Rudolf Becker and Johannes Fiala
More than ever, every German citizen is responsible for his or her own retirement provision. The benefits provided by the statutory pension are no longer nearly sufficient to maintain the accustomed standard of living in retirement. Even the Retirement Assets Act (AVmG) passed on 11.05.2001 is only an inadequate way out of the dilemma. And the original quote from Walter Riester is not misleading: ‘This is the start of the biggest old-age pension programme of all time’. In the quote from the Münchner Merkur, under the title “Riester’s monstrosity”, it says: “The result is an over-bureaucratised patchwork that is only likely to last a few years. Such a monstrosity could only have come about because the political authors of the reform are more inclined towards collective approaches than individual solutions. Pensions were not secure without this reform, nor will they be with it. Anyone who expects citizens to accept such silliness as the rule that they can take an interest-free loan from themselves need not be surprised at the lack of confidence in the substance and durability of a reform? These remarks hit the nail on the head. If the area of occupational pensions was already a rather complex and, for some, unmanageable entity, for someone who is not constantly involved in this matter, the chaos is now perfect. Even in specialist circles, this reform in the area of occupational pension provision is met with nothing but shaking heads and incomprehension. The whole thing carries a danger that should not be underestimated. If already in the past by wrong and/or incomplete consultation of the concerning substantial economic damage was caused, then this fact might intensify now still in enormous extent. More than ever, education and information are necessary in order to use the instruments of occupational pension provision in an economically sensible way for all parties involved. It is impossible to warn strongly enough against linking private provision under the AvmG with a company pension scheme. Neither the employer nor the employee will benefit in any way. If the employee claims the subsidy under 10 a EStG, then he pays contributions from taxed and contributed remuneration. Thus, the employer also pays his social security contribution. The company pension scheme by means of the support fund implementation method is still the most flexible, individual and economically sensible concept and has even undergone further improvements as a result of the law reform. In principle, one thing remains to be said: Properly designed, company pension schemes are more valuable and important than ever from a business, personnel policy and social perspective.
What is a provident fund? As a social institution, the provident fund is a tax-exempt, legally independent pension institution that grants occupational pensions without legal entitlement. The tax exemption is justified by the purpose of the occupational pension scheme (social security scheme). These features result in numerous advantages. The provident fund has its own ? separated from the employer ? Special assets (insolvency protection), which are fed by contributions from the employer. The employer makes a commitment to the employees and pays tax-deductible contributions to the relief fund. This allocated capital is invested by the provident fund in accordance with tax regulations. Conversely, the Fund shall make payments to the employees and, upon request, also to the employer which become due at a later date. The entrepreneur can choose the most common form of provision via the insurance industry and thus set up an insurance-backed provident fund. He can also dispense with the reinsurance and choose a lump-sum funded provident fund. This means that the company receives the annual endowment back in the form of a loan and invests this capital itself on the capital market; or it uses the loan for investments within the company. Since relief funds are not subject to insurance supervision like pension funds or pension schemes, they may make their assets available to the sponsoring undertaking in the form of loans against an appropriate interest rate. The interest to be paid is operating expenses, increases the cash assets and can be adjusted to the profit situation. The economy thus has a supply instrument at its disposal that also makes economic sense. Occupational pension schemes financed by the employer are a voluntary decision. As an entrepreneur, you only decide on something that benefits you and your employees. No instrument of company pension schemes is as efficient for you, for your company and for your employees as the provident fund.
The advantages for the company: 1. the pension capital can be funded with tax effect. 2. 2. security for sufficient pension capital is ensured, biological risk is reinsured. 3. with a lump-sum UK endowment, the assets can be freely invested. The added value is shifted from the insurance groups back to the sponsoring company. 4. not a “tax-saving model”, but tax-privileged asset accumulation. 5. 5. the assets are outsourced to the fund, no capitalisation of the assets in the balance sheet. 6. likewise, no pension obligations are to be carried as liabilities in the company balance sheet (no pension provisions, complete balance sheet neutrality). 7. no over-indebtedness risks due to unscheduled benefit payments. 8. the income from the assets remains tax-free in the support fund. 9. flexible endowment payment, suspension of endowment and ? 9. flexible endowment payment, endowment suspension and resumption possible at any time, no catch-up ban, even decreasing endowment by offsetting possible. 10. financing is a general weak point of German medium-sized companies. The Basel Credit Decisions will further exacerbate this dilemma. Endowed amounts are immediately available as liquidity in the form of a loan from the UK to the sponsoring company. This not only reduces the dependence on the house banks, but also the credit costs, because the interest rates for the UK loan can be reset annually within a range of 4 % to approx. 10 %. Depending on the profit situation, the upper limit can be just as interesting as the lower limit. 11. inheritance tax free on transfer of business.
