Technically, promoted products tend to stick to conventionally introduced ones – making them equally inflexible. At the start of the contract, it is assumed that the first-year premium will also be paid in each subsequent year until the start of the pension – and the acquisition costs are calculated on this total premium sum. Cancellation or premium waivers within the first few years inevitably lead to considerable losses due to the costs alone. Loss-free product solutions for dealing with fluctuating incomes or family circumstances are usually not offered. When taking out a policy, the customer is therefore faced with the situation of having to assume that conditions will remain the same until the start of the annuity or risking significant portions of his or her potential returns.
Year after year tax or allowance optimisation is hardly possible as a result of the mostly inflexible products. The continuation of, for example, a Riester pension with the same personal contributions despite a change in income and family circumstances leads to unnecessarily high contributions paid, relatively suboptimal promotion or even to the loss of the possibility of promotion in individual years. It is also a fact that the effort to optimise the payment of premiums is almost impossible and also involves additional costs. Of course, acquisition costs paid once for a high premium sum are not refunded if this later decreases. If, in order to avoid such disadvantages, the premium is paid in part from taxed income, double taxation may occur in this respect when the pension is drawn. The net return calculated and promised in unrealistically simplified models at the beginning of the contract then melts away. If the subsidised products are to achieve a higher net return than conventional pension products, then this is only due to the (hopefully) lower marginal tax rates in the pension phase compared to those in the subsidised phase due to lower retirement income – or to allowances in excess of this. If taxation in the subsidised phase were the same as in the pension phase, then a subsidised product would hardly differ from an unsubsidised one in terms of net pension income.
In addition, further corrections can be expected in the investment of savings contributions on the capital market as a result of past, current and more frequent financial market crises . The Bundesverband Investment (German Investment Association) recently analysed share savings plans with a term of ten years and monthly payments: The increase in value was minus 40 percent with the usual costs there – with a packaging in a pension insurance, no less high other or even additional and costs to be borne for the entire term right at the start, whereas the investment risk in unit-linked life insurance products, for example, is the same as for direct investment in funds – and is also borne in full by the customer. The famous cost-average effect also works its way up and down for long-term savers, but advisors have been all too happy to suppress this in recent years. In particular, if there is a massive slump in the capital markets in the last few years before the start of retirement – as is currently the case – hopes of high pension payments also collapse accordingly, with no other option for reaction than to resign oneself to a lower retirement income.
On closer inspection, the state promises of a bonus or tax subsidy – a kind of financial perpetuum mobile – turn out to be milkmaid’s calculations: in the case of Riester contracts, after actual life expectancy and due to the costs included as well as taxes to be paid, repayment of the capital paid in can at best be expected with a minimal return (net around three percent). Even a dreamlike 44 percent subsidy still only leads to a yield increase of three percent without calculated costs and without taking into account deferred taxation and only in relation to the capital at the start of the pension after 35 years – after costs, taxes and payout in the pension phase, virtually nothing of this remains. So target returns of seven percent are not realistic, except for people close to retirement age. It is to be feared that more than this return will be eaten up by inflation – only optimists or ignoramuses will rule this out over the questionable periods of several decades until pension payments are made. Yield forecasts of up to double digits after the end of the deflationary phase overlook the fact that inflation in Germany does not necessarily mean that yields on the international capital markets will therefore increase. And the fine government allowances? For the most part, they end up with the insurers as so-called mortality gains, in distribution costs or as downstream taxes with the tax office. The main beneficiary is the state, because the majority of Riester savers are low-income earners and will therefore not see a cent of additional pension: The payout will be counted 100 percent towards their basic income support at social assistance level. However, this may be a deliberate move on the part of the state, as it improves the poverty statistics. How else should the state get this idea among the people than through the army of commission-controlled sales staff, and how else should it get the insurers to make such offers than by the fact that they can make a profit with it. And without demonstrable sales success for these private forms of provision, it would be difficult to justify dismantling the state pension.
The situation is hardly any better with Rürup: The “target return of about seven percent” mentioned by many a finance professor comes largely from tax savings effects under conditions that cannot be generalized, because it pays off especially for today’s generations “50-plus” or “60-plus”, and ensures a gigantic redistribution – also in favor of the treasury. Since today only a part is tax deductible, but at retirement age often 100 percent is taxable, a deposit is worthwhile today only in a few cases: so with deposit in the last decade before retirement with high income and subsequent significantly lower taxation in the pension phase. The model calculations are often glossed over because they assume that premiums will be paid at the same level until the start of the pension, which means that the years with better tax treatment outweigh the disadvantageous effects. However, such inflexible long-term contracts also increase the acquisition costs charged, so that often less than half of the first annual premiums paid are actually invested. Due to their inflexibility, Riester and Rürup insurance are generally not recommended; Riester funds are usually more flexible. Products that contractually stipulate an equal annual premium payment until the start of the annuity are hardly an option. It would be like buying a pair of socks and having to sign up for a monthly sock subscription, with only half of the socks being delivered in the first five years because the other half of the subscription price is used to pay off the contract broker’s commission. There is no reason whatsoever to enter into such long-term commitments with Riester contracts, let alone with Rürup. (To be continued!)
Peter A. Schramm
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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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