Pensions in Germany Explained:
Some answers to frequently asked questions
Our Private Pension Plan
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 %.
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 costs low. Our system is designed around self-service, so you can go really far, and if you want all the way, without any consultation.
We at Pensionfriend are fully transparent about our simple low-cost structure: We only charge 0,79 % for the pension plan per year and that´s it: No hidden fees, no closing costs, not even a cancellation fee if you do not want to continue your contract.
This service fee is based on your average fund assets per year and is deducted from your capital on a monthly pro-rata basis.
For smaller contracts, we charge a 5 EUR “fee” per month until the value of your contract reaches 10.000 EUR. But this is not a real fee: the 5 EUR are invested in a loyalty fund and the whole sum will be transferred back to you at age 62; when the tax benefits of a private pension plan are available. This loyalty premium can be avoided if you start Pensionfriend with a 10k one-time investment.
For the ETF we have pretty low running costs (0,15 % - 0,28 %) depending on which ETF portfolio you choose. These fees are going completely to the ETF provider.
Compared to ETFs that track the same stock index you buy through a broker you have three major benefits:
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.
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.
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.
About Pensionfriend
Our pension team is passionate, dedicated, and world-class focused on all aspects of the pension decision, to help you plan for a safe and sound financial future. Our biggest advantage is that we understand investments.
Dr. Chris Mulder was head of the public investment advisory at the World Bank and knows how to separate the chaff from the wheat. Our advice is based on unbiased data, unlike virtually every other investment advisory.
Our team of economists, insurance, legal and financial experts have dissected Germany's unprecedentedly complex pension and tax system, so we have developed formulas to calculate and forecast taxes and benefits as accurately as possible.
The Pensionfriend team is moreover supported by a brilliant team of software engineers and product managers. This allows us to bring you calculators that others can only dream of. This way you can calculate for yourself how your future looks. Yes, we are proud of our team! In sum you have finance, tax, pension, and calculation experts all at your service, so you can review your basic situation in minutes and then take your time to go over different scenarios to help you build a safe and sound financial future.
Pensionfriend works with a life insurance company to offer specific retirement products. This company is Liechtenstein Life Assurance AG. It is based in Liechtenstein and is licensed to operate among others in Germany and Switzerland. It is regulated for the German market by the so-called Bafin.
The assets that you hold through Liechtenstein Life are so-called Sondervermögen, or special assets, and not part of the insolvency mass of Liechtenstein Life or Hypofriend. Thus your assets are yours even in the unlikely event of an insolvency.
We do not hold your assets, the assets are held by our cooperation partner Liechtenstein Life, which is based in Liechtenstein and is therefore subject to Liechtenstein national laws.
This is a great advantage for you because this means in case of insolvency your assets must be managed as special assets according to Liechtenstein's bankruptcy code and are therefore transferred to you, nobody else can touch them. (see article 59 (1) of the Liechtenstein Insurance Supervision Act).
This is unlike in Germany, where these assets would just become part of the insolvency estate.
Learn more about how your investments are protected as special assets.
Retirement Knowledge
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 save 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.
Investment Knowledge
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
There are indeed some forms of company pension plans that are attractive. These are the ones that only your employer contributes to 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. 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.
ETFs, or Exchange-Traded Funds in full, are a wonderful invention to buy in one go a basket of stocks, that give you the benefit of diversification, at a low annual cost.
You can for example use ETFs to track indices, such as the S&P 500, which contains shares of 500 of the largest US companies. So when you buy an S&P 500 ETF, you're investing in not only one company but all 500 companies listed in the S&P 500. This way you spread your risk.
ETFs are available for all kinds of stock indices, for example, the EURO STOXX 50, which contains the largest companies in the eurozone, or the MSCI Emerging Markets Index, which tracks the performance of nearly 1.400 companies from 24 emerging countries.
ETFs are not free and do not track the underlying stock baskets or indices perfectly. This leads to a so-called tracking difference. You will be shocked to find out how costly some ETFs are, and pleased if you would see the positive tracking difference some ETFs are able to generate.
The most important decision you need to make is the index or basket of stocks that you want to track. Next comes the ETF that tracks this basket.
In choosing among thousands of ETFs you also have to watch out for all kinds of unsavory ETFs with high fees, and odd baskets of stocks.
At Pensionfriend we focus on data and cost. Our aim is to find those ETFs that replicate our preferred stock indices with the best tracking difference and cost combination. For the Stoxx 50 index, this can save you over 0,5 % per year. To select the preferred stock indices, we compare their performance using the longest unbiased data series available, which spans over 150 years and across many business cycles and crises. This way we understand the relative performance and risk much better.
For example, the high(over 10 %) reported performance of the well-known MSCI world index has a lot to do with the starting date that included a huge upswing in the Japanese stock market, which however going forward is underperforming due among others to aging and lower agility of the Japanese economy. Over the longest comparable period, the S&P 500 outperformed… Very long data analysis and basic economics also show that returns of 10 % are not sustainable, and should not be expected.
We're very happy you've understood the importance of investing for your retirement. Our primary goal is to see everyone achieve financial security. Whether you choose to invest through the Pensionfriend Pension Plan or independently, we're supportive of your decision.
However, if you:
don't want to spend time finding the best ETFs out of thousands
don't want to spend time making the trades
don't want to figure out a rebalancing strategy and execute on it
don't want to figure out which broker really costs you less and avoid idle cash
but, instead, if you:
want to rely on our expertise to pick the outperforming portfolios–we aim for 2 % over the MSCI World index.
want tax benefits that offset the 0,79 % fees
want to leave your assets to your loved ones without paying inheritance tax
want 0-10 % life insurance top-up for free
want peace of mind that your investments are being taken care off
want advice when you grow closer to retirement on how to adjust your portfolio
...then Pensionfriend's Pension Plan is for you!