “welfare state” and the “principle of equal treatment” of Art.3 Basic Law” addressed. Jani comments, “The seizure exemption limits are designed in such a way that “young self-employed persons” can build up provisions that differ by a factor of 9 in some cases compared to “old self-employed persons” by means of a private pension under layer 1 or layer 3. This is unequal treatment, i.e. discrimination against the elderly, and does not really get the job done.” He also sees a lack of dynamisation of the exemption limits for garnishment in order to adequately counteract the devaluation of money.
No planning certainty without an actuary: The examples assume, for example, for age 18, that 2000 euros in contributions are paid annually from age 18. In the next age group (30 to 39 year olds), however, the amounts increase by EUR 1000 and so on. – and this cumulates in each case. However, the law in its reasoning and according to its wording does not depend on the paid-in contributions, the result of which (actuarial reserve or surrender value of a life insurance policy including the surpluses) would then be exempt from seizure ! Rather, the legislator speaks of a maximum garnishment-free asset i.H.v. in total and depending on age up to 194,000 euros, which may be accumulated as a result of the savings process. These assets, i.e. the accrued actuarial reserves (with all interest and surpluses) are limited by law. These assets themselves are limited on a graduated basis according to age, to a total of 194,000 euros at the final age of 65. However, these 194,000 euros are already exceeded for the case before the age of 65, even if only 2,000 euros are paid in annually from age 18 to 65 (cf. the higher capital settlement). Ultimately, however, the high pensions of the example (see the sample calculations according to the tables) would not be possible, because at the age of 65 a maximum of 194,000 euros of actuarial reserve is available without seizure, and before that less in each case according to the scale based on the actuarial reserve (not the paid-in contribution). This means that in the best case scenario the pensions that can actually be achieved are more likely to be a maximum of 1,000 euros per month. In individual cases, a person concerned will not be able to avoid having to calculate exactly how to optimise his contract and his payments in accordance with the new statutory provision.
Legal optimisation has always been possible in Germany: however, the new legal regulation disregards cases in which the limit of up to 238,000 euros as an “accumulated total sum” cannot be applied at all. If no surrender value is contractually conceivable at all, the limit of € 238,000 becomes completely irrelevant. The capital of the life insurance or pension insurance can only be seized if there is also a payable surrender value – and not only an accumulated actuarial reserve. In pension insurance, however, there is no legal entitlement to a surrender value at all. If it is not contractually agreed either, the policy is worthless to any creditor – only the attachable portion of any future annuity can then be attached. Such policies without a contractual surrender value are common, for example, even if no death benefit is agreed. It is legally disputed whether an option for a lump-sum settlement at the start of the pension can also be granted without prejudice. If you are worried that the capital you have saved will be lost to your heirs in the event of your death, you can cover this by taking out a separate death insurance policy. In this way – without the need for new legal regulations – an unlimited seizure-proof old-age provision can be built up and possibly even the capital can be disposed of at the start of the pension (sensibly only if the insolvency has been concluded by then).
Is the garnishment protection bill based on erroneous premises? But that is precisely what the far narrower rules under the new law do not allow – lump-sum compensation. Since repurchase is also excluded, the law offers no advantages over what was already possible. And even its limitation proves to be useless for the creditor, because if he asks in the case of such an annuity insurance what surrender value will be paid out, he will be told: zero – because the right of cancellation and surrender must also be excluded according to the wording of the law. So there’s nothing to garnish from it at all. There is some evidence to suggest that the drafters of the bill mistakenly assumed that the annuities they describe would have a garnishable cash surrender value. However, this is forgivable, because even the German Insurance Association (Gesamtverband der Versicherungswirtschaft) had until recently – immediately judged to be groundless by the Life Committee of the Actuarial Association – still erroneously held the view that there was a statutory surrender value for annuity insurance policies after all. A cover capital is of course available, but this itself is not attachable. Only the right of termination (if not contractually excluded) combined with the surrender value to be paid out then (if – in the absence of statutory regulation – contractually agreed at most) is attachable. In the case of the annuity insurance policies described in the law, however, cancellation is already excluded – instead and instead of payment of the surrender value, therefore, only conversion into a non-contributory annuity corresponding to the actuarial reserve achieved is possible. The creditor is thus left empty-handed until the start of the pension – not unlike the situation in the past with corresponding arrangements. From the start of the pension, the pensions paid from it can then be seized – with seizure exemption limits. By then, however, the insolvency proceedings will probably have been concluded long ago. However, a recent ruling by the BFH suggests that the right to a lump-sum settlement (not just a chosen lump-sum settlement itself) may also be attachable.
Deciding between garnishment protection and creditworthiness The self-employed person can also take out a new garnishment-protected pension contract during a garnishment and pay into it in accordance with the annual statutory maximum limits. This increases his garnishment exemption limits by the maximum amounts of the deposits, which are graduated according to age. In this way, an attachment-protected old-age provision can be built up even while the attachment is still in effect – the creditors are left empty-handed in this respect. But this is double-edged for the self-employed person – because it lowers his credit rating for creditors. Unilateral advice to the self-employed with regard to seizure protection can lead to the fact that he may only dispose of his assets to a limited extent and, for example, the “marketability” of pension insurance contracts is no longer given due to the lack of a surrender value. If he later needs collateral to improve his creditworthiness, these insurance contracts are worth nothing to the creditor. Either he doesn’t get the loan he needs then, or he pays higher interest rates. Thus, in extreme cases, worries about garnishment security can lead to insolvency in the first place.
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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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