Rürup Pension Calculator: Does a Rürup Pension work for you?

Your Rürup pension

With your monthly contribution of 400 € you can expect to accumulate a total amount of 774.759 € at age 67. On this amount, you will have to pay an expected tax rate of 23,83 %. You will have to convert this amount into an annuity, i.e., a fixed pension that pays you an expected monthly net income of  1.770 € throughout your retirement.

The value of that annuity depends on how long you live in retirement. If you live until about 105, you get out as much as you put in nominally. If you live the normal life expectancy of 20 years, you would have collected 53 % of the amount you built up.

Rürup compared to a private pension plan

With Pensionfriend’s low-cost pension plan, you can expect to accumulate a total amount of 774.386 € after tax at age 67.

This accumulated amount is higher for a private pension plan than in the case of a Rürup for most cost structures if you are at a young age. However, for the rare low Rürup cost structures and when you start at a rather high age, the accumulated Rürup assets at retirement may be higher.

Figure 1. The asset value of the Rürup vs. private pension plan options

Does that mean the Rürup pension is better id the assets at retirement are higher? No. The Rürup pension has to be converted into an annuity, and this means that the money is, in essence, no longer gainfully invested. In contrast, the private pension plan can be invested. This is why the private pension plan line in the graph above keeps growing after your retirement.

The private pension plan, therefore, allows you to pay yourself a higher and growing monthly pension, as is demonstrated in the following graph: 

Figure 2. The pension payout of Rürup vs. private pension plans

The Rürup pension is nearly always lower due to the extraordinary cost of the annuity: With the average Rentenfaktor of 22, you get 12×22/10.000 = 2,64 % paid out each year. If instead you take the PPP assets, and you keep investing with our long-term expected return of 8%, we calculate that you can withdraw 5 % and pay yourself a 2% more each year to compensate for inflation and still see your asset stock grow. This withdrawal rate of 5% is almost double the 2,64% you get with an annuity, so this acts is like a 50% + tax.

When you choose a PPP and self invest, your assets remain in place and so these are available to help protect those you leave behind in case of your death, unlike with a Rürup where all your assets will be gone. If you want to financially protects your partner when you have a Rürup pension you have to choose an additional insurance options and accept a significantly lower Rentenfaktor and pension.

The Rürup annuity is subject to tax at your income tax rate. This rate is in practice often close to your tax rate when working, and can even be higher. So on balance this means in most cases no or no meaningful net tax benefit. Only in the more extreme cases, like paying the top income tax rate when working and not having any taxable income in retirement will a Rürup annuity built up with a very low cost be better at the outset. But even then overtime the PPP pension will overtake the Rürup pension as the PPP pension can be inflation adjusted and moreover protect those you leave behind.

Note that the PPP withdrawal is subject to the lower capital gains taxes and only the gains are taxable after being reduced by 15% and again by 50%.

In case of a PPP you can also decide at any time (before the age of 85) to convert your remaining private pension plan assets into an annuity.  Converting your PPP assets to an annuity later in life has the benefit that taxation of a PPP annuity declines with age. For example, at age 76, your tax rate for an annuity is pre-multiplied by 10 %! So, if your tax rate is 30 %, you would pay just 10 % × 30 % = 3 % on the annuity, which is a fraction of the tax on a Rürup annuity.

If you keep investing, you will be able to pass a surviving spouse, or any other heir, a sizable sum, as is shown in Figure 3.

Figure 3. The total value derived from Rürup vs. Private Pension Plans is dependent on life expectancy

Bottom line: A costly Rürup should be avoided in any case. We can offer you a low-cost Rürup if you decide on this option. The tax savings will in no way make up for the typical costs you incur. For nearly all people a low cost Rürup is also not worth it due to the loss of having to take an annuity! A Rürup really only makes sense if you need a fixed base income in retirement. But in that case we usually recommend to voluntarily contribute to the “Deutsche Rentenversicherung,” the public pension system if self employed. From the age of 50 or so onwards, that yields you a better return than saving up for an annuity. The alternative of investing in a investment property would also yield you a reliable base income but at a much higher overall rate of return. And finally directly investing in bonds can also generate you a base income at a rate that is as favorable as the annuity, while you keep your assets in tact for your heirs/dependants.

