Retirement provision: How to get the most out of your Riester pension

Highlights: Riester contracts usually produce poor returns - but with government subsidies and tax advantages, they can still be worthwhile for consumers. There would be even more money if politicians finally allowed a simple trick. The Riester pension is getting an increasingly bad reputation because the returns remain low due to high costs and little money is paid out monthly in the pension. But there is a trick with which the legislature could increase the Riesters' pension for savers quite easily and even more quickly. The trick is to wait until the money has been used up - and only then claim the statutory pension.

Riester contracts usually produce poor returns - but with government subsidies and tax advantages, they can still be worthwhile for consumers. There would be even more money if politicians finally allowed a simple trick.

Enlarge image

Pensioners on the Baltic Sea: The trouble with the death tables

Photo: Ralf Homburg / Lobeca / IMAGO

The Riester pension is getting an increasingly bad reputation because the returns remain low due to high costs and little money is paid out monthly in the pension.

The background is the model of the pension insurers, in which the Riester money saved must, in case of doubt, last up to the age of 108. The insurers calculate with high life expectancies among savers; in technical jargon, these calculations are called mortality tables. For every month of pension that the money in the Riester contract has to last longer according to the insurer's calculations, the monthly payout becomes lower. But there is a trick with which the legislature could increase the Riester pension for savers quite easily and even more quickly.

Justified criticism of the Riester payout

The recent criticism of Riester was predictable and quite justified. At the end of January, Axel Kleinlein, financial mathematician and former CEO of the Association of Insured Persons, calculated for the Finanzwende association that new Riester contracts are usually not worthwhile for savers.

In his analysis, Kleinlein ignored all questions of funding this time and concentrated on two points of criticism regarding the basic performance of the products:

First: The costs of many Riester contracts are far too high. No matter how successful insurers and fund companies are at investing money, success will only end up in their own pockets and not in those of their customers. The new Riester products did not even meet the basic requirement of the financial regulator Bafin from 2023, according to which retirement provision products should provide “appropriate benefit” even without state funding. From a supervisory perspective, such a benefit would be, for example, an inflation compensation of 2 percent per year. In fact, Bafin announced tough controls this week in view of the excesses in life insurers' costs.
Secondly: Kleinlein told me this week that to check how much the contracts would bring in the pension payout phase, "for the benefit of the insurers," he used a more realistic mortality table from the German Actuarial Association, which is the professional representation of insurance and building societies - and financial mathematicians in Germany. This makes assumptions about how old the customers in such a Riester customer collective will be and how often a monthly pension has to be paid out to them. According to the average calculations, there was still no return in the retirement phase. From the perspective of the individual Riester customer, says Kleinlein, they have to be 99 years old on average in order to get at least a 2 percent nominal return on the money they deposit.

Theory and practice for Riester customers

As I said, Kleinlein's study deliberately leaves out the funding in the Riester contracts and only examines the performance of the contract. Most Riester contracts are, if at all, worthwhile, especially because savers with children benefit from government support. Or because they also received a tax advantage when they made the deposit and received a tax refund for it every year.

As a Riester saver, you are probably most interested in reading this: How can I at least quickly collect the return from the state support when I retire soon? Federal Health Minister Karl Lauterbach (SPD) has just calculated that there are 19 million aging baby boomers. Millions of them have such a Riester contract.

Possible remedy

Years ago, two scientists at the German Pension Insurance (DRV) suggested a trick that could help many Riester savers get a better, earlier payout. Reinhold Thiede and Christian Rieckhoff suggested that savers first have their Riester pension paid out in retirement, in the amount that they really need each month - before they claim their right to the statutory pension. In other words: You should wait until the Riester money has been used up - and only then claim the statutory pension.

That would have two advantages:

If the Riester contract generated a decent return when saving up to the age of 65 or 67, this would be received by the customer and would not be eaten up by the insurers' mortality tables and high costs during the retirement period.
Secondly, according to the rules of the statutory pension insurance, pensioners would receive half a percent more in pension for each month that they later receive their statutory pension. Anyone who does not claim any or only a small part of their statutory pension in the first 30 months after the official retirement age will receive 15 percent more pension for the rest of their life. So, for example, instead of 1500 euros then 1725 euros per month. Since 1992, not only has 0.3 percent been deducted from the statutory pension for every month that you retire earlier, but also 0.5 percent has been added to it for every month that you retire later.

According to the scientists, the original purpose of the Riester pension would be practically fulfilled with this solution. Savers would actually have more money in their pockets in old age - and the insurers' tough mortality tables would be easily avoided.

