In the media and in government circles the debate over the intergenerational contract is in full swing; opinions on the subject also vary widely. However, one thing is certain: Germany is in a state of profound demographic change. The number of pensioners is increasing but the number of people in the workforce paying taxes is decreasing. The average retirement period is also lengthening. The consequence is that, later on, pensioners will not be able to live on their state pensions alone. There is no way around additional private retirement insurance, but many people feel utterly overwhelmed by the wealth and complexity of retirement insurance products, preferring general explanations about the best type of policy for them. However, this broad statement is neither possible nor advisable, as every customer has different needs and wants for his or her retirement. And it is precisely these needs and wants that should be reflected in their retirement insurance.
Generally speaking, the earlier you start saving for your old age, the better. Due to the effect of compound interest, even those starting out in the workforce can benefit from paying a monthly premium of just 50 euros. Shares, unit trusts and unit-linked insurance policies are ideal for young people. While they offer no fixed interest rate, they do offer higher potential returns over the long term and, due to the term of the contract of 30 years or more, short-term losses can be compensated for. It is also important for those starting out in the workforce to take out disability insurance so that they have a more carefree future.
With life assurance policies, a distinction should be made between an endowment life policy and a unit-linked life policy. The former is characterized by its security in the form of a guaranteed minimum rate of interest. However, this interest rate has dropped to 2.25 per cent over the last ten years and will probably continue to drop. Then there is the annual permanent profit sharing rate of two per cent currently, but clients will have to expect reduced returns here as well due to lower interest rates.
For this reason, the demand for unit-linked life policies has increased. These products use opportunities for potentially higher returns on international stock exchanges and are therefore suitable for retirement insurance contracts of terms of ten years and longer.
Certainly, some people have become worried due to the recent fluctuations in unit prices. Yet funds are not automatically share-based unit trusts. There are many variations, including guarantee funds, which combine security and potential returns. Due to the great demand for guarantee funds from large sections of the public, some financial services companies such as Heidelberger Leben have established guarantee funds over the last ten years. But there are differences in guarantee funds as well, for instance in the level of security, the percentage to which the capital is guaranteed, and or whether the guarantee refers to the premiums or the final accumulated amount.
Use state subsidies. People with private retirement insurance should not forgo taking advantage of government subsidies. The basic private pension is of particular advantage to senior executives and the self-employed due to its tax advantages, as payments can be deducted from income tax as “special expenses”. Thus, about 70 per cent of the maximum amount (20,000 euros for singles and 40,000 euros for married couples) can be deducted from income tax.
The “Riester-Rente” (“Riester Pension”, named after its architect) is suitable for low and mid-level employees. For example, anyone paying four per cent of their previous year’s gross annual income into a Riester retirement insurance policy receives a government subsidy of 154 euros. There are additional subsidies for children, and personal contributions and subsidies can be deducted from income tax. This clever idea of retirement insurance with a state subsidy should be included in your planning in all cases because it is money easily earned.
Expanding retirement insurance provision and optimization for “Generation 50plus”. For those aged over 50, retirement insurance requirements differ for those aged between 50 and retirement age and pensioners over 65. Most of the first group are approaching the end of their working life and want to increase provision for their retirement. Many use inheritance or life insurance policies that have been paid out in a single amount.
Pensioners, on the other hand, often enjoy the first few years of their retirement by travelling and on cultural activities. Short-term liquidity plays a greater role for them, which is why their demand for daily interest rates or short-term, fixed-interest securities increases. Due to their higher life expectancy, they also need more additional capital for their retirement, which they can most easily draw on from income-oriented investments.
Anyone wanting to will their heirs tangible or financial assets is well advised to use the advantages of life assurance policies in the form of a cross-over policy. In such policies, a wife takes out a life policy on the life of her husband and the husband does the same in respect of his wife. The big advantage of these policies is that no inheritance tax is payable.
A good retirement insurance policy is an individual retirement insurance policy. The wealth of products and the various different subsidy options show that only a detailed analysis of one’s personal situation and life planning can give a substantial idea as to what the optimal provision for retirement should be. Besides age, income and marital status, expectations and sense of security must be taken into account. What is crucial is that clients get solid advice and retirement insurance solutions tailored to their needs.
Thomas Bahr (born in 1963) lives with his family near Heidelberg. He is an expert on sales of assurance products. His goal is to establish unit-linked life assurance policies and flexible guaranteed funds at all tax-assisted levels.
