– How to design more retirement income and pension increases early on ?
“He who does not work should not eat” (Franz Müntefering, 09.05.2006)
In the last up to more than 35 years, people’s parties have more than halved the statutory net pension level. The cost of an equally high funded pension in safe government bonds has approximately tripled as a result of political decisions. Recipients of basic income support – most of whom do not apply for it from the growing precariat – can be indifferent to this development. In fact, small and medium-sized companies are often forced to use asset growth to optimise their own long-term pension provision.
Massive liability cases due to compensation that is wrong in content – even after an action for unfair dismissal
If an employment relationship is terminated – with or without an action for protection against dismissal – and a severance payment is agreed with the (ex-)employer, this has generally been taxable in full as a normal wage payment for years, i.e. wage tax but no social insurance has to be paid by the employer (AG).
However, if the severance payment is used to supplement the statutory pension – which must be done through the employer’s payroll office – to supplement the statutory pension, half of the severance payment is completely tax-free, § 3 No.28 Income tax. Trade union “secretaries” as trial representatives, but also legal advisers on both sides, often forget to inform about this. The employer may not care – he has no harm if this option is not chosen.
Legally imposed old-age poverty
Anyone who can expect to receive more than the basic provision in old age will be “compulsorily pensioned off” (with deductions, of course) from the age of 63. This concerns all the (a) either receive “unemployment benefit 2” (or Hartz IV), or (b) receive a pension or basic income support due to reduced earning capacity. Affected people rub their eyes why it did not happen in school lessons, because the pension insurance has to be arranged for early retirement. This means that every citizen potentially belongs to the “early retirement generation”.
Basic pension or Rürup pension as an alternative?
In 2020, up to €25,046 will be tax deductible as a retirement pension, twice as much for married couples. Then 90 % of it will be tax deductible like special expenses. This applies to the compulsory contributions of employees via the employer to the Deutsche Rentenversicherung Bund (DRV), but also to compulsory contributions to a professional pension scheme.
In addition to this, private life insurance policies, which are designed as a basic pension or Rürup pension, are also eligible for voluntary payment to a pension fund, but also voluntary or, if necessary, further compulsory insurance for additional contributions to the DRV. The “return prospects” vary considerably, for example due to management costs and commissions. But the risks can also be massively divergent – for example, through politicians:
For example, the Federal Constitutional Court will (once again) be allowed to examine whether the so-called downstream taxation leads to an inadmissible double burden on pensioners. Meanwhile, pensioners of one or the other pension fund can be happy about a lower tax burden, which reduces pensions by up to more than 20 percent to help them restructure.
Shareholder-managing directors (GGF) often want early capital compensation
The Federal Court of Finance (BFH judgement of 11.9.2013, ref. I R 28/13) has clarified that a GGF cannot spontaneously simply change its commitment to occupational pension schemes, i.e. add a short-term settlement as a lump-sum payment in order to have the assets paid out for retirement. There is the threat of so-called “hidden profit distribution”, which economically means that in fact approximately the entire saved assets have to be handed over to the tax authorities – a punishment by judicial law. This can only be counteracted by careful and early design.
Voluntary pension top-up at the German Pension Insurance
The DRV promises an annual payout of 5.14% on voluntary payments on the Internet. After less than 20 years, you have received more than your deposit back. On average, this is good business for small and medium-sized companies, because precarity in Germany lives up to more than 11 years shorter – in England it dies up to more than 21 years earlier. And surviving recipients of widow’s pensions live on average many years longer anyway.
For voluntary payments, however, you may not (alone) be a normal employee who already pays compulsory contributions via your employer. The additional contributions can only be paid from the age of 50 onwards to fully or partially compensate for the pension reductions in the event of early retirement – which has a pension-increasing effect if you decide later not to draw a pension earlier. This is, of course, an absurdity of the legislator’s regulation, because potential poverty in old age is, for example, pre-programmed today with a pension insurance contribution of less than 20%.
Maximising contributions to the DRV through design
There are also solutions for employees with incomes below the income threshold to optimise payments to the DRV. At best, for example, through a creative sideline with a small income or another activity, even as a non-worker. The threat of poverty among the elderly as a prospect, with a recent increase in the number of “customers” at the boards by 10% within a year, and by 20% among pensioners, may be a sign that the course should be set earlier than originally planned. Inheritances and gifts can also be gradually accommodated in this way – and your own estate reduced. For such retirement assets are usually non-heritable.
Maximising pensions through late retirement
It is also little known that after reaching the standard retirement age for the statutory pension, it can be increased by 6% p.a. – by deferring the pension application. Those who receive sickness benefit or “unemployment benefit 1” often let themselves be persuaded by their own statutory health insurance or the ARGE or the job centre to apply for their pension immediately – without need, a renunciation of permanently higher old-age benefits.
What offers the best chances in each individual case should be advised. Actuaries know the yield prospects from statistics as empirical values. Few experienced insurance consultants can provide comparative analyses of the various offers for basic pensions or Rürup pensions. All fee consultants, without commission interests. In Japan, the low interest rate level has caused more and more people to voluntarily work longer hours, statistically suggesting “full employment” – and in America, the trend towards third or fourth jobs is unbroken; in our country, the bottle collector has become a rising profession.
“Only those who work should eat.” (Franz Müntefering, 09.05.2006)
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.kulturexpress.de (published on 16.12.2019)
www.submission.de (published in the submission gazette no. 250/251, page 1 and page 40)
www.goldseiten.de (published on 25.12.2019)
Link: https://www.goldseiten.de/artikel/435237–Steuern-sparen~-with-capital payout-of-company pensions-severance pay-and after-active-part time.html
www.komet-pirmasens.de (published in “Der Komet”, issue 5666 of 10.01.2020, page 4)
www.hrperformance-online.de (published in “HRPerformance, issue 04/2020, pages 16 and 17)
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About the author
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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