Why should you start investing in a private pension plan today?

The public pension you can get in Germany is higher than in many other countries. Nonetheless, while it is a solid basis for those who worked and contributed most of their life, it won’t be enough to maintain your standard of living in old age.  

The shortfall is especially large if you did not contribute for a longer period, or if your income increased substantially, and your pension is hence in part based on the lower income you used to have, and less so on your current high income. 

It is also very relevant to know that the public pension is a so-called pay-as-you-go system. This means that the contributions you pay into the pension fund today are used to pay the monthly pension of current pensioners. Your pension will therefore be paid by future generations. However, as many baby boomers will retire in the coming years, fewer young people will have to pay for more retirees.

Based on our funding and demographic analysis we expect that the public pensions will just keep up with inflation, but no more than that. That is another reason why you will need supplementary components for a decent pension.

Learn more about how the public pension works in Germany and why it should only be the foundation of your retirement planning.

The term "pension gap" refers to the difference between your pension income and your needs to maintain your standard of living in old age. Traditionally, many people in Germany rely on the public pension. However, this is usually significantly lower than the last net income before retirement.

For example, if you retire as a salaried employee in Germany at the age of 67 after 45 years of employment and your last monthly gross income was 6.000 €, you will receive a public pension of around 2.130 €.

If there is no further income from a private pension, renting of real estate or other, the difference to the last income as an employed person is 1.480 €. It is usually assumed that you will need a little less money in retirement because you safe money from your income for your retirement, 

Therefore, let’s assume that 80 % of your last net income will be enough to maintain your accustomed standard of living. In our example calculation, the difference is then still 760 €. This amount is the pension gap. 

At Pensionfriend, we have made it our mission to build up a pension plan and close this gap, for example with private pension insurance or real estate.

Calculate your gap now with our Pension Gap Calculator

A promise for a certain growth rate is simply not possible, but we can share with you what the longest time series in the world tell us in an unbiased way, what outlook is in line with insights from the economic profession, and what is "baloney". 

Fundamentally a representative mix of stocks will grow in line with the economy over the long haul. That means the return is on the order of 6-7 % (nominal GDP growth plus dividend yield or buybacks). You can outperform in a sustained way if the economy or business you focus on is more innovative. Our  ETF mix historically beats the MSCI World benchmark by about 2 % as it focuses on small (and more innovative) companies and on the more innovative economies in the world with a stable investment environment. 

In addition, there is always a certain volatility risk when investing in equities. However, over an investment period of about 10-15 years, well-selected stock indices have historically always delivered gains, making them a safer investment than annuities with guarantees, which unfortunately often only guarantee high costs and minimal returns. In periods without a world war, you can expect a superior index to avoid losses for any 10-year period.

The tax benefit of your pension plan with Pensionfriend is that:

• You pay capital gain tax only once, as the private pension functions as a tax wrapper namely when you take out the money. If you would instead have an ETF portfolio with a broker, you pay tax every year on the gains beyond the threshold. The big drawback of that is that the tax you paid is no longer invested and no longer earns money for you.

• Only half of the return on your investments is subject to taxation if you pay it out at a lump sum from age 62 onwards and if you have held the pension contract for more than 12 years.

It can be attractive to take your payments in different tranches to reduce your tax liability as your pension income is much lower. Most likely, you will not pay more than the normal capital gains tax of 26,375 %.

You own a property? Congratulations, you have already set the foundation for your retirement. In many cases, however, this is not enough to close the pension gap. If you live in your property yourself, you will save on rent, but that will probably not be enough, as you will still have other expenses that may not be covered by other pensions you are entitled to.

The same applies to a property you rent out: you have a steady income from the rental payments, but still have to pay your own rent and the running costs for the property. 

Discover your options for optimal retirement planning with Pensionfriend

With the Pensionfriend Pension Plan, you can start with a one-time investment or with a monthly or quarterly savings plan. We are looking for a minimum commitment, and your capability to save this much given your income.  

Our webinars and software are free. We do have an expected minimum for a consultation. Currently, the minimum is 10.000 € or 100 € per month. This is necessary to keep our cost low. Our system is designed around self-service, so you can go really far, and if you want all the way, without any consultation.  

Discover your options with the Pensionfriend Pension Plan.

Our cost structure is very simple and transparent: If you have less than 10k invested, we charge 0,8 % annually and 5 € monthly. Above 10k, we only charge 0,8 % per year. That's all. No hidden fees, no closing costs, no rising costs as your portfolio grows. 

Compared to ETFs that track the same stock index you buy through a broker you have three major benefits:

1. A tax-efficient structure where you only pay taxes on half of your gains once at the end, instead of every year. This saves the average user 0,6-1 % per year over a 30-year period.

2. We rebalance for you, so you don't have to be bothered. Moreover, our rebalancing algorithm can add about 0,1-0,2 % per year.

3. We pick ETFs that cost less and even earn some side fees that get reflected in an extra appreciation. This saves the typical user 0,2-0,4 % annually over the medium term. Compared to other pension plans, a huge benefit is that you have no large upfront fees. This means you are not locked in due to the cost you already made. It gives you flexibility. Moreover, we work with the lowest-cost insurance companies to bring you these offers. And don't be mistaken: higher cost does not mean better returns. Higher-cost insurance companies just have higher profits and advertising budgets. The underlying risk is exactly the same. With Pensionfriend, you can choose out of 500 ETFs, but we recommend our Pensionfriend ETF mix, which outperforms benchmarks like the MSCI World and S&P 500 in unbiased data trials and in line with fundamental economic logic.

There are indeed some forms of company pension plans that are attractive. These are the ones where only your employer contributes or where the assets are invested through a company or industry pension fund.

However, these forms only exist in rare places; in the vast majority of cases, company pension plans are so-called direct insurance policies nowadays. And those are anything but suitable for closing your pension gap. 

The main disadvantages include 

1. high upfront and ongoing acquisition and administration costs

2. very low returns due to limits on how your contributions are invested

3. you pay the tax advantages in the savings phase back through taxation of the pensions you receive in retirement. 

When you change your job, the tax advantages also fall away: your upfront costs are lost if you stop the program, in the limited cases you can, and if you continue it is basically dead money with zero return at current interest rates. 

Our conclusion is quite clear: In most cases by far, a company pension plan is not a beneficial investment and not suitable to provide for a financially secure retirement. You can read more about this in our article Why company pension plans don't make sense in Germany.

You can take your pension plan to any country within the European Economic Area (EEA) and continue saving from there. Paying out in other EU countries is also no problem. You only lose the German tax advantages if you no longer live in Germany. However, you continue to benefit from the Pensionfriend ETF mix, which historically outperforms the MSCI World by about 2 % per year.

If you move to another country of the EEA and do not want to take your pension plan with you, you can of course cancel it at any time. At that time it makes sense to compare the capital gains taxation in your new home country with that in Germany. If it is lower than in Germany, make no change. If it is higher than in Germany you can cash out and reinvest.

If you're moving to a state outside of the EEA, your contract can't be continued and will be terminated and paid out.