Investment Calculator Germany: ETFs vs. Private Pension Plan

Do you know the cost of rebalancing your ETF portfolio? We have a solution to invest cost-efficiently and smartly!
Published on Dec 7, 2022
Investment Calculator Germany: ETFs vs. Private Pension Plan

Written by Dr. Christian Mulder

Published on

Most people do not realize that trading or just rebalancing their ETF portfolio can be very costly in terms of long-term return. Investing in ETFs through a private pension plan helps to minimize your taxes and grow your portfolio faster over time. The following calculator can help you understand whether investing in ETFs through such a pension product makes sense for you. *Update and alert: ETF investors have to start paying the annual ETF withholding tax now interest rates are positive again.*

Let’s calculate how much you can save with a private pension plan


The results of our comparison

By investing in ETFs through a broker, you will have 672.872 € at 67 compared to 696.657 € when you invest through a Private Pension Plan. Investing through a Private Pension plan will save you 0,13 % per year on average or a total of 23.785 € till 67. This is because your capital gains taxes reduce your return by about 1,37 % per year when you invest directly.

A Private Pension Plan functions as a tax wrapper, which allows you to save on paying capital gains tax. The more you (need to) rebalance your portfolio the more you will benefit from a tax wrapper. When you make your decision also consider how the future may change taxation:

  1. The costs of a private pension plan are likely to go down in the direction of broker costs. Deciding later when you have considerable capital gains is costly.

  2. If you turn your portfolio into a fixed pension income (an annuity) in retirement you would have additional tax benefits that would save you 6-10 percent of your total assets.

In the following graph, we compare investing directly in ETFs to investing in the same ETFs through a tax wrapper and holding the retirement plan until retirement. The numbers are after taxes.

The three main tax benefits of a private pension plan

  1. You pay capital gains tax only once if you use a private pension plan 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 you realize. The big drawback is that the tax you paid is no longer invested and no longer earns money for you.

  2. 15 % of your capital gains are tax-exempt in line with § 20 4 of InvStG whenever you take them.

  3. In addition, only half of the remaining gains on your investments are subject to taxation if you have it paid out as lump sums from the age of 62 onwards and if you have held the pension contract for more than 12 years. This is referred to as Halbeinkünfteverfahren and is regulated in § 20 6 of EStG (the German income tax law)).

Altogether this means paying tax once at a rate of (1-15 %)×(1-50 %) = 42,5 % on the gains if you are over 62 and held the contract for over 12 years.

The tax rate is the minimum of (1-15 %) × 26,375 % and (1-15 %) × (1-50 %) × income tax rate in retirement. For a median gross incomethat income tax rate is about 19%.

It follows that the tax rate (1-15 %) × (1-50 %) × 19 % is just 8 %! For an income of 60.000 € gross it means a tax rate of about 12 %. This compares to a normal capital gains tax of 26,375 %.

If you take the payment as an annuity the taxable amount is reduced by 83 % if you take it at the age of 67 and 90 % if you take it at the age of 77. This is even lower than the 42,5 % reduction calculated above in the case of a lump sum. Keep in mind that you pay it over the entire amount, including the invested sum. What are the three additional tax benefits and cost considerations to take into account when you hold ETFs through a broker:

  1. If you hold an ETF that is over 51 % invested in stocks, you only pay 70 % of the tax according to § 20 1 of InvStG. If it is a mixed fund with under 51 % in stocks the tax rate is 85 %. The impact of these two rules together is that for a stock ETF, you pay a withholding tax of 0,33 % and an overall capital gains tax rate of 18,4625 %. 

  2. According to § 18 of InvStG, ETFs are subject to a withholdings tax. This tax depends on the interest rate and was basically zero for a few years as interest rates were so low. For 2023 the rate used for the withholding tax has been set at 2,55 %. This was the interest rate at which the 10 year-German government bond traded on the last trading day of 2022, December 30. This rate is multiplied by 0,7 and any ETF holder is required to pay this tax over last year's holdings. This means a charge of 26,375 % × 0,7 × 2,55 % = 0,471 %. This tax is in the end deducted from the capital gains tax you report when selling your ETF, but it means that in the meantime you have less capital working for you.

  3. You will be surprised to find out how much money brokers charge. They have a great way of hiding it. In their annual reports to shareholders, they are however very proudly displaying how much they earn from their customers. Below you see a figure from an investor presentation in 2022 which shows that they earn over 1 % on their client’s assets on average.

brokers margins

Our underlying assumptions

How do we deal with these complexities in our calculator? First, we assume that the withholding interest rate stays at 2,55 %, although there is a risk it could increase. Second, we assume that the broker charges 0,2 %, which is a fifth of the overall revenue they obtain from clients, but we assume that you are getting a great deal.

We contrast this with Pensionfriend's fees for a  Private Pension Plan of 0,8 % annually of the value of the assets, and without any upfront cost. We ignore the one-off buy-and-sell cost of ETFs (0,15 % in the case of Pensionfriend which is offset by our rebalancing algorithm) and the charges for the ETFs as they are ETF-specific. We assume a gross retirement income of about 60.000 euros (and hence a relatively high tax rate of 26,375 %, equal to the capital gains tax rate).