The DRV authors first suggested this trick in 2021. But the idea apparently got lost in the election campaign back then. The proposal was also on the table again in the private pension focus group, in which the federal government looked for reform options for Riester with various providers in 2023, but it probably didn't really get through.

No wonder there is headwind from providers

Norbert Rollinger, the president of the General Association of the Insurance Industry (GDV), told me this week that insurers still don't like the idea. In fact, the industry is also missing out on lucrative business.

The BVI fund association is also not happy with the idea, it was said over the phone. The fund companies would rather manage the money themselves for as long as possible, pay it out monthly and earn money from the customers. The association then wrote to me that the BVI is of course against the expensive compulsory retirement of Riester contracts with insurers.

Instructions for politicians and savers who still find the DRV proposal attractive

Christian Rieckhoff, one of the authors, emphasized in the interview that the concept currently fits the landscape much better than it did a few years ago, also because tax rules for prospective pensioners have been changed. It would actually be best if Riester savers had a small part of their statutory pension paid out every month and could then top it up to the full pension amount with the money from the Riester contract. However, such an approach is not yet permitted for Riester contracts.

Most pensioners' health and nursing care insurance contributions could be paid from the smaller statutory portion of their retirement income - and would then be particularly low in this phase. Anyone who only receives a statutory pension of 100 euros would only have to pay 19 to 20 euros for health and nursing care insurance during this time - and would also receive a subsidy of seven to eight euros for the pension fund.
With the receipt of the statutory partial pension, it is also ensured that the tax exemption is based on the entire statutory pension based on the year in which you took partial retirement. The allowance is therefore higher and therefore an advantage for pensioners and Riester savers.

appeal

Dear traffic light, dear members of the Union, make this trick possible! Here you can do something for better additional retirement provision without it costing the state anything. And many Riester savers would have a chance to make optimal use of their savings.

And till then?

At Finanztip we always think about what could be done under the given circumstances so that the 15 million Riester savers get out of the politically messed up situation as unscathed as possible.

1) Check whether and why the Riester contract is worthwhile for you. In principle there are three starting points.

Direct support:

You have children and can take

child support

with you as long as you are entitled to child benefit. That can be 25 years - times 300 euros that's 7500 euros. Plus their own promotion. 175 euros each for 30 to 45 years. In any case, you will receive this in addition to what you have paid in contributions.

Tax support:

If you earn a lot of money, have no children, pay 1,925 euros a year into the Riester contract and receive 175 euros in direct support, you will get 500

to 700 euros back from

the tax office

every year. To do this, you have to pay tax on your Riester pension afterwards. The advantage is particularly relevant if you earn well today and don't have that much pension when you get older.

Successful investment: At Finanztip we have only recommended

Riester fund savings contracts

in recent years

because these have the highest potential returns. The returns for Riester insurance were too low. And Riester bank savings plans were practically no longer offered. With such fund savings plans, a payout plan can initially be used for the payout. However, for the forecast period from the age of 85 onwards, money must still be set aside for pension insurance. With an option for action such as that proposed by the DRV scientists, this expensive pension insurance solution could be eliminated.

2) If the contract is worth it to you, stick with it. Make sure that you actually receive the full funding every year. If you, like several million customers, are saving for a Riester fund policy - i.e. funds in an insurance cover - take a close look at it. You can often swap out the funds you're saving and move on to cheaper ETFs at no additional cost. In doing so, you are changing the return engine of your Riester retirement provision, so to speak. This can be quite lucrative. If the full 2,100 euros bring one percent more return over 20 years, for example four percent instead of just three percent, you will end up with 7,000 euros more in your cash register.

3) If your Riester contract is no longer worthwhile, make the contract exempt from contributions. But don't cancel: You would then not only have to repay the direct funding you received, but also the tax funding from the tax office. In addition, there are often cancellation deductions from Riester providers.

4) If you have just concluded an unfavorable Riester contract in the last five years, then ask a consumer advice center, for example, to check whether it is worth terminating it. Please note the difference in returns compared to a reasonable ETF fund savings plan, but also the direct support, the tax advantage and the health insurance exemption of the later Riester pension for all those with statutory health insurance.

5) Or you can use the credit from your Riester contract to renovate your home's energy efficiency. There are contractual options for this. The model is called Wohnriester and allows you to take the money now and renovate it and only have to pay taxes on it when you retire.

And feel free to talk to your MP about your contract. 2024 is the year of reform for pension provision – and in many places it is also an election year. A small Riester pension reform like this could really give your pension a boost.