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

Your Rürup pension

With your monthly contribution of 300 € you can expect to accumulate a total amount of 244.414 € at age 67. On this amount, you will have to pay an expected tax rate of 19,3 %. You will have to convert into an annuity, i.e. a fixed pension that pays you an expected monthly net income of  592 € throughout your retirement.

The value of that annuity depends on how long you live in retirement. If you live till 95, you get out as much as you put in nominally. If you live the normal life expectancy of 20 years you would have collected 65 % 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 240.865 € after tax at age 67. That is if you would have it paid out at that time. 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. But for the very rare low Rürup cost structures and 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? 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 monthly pension as is demonstrated in the following graph: 

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

In principle, the usually lower Rürup pension is paid indefinitely, that is till you die. In contrast, there is a possibility that you have to cut back the pension from your private pension plan at some old age as your assets run out. Fortunately, you can decide at any time to convert your remaining private pension plan assets into an annuity.  If your buffer is high enough, continuing your investment is much wiser than having your money sit and do nothing. If your buffer for whatever reason has shrunk by too much you can always decide to go for an annuity. We can calculate for you when to do so.

Converting to an annuity later in life has the benefit that taxation declines with age. For example, at age 76 your tax rate for an annuity is pre-multiplied by 10 %. So instead of paying your tax rate of, say, 30 %, you would pay just 10 % × 30 % = 3 %. At age 67 that pre-multiplication factor is 17 %. 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. Unless you grow really seriously old a private pension plan typically gives you a much better pension and an inheritance.

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 advise you how to. Likewise, a Rürup that has a guaranteed return as these are very poor. The tax savings will in no way make up for the costs you incur! The Rürup then still only makes sense if you need a fixed base income in retirement. This can especially be the case if you have modest savings, or don't own a home – and hence have higher expenses. In many cases, an investment property or certainly buying your own home is a better solution to generate a very reliable income stream than a Rürup pension. Also late in life, you should consider contributing to the "Deutsche Rentenversicherung", the public pension system. From the age of 50 or so onwards that yields you a better return than saving up for an annuity.

Canceling

Unfortunately, you cannot cancel your Rürup contract in the sense that you cannot take your assets out of any Rürup contract that you already have 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 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 payout. Not only do your assets not benefit from a positive return in the 20 years or so in retirement, but the insurance company may hold back some 40 % of your assets and only pay this out as some bonus late in retirement if other people in the cohort start to pass away. 

• 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) as protection against longevity risk.

• If you choose Rürup, do select a low-cost version, a high-return investment, and choose the possibility for a pay-out at a very late age in retirement. In this way, your assets keep accumulating at a high return, and you obtain extra insurance for longevity.

• If you plan to retire outside of Germany you should be prepared to pay far higher taxes on the payout than in Germany (up to 10 times).

At face value, Rürup is an attractive option to enhance your pension, but in practice, it is not a sensible choice as the costs are usually very high, and the payout too 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 that 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. 

Consider the following example. Currently, the maximum annual Rürup contribution is 26.528 €. If you contribute 8.146,80 € annually (which happens to be as much as possible) to the public pension, then you can contribute up to a total of 18.581,20 € annually to Rürup; 26.528 € (max. Rürup) - 8.146,80 € (GRV contribution) = 18.581,20 €. Note that the 8.146,80 € contribution to the public pension is only the employee's share. 

The main benefit of the pension is that the contributions are now 100% tax deductible up to the overall maximum of 26.528 €, so the return is accumulated tax-free and you benefit from compounding at a higher rate. 

The Rürup pension is a contract between you and an insurance company. Unlike the public pension, which is a pay-as-you-go pension (your contributions pay current pensioners), the Rürup pension is fully funded and invested for your own future benefit. 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 mostly tax deductible. In 2022, 94 % of contributions are tax deductible.  From 2023 on 100 % is 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, 82 % of your pension is currently taxed, with this value increasing by 1 % every year until 2040. You will have to pay taxes on 100 % of your pension in that year. 

In addition to being tax deductible, you do not need to pay social security insurance on your Rürup pension payouts if you are compulsorily insured. 

If you retire outside Germany you are most likely subject to taxes in your new country of residence. It is quite unlikely that the taxation is as favorable as it is in Germany! Usually, pensions are taxed as if they constitute normal income, hence without the Ertragsanteil.

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 % (2022), which is a pittance compared to other investment returns and much less than the cost insurance companies charge. So you are sure to 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 of and allocation to 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 take the form of an annuity: no lump sum payment is possible. 

The amount of the pension 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 24 at age 67. This means that you get a pension of 24 € per month or 288 € annually for each 10.000 € accumulated. If you live till 87, then you will receive a guaranteed 5.760 € 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 which includes the additional benefit of the so-called "Überschussbeteiligung", the sharing in excess returns. 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

A Rürup pension will last your whole life and provides this pension in a very tax-efficient way. The tax benefit is rather large as you can deduct your initial investment from your income tax and therefore you can invest a much higher amount. While you pay tax on the payout, in the meantime you have earned a lot of return on the money you did not pay tax on.

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 high fees charged by the insurance companies and especially the forced annuity. These can eat up a lot of the return and some of your contributions as well in the case of many conservative investment options.

The effective costs

The Rürup pension fees during the Ansparphase are made up of acquisition and sales fees, and 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 likewise 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 have to 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 aforementioned fees 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.

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 to have 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 insured. 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. In terms of taxation upon pay-out during retirement, it also depends on whether the country has signed a double tax agreement with Germany. If your country of residence has a (double) tax agreement, you just pay the tax of the country you are residing in (residence principle). In other cases, you can end up paying both the taxes of the country of residence and German taxes. Be aware that in most countries a pension is taxed fully at the going income tax rates. Hence your annuity is not going to be pre-multiplies with an "Ertragsantail", and hence 100 % will be taxable. This is a factor 6 higher at age 67, and a factor 10 at age 77! In addition, tax rates may be lower or higher.