An overview of the different pension models

There are many different models for old-age provision. Often, people simply go to an insurance company and take out a contract if they are concerned about old-age provision. But is the contract really the best one? This is rarely the case. To help you find the ideal retirement savings model for you, Alterix explains everything you need to know in this article.

Some time ago, we saw a frustrated lady on a talk show on ZDF - it must have been Maybrit Illner - who was talking about the Riester pension. She said: "I would never take out a Riester pension again; it's only Riester who has become rich.

In fact, the Riester pension is not the right means of old-age provision for every person. For this reason, we would like to inform you briefly and concisely in this section about which groups of people benefit from the Riester pension. Furthermore, you will learn what the Riester pension actually is and what you can expect from it.

What is the Riester pension?

Walter Riester is known as the founder of the Riester pension. The then Federal Minister of Labour and Social Affairs proposed a subsidised voluntary old-age pension scheme. The reason for this was a reform of the statutory pension insurance. The reform had lowered the net pension level of many pensioners from 70% to 67%. To compensate for this, the Riester pension was introduced.

However, transparent information and education on the subject of the Riester pension did not exist at any time. Thus, people took out a contract for this model of old-age provision even though it was not the ideal provision model for them. This is why the Riester pension fell into disrepute here and there. However, there are groups of people who can profit considerably from the Riester pension. But which groups of people are we talking about?

These groups of people benefit from the Riester pension

The following groups of people are considered to be big winners of the Riester pension:

• Families with children
• Low-income earners
• Well-earning singles

But why is that?

For families with children, the state allowances are the big advantage. The allowances reduce the savings contribution from one's own resources by €720 to €950, depending on the situation. It should be noted, however, that in some individual tax cases a Riester contract for a spouse is more profitable.

As far as low-income earners are concerned, the advantage stems from their own low income. This results in an allowance of at least 175 euros from the state.

Again, high earning singles benefit by being able to deduct up to € 2,100 as special expenses from their taxes. This deduction is particularly beneficial for people who pay the highest marginal tax rate.

Nevertheless, the pension model also has its disadvantages for the aforementioned groups of people. Whether you benefit or not depends on your individual case. Here is a basic overview of the advantages and disadvantages:

The fact is that many of the disadvantages are due to the complicated design of the tariffs and contracts. For example, the high acquisition costs and the problem of non-transparent tariffs can be avoided very well by having a specialist help you choose the right conditions.

Not all Riester pensions are the same!

Finally, we will illustrate how different the individual contracts can be. For this purpose, we will look at three different variants:

• Residential Riester
• Classic Riester pension
• Unit-linked Riester pension

What few people are aware of is the existence of the Wohnriester. This model is used to pay off building loans. It is therefore a subsidy for building savings contracts.

Furthermore, it is important to distinguish between the classic and the unit-linked Riester pension: In the case of the first variant, your contributions are invested in safe investments, which, however, means that the return prospects for your pension are lower. On the other hand, the unit-linked Riester pension has the direct advantage of investing your contributions in funds, which increases the prospects of a higher return.

There are also other models and variants that allow various combinations with bank products or other old-age provision products. It is advisable to seek professional advice on what makes sense for you personally.

The Rürüp pension is a model that belongs to the so-called basic provision and is thus a tax-privileged form of private old-age provision. However, although the Rürüp pension belongs to the basic provision and thus has many parallels to the statutory pension insurance, it differs in many points. So let's take a closer look at the Rürüp pension in comparison to the statutory pension insurance and see who particularly benefits from the Rürüp pension and for what reasons.

Comparison with the statutory pension insurance: The differences & similarities

First of all, a Rürüp pension is treated in the same way for tax purposes as a statutory pension insurance: you can currently claim up to 88 percent of your payments as special expenses for tax purposes. Furthermore, there is a parallel in the type of payment. It must be stated in the contract that - as with the statutory pension - the pension is paid monthly with a fixed contribution. So although a Rürüp pension is a private old-age provision, the capital must not be paid out to you in one go when you retire.

