The 3 Inheritance Tax Benefits of a Private Pension Plan in Germany

The main benefits of Private Pension Plans and Inheritance in Germany

Thinking of death is very unpleasant but important so that your loved ones are financially secure, especially when they are already dealing with their loss.

In planning for your future and any possible mishaps in Germany, we from Pensionfriend do recommend considering a Private Pension Plan.

A Private Pension Plan not only has great benefits in terms of allowing for high returns through a well-selected portfolio of ETFs and tax-free rebalancing so that you can have a great pension, it also has several traditional insurance benefits in case of death:

1. Most importantly, your designated beneficiaries do not need to pay capital gains or income tax on the amount paid, as it is treated as an insurance payout. So, in contrast to inheriting a portfolio of stocks or ETFs held with a broker, they would get this asset free of capital gains tax. This can save up to 26 %!

2. With Pensionfriend's Private Pension Plan, you get paid up to 110 % of the contributions you made in case of death. So if you contributed 20.000 € you may get paid up to 22.000 €. This is in addition to any capital gains. This may be a good augmentation of the assets you leave behind in case of your untimely death.

3. You can easily assign and reassign who is the beneficiary of your Private Pension Plan in case of your death. You do not need to change your will, and this gives added flexibility that can help to reduce your tax burden and secure a safe future for your loved ones.

The most important inheritance tax points to know

Your spouse or registered partner can inherit the home you are living in without paying any inheritance tax if they continue living in the home for at least 10 years. This is in addition to the standard 500.000 € threshold from inheritance tax for spouses. Your children have a threshold of 400.000 € that you can use every 10 years (it also applies to gifts).

The main tax rates on inheritances and gifts to spouses, kids, and grandchildren that apply after the various exemptions and thresholds are 7 % for the first 75.000 €, then 11 % until 300.000 €, 15 % until 600.000 €, and then 19 % until 6 million €. These rates are smaller than the capital gains tax rate of 26,375 %. So, saving on capital gains tax is relatively important.

Three situations where the (re)assignment benefit of the Private Pension Plan is especially helpful to reduce your taxes:

1. If your partner has not reached a good old age pension, you can designate your partner as a beneficiary of your Private Pension Plan. Your partner will then not pay capital gains tax! Keep in mind that your partner is subject to inheritance tax, but as noted, the threshold is high, the house can be exempt, and the rates are typically low.

2. If your partner has reached a good old age provision, you could name your children as the beneficiary of your Private Pension Plan in case of your death. That means your assets go directly to your children, thus avoiding any double inheritance taxation that might apply if the assets would first go to your partner and then later to your children.

3. A variation on this situation is if you have the insurance payout dependent on the death of someone else, such as an older relative. Then, your partner or your children might benefit at a much younger age from the Private Pension Plan payout without paying any capital gains tax.

If you would like to know more about how you can use a Private Pension Plan to benefit your children and use it to pay for their education or help them on their way in life, read here.

How cross-insurance can help you build protection

Cross-insurance means both partners have a Private Pension Plan. An attractive option for couples where both partners work and have assets is cross-insurance. Many insurance companies recommend such cross-insurance. This means that both you and your partner have a private pension plan, and both designate the other as the beneficiary in case of their death. The benefit of this is that if one of you has an untimely death, the other obtains the Private Pension Plan (plus the top-up of up to 10 %) without paying capital gains tax.

So, each partner has a Private Pension Plan and gets a capital gains tax-free asset boost from the other in case of early untimely death. Often, it is then completely tax-free, that is if the Private Pension Plan is below the gift tax threshold, you also avoid inheritance tax. The surviving spouse can then reassign their Private Pension Plan to themselves, which they can then use at a later age or assign to the children.

In contrast, if you held ETFs outright, you would have to pay immediate capital gains tax if you needed money (for example, to pay the inheritance tax) or for living expenses.

The most important child and widow provisions in Germany you need to know

The widow(er) or child benefits upon death depend on the Public Pension you have built up. You need to have paid in 5 years to be entitled. The widow(er) pension is at most 55 % of the deceased person's public pension, and the child benefit is 10 %. For most people, this means basically no meaningful support. For example, if you have worked 10 years at the medium wage, your partner might get 55 % * 10 × 39,32 € = 216,26 € and your child 10 % * 10 × 39,32 € = 39,32 € in case of your death.

Why you still may need term life insurance

Keep in mind that as protection for an early untimely death, your Private Pension Plan is not enough: you need to add term life insurance. It is cheap precisely when you are young, and you typically need it most. It really is a must for many couples with young children if you cannot cover the cost of your house and your children with the remaining income. As noted above, official support is quite limited and rarely sufficient to secure the loved ones in case of your death.

Once you have built up adequate assets through Private Pension Plans and other instruments, such as public pensions and property with a smaller mortgage, then you are typically older, and the term life insurance becomes more expensive. As you also need it less, you can consider dropping or reducing the term life insurance.