Canceling

Unfortunately, you cannot cancel your Rürup contract, in the sense that you cannot take your assets out of any Rürup contract that you have already paid into. However, you can stop contributing. Review the effective costs for your latest contributions and use those in the calculator above to see if your contract is worth continuing or whether you would rather switch your contributions to our low-cost private pension plan.

The key points of Rürup

• Rürup pensions are targeted towards the self-employed but can be used by anyone who is below the public pension contribution limit to enhance their pension.

• Most insurance companies offer very costly products, which form a huge drag on your pension. Even the less expensive ones are unattractive because you have to take an annuity as a payout.

• The required annuity results in a very poor overall return. For a 50-year-old with an average life expectancy, a Rürup contract will return about 3,5 % over the entire period even when it returns 8 % (with a low 1 % cost) in the build-up phase. This is for a maximum tax benefit of 45 % tax when working and a 0 % tax rate in retirement. For a balanced tax situation, with the tax rate equal in retirement, the return falls to about 0,3 %.

• Hence, a low-cost private pension plan is often more attractive than Rürup unless you really need an annuity.

• For the self-employed, we recommend voluntary payments to the public pension later in life (say, over the age of 50) to get an annuity, which then grows with inflation — in contrast to the Rürup annuity. The alternatives of an investment property or using bonds for a minimum base income are also preferred.

• If you choose Rürup, select a low-cost version and a high-return investment. We can offer those as well.

At face value, Rürup is an attractive option to enhance your pension, but in practice, it is not a sensible choice. Even for a low-cost option, the payout is poor as you are forced to buy a very low-yielding annuity in retirement.

An overview of how Rürup works

Rürup is a pension designed for those who are not – or not sufficiently – covered by the public pension, the GRV. Everyone is entitled to invest in a Rürup pension up to a maximum, but any GRV contributions you make are deducted from that maximum. 

Currently, the maximum annual Rürup contribution is 29.344 €.

The Rürup pension is a contract between you and an insurance company. The Rürup pension cannot be paid out before the age of 62 (60 if your contract was concluded before 2012), and the contract cannot be terminated, nor is it transferable, lendable, or inheritable. You can pay less or stop paying contributions. 

Tax benefits of Rürup Rente

During the so-called “Ansparphase” or 'pay-in' phase, contributions are from 2023 onward 100 % tax-deductible, so you do not need to pay any income taxes on the part of your income that you contribute to your Rürup pension fund. 

During the 'pay-out' phase, 84 % of your pension is currently taxed, with this value increasing by 1 % every year until 2040. You must pay taxes on 100 % of your pension that year. You do not need to pay social insurance on your payouts.

Investment options for the Rürup pension pay-in phase

The pension can take the form of 1) the classic option, 2) fund-linked, or 3) a fund savings plan (known as “Fondssparplan” in German). 

The classic option has a guaranteed interest rate during the pay-in phase. Unfortunately for those who have to decide now, the current guaranteed interest rate is just 0,25 % (2024), which is a pittance compared to other investment returns and much less than the cost insurance companies charge. So you will surely lose a significant amount of your contribution already in the Ansparphase. 

The investment fund-linked annuity is when the return on your savings (after cost) is directly linked to the performance of an elected type of investment. As a result, this option is likely to have a much higher return but also a much higher risk. It is important to pick the investment fund wisely. Over long periods, the high return clearly outweighs the risk, as the risk becomes relatively smaller. 

The fund savings plan is similar to the investment fund-linked option, with the difference that your payments are directly invested in ETFs or specific investment funds. This allows you to change the choice and allocation of the various funds more easily. Some plans also provide you with options to manage the portfolio composition more automatically.

The payout phase and the Rentenfaktor

You must begin your pension payout between 62 (60 if your contract was concluded before 2012) and 85 years old. All pay-outs are an annuity: no lump sum payment is possible. 

The pension amount you get is not fixed when the contract is concluded. You do, however, get a guaranteed “Rentenfaktor,” which determines the minimum you may get in your pension for each 10.000 € accumulated at the start of the pension.  

The guaranteed Rentenfaktor is currently on the order of 22 at age 67. This means you get a pension of 22 € per month or 264 € annually for each 10.000 € accumulated. If you live until 87, you will receive a guaranteed 5.280 € in pension. In other words, the guarantee is a fraction of your pay-in, and it will not keep up with inflation. 