Despite all these important similarities, however, there is one major difference between the Rürüp pension and the statutory pension insurance: namely, the Rürüp pension is a funded old-age provision. This has the following advantages over the statutory pension:

• The legislation remains the same and thus your pension level cannot fluctuate as it does with the statutory pension.
• The Rürüp pension is funded by the capital you pay in over time.
• By choosing certain fund savings plans and insurance contracts, much higher returns are possible.

These groups of people benefit from the Rürüp pension

The following people in particular are in good hands with a Rürüp pension: On the one hand, those who earn well, and on the other, those who consider the statutory pension insurance to be insufficient. Thus, the following groups of people crystallise:

• Sceptics: self-employed people who have doubts about the statutory pension insurance and would like to take out alternative insurance.
• High earners: Self-employed people who earn well and would like to take full advantage of the state subsidies for basic provision.
• Top-up earners: compulsorily insured employees or self-employed persons who earn well and would like to top up their provision in addition to the statutory pension insurance.
• Young entrepreneurs: Well-earning self-employed persons with a secure income situation who want to achieve tax advantages and a good old-age provision.

The Rürüp pension is therefore particularly convincing when it comes to taking advantage of state subsidies and obtaining tax benefits. Furthermore, it is a very good alternative for secure old-age provision with good returns for self-employed persons who are not compulsorily insured in the statutory pension scheme.

With an overview of the advantages and disadvantages of the Rürüp pension, we gradually move on to the conclusion of this old-age provision. Here, the following aspects should be considered:

For a good Rürüp pension, it is necessary to have an overview of the market and the contract design. In addition, for a full state subsidy and tax benefits, it is important to note whether the respective company offers a Rürüp certificate. Here, however, many laypersons make the gullible mistake that a Rürüp certificate automatically means that the respective insurance company sells good products. But this is not necessarily the case. Instead, every aspect must be carefully considered and it must also be decided whether it should be a classic or unit-linked Rürüp pension. Since there is thus a lot of leeway, it is always advisable to talk to a professional about the right pension model.

The abbreviation baV is established for occupational pension provision. This is a principle that has existed for more than 100 years. In the beginning, it was always about companies putting money aside to provide employees with a pension. This was called occupational pension provision.

Today, however, other actions are commonplace. On the one hand, it is possible for the company to pay part of the contributions to a company pension scheme or for the employee to pay the full cost of the pension scheme through deferred compensation. In this case, we are talking about occupational pension provision. A model in which the employer bears the full costs, as in the case of occupational pension provision, is a rarity nowadays.

What is deferred compensation?

Now a term came up that we would like to explain to you. This is deferred compensation. It is a process whereby employees take a portion of their gross salary to pay into a pension scheme. By taking part of the gross salary, the net salary is reduced, but workers receive two very important benefits:

1. There is less tax and social security contributions.
2. This results in additional effective provision for old age.

However, there are exceptions here. For people with monthly earnings between 4,537 and 6,700 euros have several disadvantages with deferred compensation. Basically, deferred compensation is a scenario that should only be used in exceptional cases. Instead, it is always advisable for employees to have company pension plans financed in whole or in part by the company.

How can retirement provision be financed by the employer?

It seems like wishful thinking: the employer pays in and the employees receive a pension later as a result. But this process is absolutely realistic. If you are reading up on this topic for the first time, remember - if you are employed - to find out about the possibilities of a company pension scheme in your company. It is quite possible that your boss will even pay the entire contributions. At this point, please take advantage of the deal! After all, what could be better than entering into a pension scheme into which you don't have to pay a single cent? That's how you like to receive your pension!

Much more likely, however, is the case that your employer supports you in deferred compensation, which saves them money and gives you an allowance for your pension. In this context, there is talk of the so-called employer's allowance, which is even fixed in the case of companies bound by collective agreements.

In what ways can occupational pension provision be implemented?

There are five different ways of implementing occupational pension provision:

• Direct insurance
• Pension fund
• Pension fund
• Direct commitment
• Support fund

Direct insurance

With direct insurance, the employer takes out a life or pension insurance policy for the benefit of the employee with an insurance company. As the administrative burden for the capital lies entirely with the insurer, the employer benefits from a very simple design of the occupational pension scheme.