For a contribution of 10.000 € at age 30 with payout at age 67, and a return of 8 % – in line with the expected return for our flagship portfolio – this results in effective costs for a private pension plan of 0,8 % before the end tax and 1,18 % after the end capital gains tax. Holding ETFs through a broker in this same portfolio results in an effective cost of 1,11 % before the end tax, and 1,34 % after the end tax.

It is absolutely essential that you choose low-cost private pension insurance to take advantage of the tax wrapper. Most products in the market have high costs. Therefore we have reviewed the fees of all insurance companies and have built a cost calculator to assess the different costs, to find the lowest cost solutions! Costs per year are as high as 4 %! The above example uses our own low-cost product with a fee of well under 1 %.

Lastly, an added benefit is that your ETF-based private pension plan is seizure-proof, so you can't be forced to sell it if you should ever receive state welfare benefits.

Secure your retirement with Pensionfriend's flexible and tax-efficient pension plan.

The clever way to invest and retire in Germany

Secure your retirement with Pensionfriend's flexible and tax-efficient pension plan

One ETF is not the other: tracking difference

You might expect that every ETF that tracks an index for example the S&P 500 has the same performance. That is not the case! You can find ETFs that outperform slightly but robustly, and those that underperform significantly. Selecting the right ETF for your index is pretty important.

We've checked which ETF in a given class performs better inclusive of all costs and hidden gains. For example, for the S&P 500, we can save you an expected 0,25 % which can add up to a nice sum over a longer investment period and with a growing portfolio value.

Choosing the right index or benchmark is crucial 

As professionals will tell you: 95 % of your return is about picking the right benchmark or basket of indices that you want to track. A disciplined investor has such a benchmark and then tracks under or outperformance.

But short of going all the way, let's first just be realistic and avoid the many big pitfalls:

  • As a long-term investor, do not fall into the trap of the many guaranteed products. In the long run, a good index is safe. We see so many examples of guarantees that ruin the returns.

  • Do not choose an index based on short-term data. Insurance companies and trading platforms show you often just data of 3-5 years. That does not tell you a darn thing. We look at total return data over the lifetime of the index and compare them to indices for which we have the longest time series (of up to 150 years). That gives you hard insights as to under/outperformance.

For example, the MSCI world index shows an 11 % return since its start, and everyone nowadays seems to think that that is the best choice. High return, well spread. But this period was just a very good period for stocks and included relatively high inflation. Other indices like the S&P 500 outperformed the MSCI by 1 %. More fundamentally 11 % is not a sustainable stock return. A sustainable stock return is about 7 %: the sum of nominal gross domestic product growth plus dividend yield/stock buybacks. If the return would be higher profits of companies would take up the entire GDP, and that would not work.

We have some tools to help select a benchmark based on long-term returns and risk to the indices (based on historic data and fundamentals). 


In case you are wondering if you should trade your portfolio at all: Virtually anyone will want to adjust their portfolio over time based on their benchmark. This is what the profs call rebalancing. So if you have two ETFs with an ideal weight of 50 % each, then for example at year-end you find that due to price movements, the weights have shifted to 40-60. At that point, profs would rebalance the portfolio back to 50-50 which involves selling some of one ETF and buying some of the other. 

The profs do this, as most good indices over time display some mean reversion. So selling the expensive and buying the cheap index, then means over time an extra gain as you usually sell high and buy low.  

We checked the finance literature and have tested which algorithms for rebalancing work best and created one that leads to a small outperformance in addition to creating a more steady portfolio, and taking away the headache of adjusting the portfolio yourself. 

Rebalancing also makes sense when you get older, or you want to de-risk for other reasons. Shift towards more stable investments, like ETFs that hold rented properties. Or if interest rates increase and hence bonds become more attractive. This then involves buying and selling ETFs, and a tax wrapper helps you preserve your capital.

The biggest risk for individual investors 

Individual investors' biggest risk is succumbing to fear or greed. Buy when stocks have gone up, which is also known as FOMO, the fear of missing out. And the fear that losses will continue when prices are down. While studies are not conclusive as to the size of the losses – as they depend on the market circumstances--credible studies show that investors lag 3-4 % compared to the country benchmark. 

We also see time and again that individual investors do not choose the best index. Unfortunately, we also see many unscrupulous advisors put their clients in portfolios with large hidden costs. 

Few individual investors – and even many professionals – do not understand which currency they should choose for their ETFs and what difference it makes. This can amount to 2 % annually. We urge you to seek a portfolio review.

Structuring your tax wrapper 

You should consider structuring your portfolio such that you have even more tax benefits. Since you need to take the capital of your private pension plan as a lump sum to make the most of the tax wrapper, it makes sense for most people to take it in different tranches. Eg., instead of it all being paid out at the age of 67, you can have the private pension plan paid in different tranches at different ages. So then the investment can accumulate longer in a tax-free way! Also, make sure you can postpone the payout so that in retirement you can fine-tune when you need the money.