In the payout phase, you get an “aktueller” or “current” Rentenfaktor and the additional benefit of the so-called “Überschussbeteiligung”, the sharing in excess returns. This additional payment is a black box and very few data are published on this: we can not recommend you to rely on this. If your life insurance company has insured people with very high life expectancies, you can expect to get very little from this sharing, and in any case, you can expect to get it only very late in life.

How to assess Rürup: main benefits and drawbacks of the Rürup pension

Taxes on the payout offset the tax deduction on the pay-in if your tax rate is the same. Only if your tax rate in retirement is lower will you actually have a tax benefit.

Just as with a regular pension, the capital you build up in the savings phase cannot be taken away from you, e.g., when unemployed or destitute, you can get social welfare while keeping your future Rürup pension claims intact, just as you do your GRV. 

Likewise, just like with a normal pension, you cannot access the capital, nor can it be inherited. So, if that is the purpose, then don't use Rürup.

The real drawback of Rürup is the forced annuity, and this gets compounded if you have one with high fees. The annuity by itself makes the product for most people unattractive.

The effective costs

The Rürup pension fees during the Ansparphase are acquisition and sales fees, as well as administrative costs.

The acquisition and sales fees are essentially the commission to acquire the contract. Although often a part is paid to an agent, if you conclude the product directly, you will pay this fee. These fees are set as a percentage of your total expected contribution to the contract. This cost is levied and distributed in equal amounts over the first five years of the contract – this is a legal requirement: § 1 Absatz 1 Satz 1 Nr. 8 AltZertG. You must pay these fees even if you stop contributing after year 1. This cost can limit your return significantly, especially if, after a few years, you reduce or stop your contributions since the fee applies as if you would pay in all contributions. You will also continue to pay the fixed administrative costs out of the contract balance every year until you retire. 

The administrative costs are usually made up of the following; a fixed cost (for example 24 € per year), and a percentage of your balance deducted yearly as an asset management fee. 

To assess the overall costs, each contract comes with an effective cost number or 'Effektivkosten', which indicates how much the fees mentioned above reduce the annual return. For example, if the funds in your contract are targeted to achieve a gross return of 5 % and your contract has 1,5 % effective costs, you will have a net return of 3,5 %. It can be used to compare different contracts since it represents the impact of all fees on return. It is common to find effective costs in the range of 3 %, but you can find amounts as high as 4,5 % and as low as 0,6 %. 

You also have to be alert to the asset management fees. The effective cost for fund-linked products depends upon the asset management fees (this is typically charged as a percentage of the built-up capital or NAV (Net Asset Value). On Product information sheets (called “Produktinfomationsblätter” in German) call it “Prozentsatz des gebildeten Kapitals”). On the Produktinformationsblätter, most insurance companies report effective cost with their highest fund cost while others consider their lowest cost fund, which can make a massive difference. 

Note: During retirement (pay-out phase), there is also a one-off administrative cost, usually about 1,75 %, but some companies charge an additional fee on the final balance.

Discover your options with the Pensionfriend Pension Plan

Survivors' and disability pension with Rürup 

Your dependents are not automatically covered in the event of your death (so no built-in inheritance) in a Rürup contract. You can select for a fee for a survivors' pension and/or a disability pension. The survivor's pension includes spouses (married) and children who are entitled to child benefits. Alternatively, and also for a fee, upon your death, they could gain entitlement to the built-up capital in your pension. It makes sense, especially for your partner, to go for a survivor benefit rather than leaving a generic inheritance behind since, with this option, the risk of the longevity of your partner is then covered and shared with other insureds. However, it is important to consider the cost. 

If you would like a contract with disability protection, it can also be arranged separately with additional costs. Such contracts should, however, not be mixed as the need for each insurance is driven by different arguments, and you may want to change one and not the other down the road, which would be difficult if they are joined. 

What happens if you move abroad? 

If you leave Germany in the Ansparphase, you can, in principle, continue to contribute to your Rürup contract, as these are private contracts. However, unless you continue paying German taxes, you will not receive any tax deductions in Germany for your contributions. You may have tax benefits in the country you move to, but that is unlikely. In any case, you can suspend your payments.

Regarding taxation upon pay-out during retirement, it depends on whether the country has signed a double tax agreement with Germany. If your country of residence has a (double) tax agreement, you pay the tax of the country you reside in (residence principle). In other cases, you can end up paying both the taxes of the country of residence and German taxes.