Personnel policy benefits The core legislative idea behind any occupational pension scheme is the personnel policy and social benefits. With the provident fund, you will see how beneficial these aspects are for reducing personnel costs. 1. motivation of your employees. 2. qualified employee recruitment and long-term ? Commitment to the business. 3. reduction of fluctuation costs. 4. reduce non-wage labour costs by making pension commitments in lieu of pending salary increases. Advantage: You save on tax and social security contributions. This otherwise lost money is preserved and saved for later pension provision.
Provision for the entrepreneur Unique in the field of occupational pension provision is the fact that entrepreneurs/shareholders and their relatives can also be beneficiaries of the provident fund. By making a commitment to your employees, you simultaneously build up your own pension scheme (this is done by transferring released fund assets to your fund account, e.g. when employees leave the company whose entitlement has lapsed due to insufficient length of service). In this way, part of the tax-free assets in the fund also serve to close your private pension gap.
What risks can the implementation method Unterstützungskasse entail? A provident fund can take the form of a foundation, a limited liability company or a registered association as a corporate body. Insolvency security varies. There are providers who control all fees, costs, directly through the U-Kasse and in case of a disproportion of expenses to income, as any business enterprise may become insolvent. The result for the sponsoring company is that the commitments then run directly through the company in the form of a pension commitment, or are transferred as quickly as possible from the sponsoring company to another pension institution. Since the reinsurance policies belong to the UKasse as the policyholder and the beneficiaries, they will then certainly be dissolved. If then a U-cash is no more, this has naturally also effects on the operating expenditure departure. A U-Kasse must be run purely as a cost-neutral pension fund, through which the endowments run. All funds that must be received by the U-Kasse are segmented in relation to the company and the beneficiaries. This applies to the reinsured, the lump-sum U-Kasse and the free fund assets. The institution, the administration with all costs and also the large item of personnel costs must be separated from the U-Kasse and run through a separate administration.
The deferred compensation The advantages for the employee From the employee’s point of view, there are first of all the classic advantages of a company pension scheme that is additionally financed by the employer: – Closing of the pension gap – Secure and profitable capital accumulation – Motivation for further company service Also for deferred compensation the better way Independently of the employer-financed contributions, the employee can use the possibility of salary conversion included in the Company Pension Act without lump-sum wage tax and without social security contributions via a support fund. As of 01.01.2002, social security contributions are exempt up to 4% of the income threshold (4,500.- ?) until 2008. In the case of Pensionskasse and Pensionsfonds, tax exemption exists up to 4% of the income threshold. In the case of the support fund, remuneration can also be converted tax-free above the 4 % limit. If desired, it can be agreed with the employer that the employee converts a certain amount of his salary. The employer transfers this amount to the provident fund. This allows the employee to shift highly taxed active pay into the low-taxed retirement phase. The following tax treatment options are available for contributions from wages that are converted into contributions to the company pension scheme: – Individual taxation in accordance with § 10 a of the German Income Tax Act (EStG) = allowance promotion and special expense deduction DV, PK, PF – Flat-rate tax in accordance with § 40 b of the German Income Tax Act (EStG) = tax rate of 20 % on contributions up to a maximum of ? 1,752. DV, PK – Tax-free up to 4% of the contribution assessment limit in the statutory pension insurance (BBG) 4,500 ? in accordance with § 3 No. 63 EStG PK, PF For amounts that originate from the employee’s salary sacrifice (direct commitment, support fund): Unlimited tax-free in accordance with § 11 EStG The different taxation in the savings phase also results in different taxation in the benefit phase. Following the passing of the Retirement Assets Act (AVmG) on 11.05.2001 and the associated introduction of additional funded old-age provision, the question arises as to whether the previously and still possible salary conversion from gross salary by means of a provident fund or the subsidised old-age provision from taxed and contributed salary is more favourable. It is therefore interesting to compare this subsidised “Riester pension” with private savings from the net salary into an investment fund and with salary conversion from the gross salary by means of a provident fund.
For whom is the provident fund suitable ? Did any of the aforementioned points appeal to you ? Now all that remains is to check whether your company is suitable for the use of a relief fund. If the following basic requirements are met, the reinsured provident fund will bring personnel and business benefits to your company in the course of the development of the pension fund. Requirements for the company in the case of company-financed provident fund: – positive earnings situation – at least 1 employee – available liquidity – balanced age structure The above requirements do not apply to salary conversion.
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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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