Pensionskasse

The Pensionskasse is a pension institution formed by several or one company. It is characterised by strong control by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) and the guarantee of subsequent pension payments to employees.

Pension funds

These are legally independent pension institutions through which employees receive a legal entitlement to the promised benefits. With pension provision according to this model, higher returns and thus later pensions are possible, but also higher risks in the loss of the saved capital.

Direct commitment

As the name suggests, these are firm commitments by an employer to pay a pension to employees from the company's assets. For this purpose, the employer uses so-called pension provisions, which it sets up specifically for this case. In the event of the employer's insolvency, the employees' pensions are protected by the Pensions-Sicherungs-Verein (PSVaG).

Support fund

This pension fund is formed by one or more companies and has the task of investing the paid-in capital in such a way that it yields the highest possible profit and guarantees a pension. If the provident fund is unable to pay out the guaranteed pension, the employer must step in. In the event of insolvency, the Pensions-Sicherungs-Verein (PSVaG) again provides protection.

What do you do if you do not have a company pension scheme?

You have already heard many times about occupational pension schemes and have also experienced some of the advantages. However, a company pension scheme is not always offered by a company. Furthermore, the employer is usually not prepared to support it and you, as an employee, have to pay the full contributions yourself. This raises the question of what to do if a company pension scheme is not worthwhile or does not exist.

Well, in this case, look at other methods of old-age provision. From the Riester pension to the Rürüp pension to fund savings plans and much more, you are sure to find what you are looking for. That's why we provide you with a lot of information in this book....

The first model we will introduce to you in the area of private pension provision is the fund pension. Namely, this is probably the most promising model of pension insurance that you can shoulder privately. Let's take a look behind the scenes of a pension plan that offers particularly high earnings potential...

What distinguishes a unit-linked pension?

The answer is already given in the name: There is a link to an equity fund. If this does not help significantly in finding a solution, the equity funds are explained in more detail below:

• Equity funds are an amalgamation of several different securities
• For example, a fund can consist of shares in Apple, Google, Amazon & Uber.
• There are also funds that track the DAX (German share index) or other indices
• Equity funds have the advantage that they consist of several shares and can thus absorb the fluctuations of a single share value (-> risk diversification)

Now another big advantage of equity funds comes into play: Namely, the assumption that the economy always develops over a longer period of time. This is shown by the performance of the DAX, which since its existence has always generated a return of at least 10 percent over a period of ten years. This not only absorbs inflation and compensates for the low-interest phase, but also provides for an effective old-age provision. In addition to the DAX, there are plenty of other equity funds that are characterised by strong and constant returns.

Perhaps you are now asking yourself why you should not go straight into the stock market? The answer is that a unit-linked pension has the advantage that the insurance company takes care of the equity funds and manages them for the insured. Furthermore, there is a guaranteed minimum pension, which does not exist in the free stock market.

These groups of people benefit from unit-linked pension provision!

Private pension insurance is primarily intended for people who still have more than 17 years until retirement. Because over a higher number of years, a good pension can already be saved with moderate monthly amounts due to interest and the compound interest effect. The younger the insured, the more lucrative unit-linked pension provision naturally becomes. The following two groups of people in particular derive advantages from this pension model:

• Young people below the age of 25
• Employed persons between the ages of 30 and 45 at the most

What are the advantages and disadvantages of unit-linked pension provision?

Let us dedicate ourselves to a final assessment of unit-linked old-age provision with the overview of the advantages and disadvantages:

Choosing the right private fund provision is a bigger task than expected. This is because there are numerous providers on the market who demand high administration costs and commissions. For this reason, it is necessary to choose the right provider. This provider should...

• ...be in a good financial position.
• ...offer a large number of funds to choose from.
• ...not include high management fees and no cancellation fees at all.

This choice is of course difficult for the layman, which is why it is important to emphasise how helpful professional assistance from experts in the financial market can be.