An overview of the different pension models

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.

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.

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

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