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Woman and man doing paperwork (symbolic image): In the case of larger company pensions, savers are asked to pay particularly heavily
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14 million baby boomers, those born between 1956 and 1965, will soon be retiring or have already done so.
Many of them have also made provisions for old age.
Now they are faced with the problem of how to bring their retirement savings home without having to pay too much in taxes and health insurance contributions.
The crucial question here is: How can we avoid the required taxes as best as possible when making the payment?
Less taxes in old age
What it's about: With both the Riester pension and many company pensions, you may have paid in during your working life and thereby avoided the often high income taxes - at least if you earned well.
With Riester, a maximum of 1,925 euros of your money can flow into the contract tax-free every year, and with the company pension even over 7,200 euros per year.
When you retire, you have the money paid out again and have to pay taxes on it.
But then you will have significantly less income - and therefore the tax rate when paying out your additional pension in old age should be significantly lower.
You don't have to pay health insurance contributions with Riester contracts anyway.
And in the company pension scheme there is an allowance of 176.75 euros for small pensions, so that you do not have to pay additional money into the health insurance company for pension payments up to this amount.
The working group for company pension schemes (aba) estimated a few years ago that around a third of benefit recipients receive such low pension payouts.
However, with larger company pensions, savers are asked to pay particularly heavily.
For almost 20 years, they have had to pay health insurance contributions alone for their company pension, and that means an average of 16.3 percent, and together with the more than three percent nursing care insurance, almost 20 percent.
Of the 500 euros in company pension, with 177 euros in the allowance and 323 euros that are taken into account, around 65 euros additionally go to the health and nursing care insurance companies month after month.
More expensive – have your retirement savings paid out in one fell swoop
Most company pensioners don't want to have their pension paid out monthly, but would rather have the money in one go.
And there are also two groups of Riester pensioners who can get a lot of money in one fell swoop.
There are those with the small Riester pension, for whom it is not worth paying it out as a pension because it would be less than 35 euros per month.
This is the limit for a so-called minimum pension, which is based on one percent of the reference value set annually by the legislature (SGBIV§ 18).
Such Riester savers receive their money, typically less than 10,000 euros, paid out in one fell swoop and then have to pay taxes on it in full immediately (BFH, AZ XR 39/17).
However, these Riester pensioners can apply the so-called fifth rule, as with a severance payment.
This means that the taxable income only increases by a fifth of the total amount in the year of payment.
The additional tax incurred is then multiplied by five by the tax office.
So if you receive 10,000 euros, it is assumed for tax purposes that you only received 2,000 euros from your Riester contract in addition to your pension.
The tax for this is multiplied by a factor of five, so the entire payment for the tax office is processed.
More difficult - large payout with Riester or company pension
Then there are all the other Riester savers.
They have the option of having 30 percent of their Riester money paid out in one fell swoop right from the start.
With 60,000 euros in Riester savings, that would be at least 18,000 euros.
Company pensioners also often receive higher pensions.
In this case, there is a risk of a larger tax hit.
If the payment is made in the year in which you are still working and then retire later, these 18,000 euros, just like the 60,000 euros in company pension, are added to your normal income from the tax office's perspective.
Many prospective pensioners who earn well just before retirement end up in the top tax rate in the last year of their employment and may have to pay 40 percent or more of their savings over many years to the tax office.
The Ministry of Finance wrote to me this week: "Depending on the case, the partial or one-time capital payment can lead to a significantly higher income tax burden due to the progression of the tax rate in the year of the payment."
And then there are high health insurance contributions
What makes it more difficult for company pensioners is that when you make a one-off payment, the health insurance company acts as if you were getting the entire company pension paid out in equal installments over ten years.
Then the assumed monthly pension is particularly high and a particularly large amount of health insurance and nursing care insurance contributions can be deducted.
These health insurance contributions to company pensions, introduced in 2004, are still highly controversial politically and are considered unfair by many experts.
The experts are right.
There is now an allowance of 176.75 euros, but for employees with high company pensions it remains an expensive nuisance.
For company pensioners who choose this option, the Federal Ministry of Health has calculated that no additional health insurance contributions will be incurred for one-off payments of less than 21,210 euros.
That would be 176.75 euros every month for ten years.
Anyone who receives more will have to pay additional health insurance contributions on a pro-rata basis, the ministry wrote to me this week.
For example, anyone who receives a company pension of 60,000 euros still has to pay around 7,500 euros to the health and nursing care insurance company.
How can you dramatically reduce your tax liability?
The trick is actually relatively simple.
You simply have the Riester pension or company pension paid out later, in the year after you retire.
By law, for example, Riester allows you to postpone payments until January 1st after your 67th birthday.
Lack of numbers among insurers and pension funds
At Union Investment, the fund company of the Volks- und Raiffeisenbanken, the most important Riester provider with at times over 1.9 million Riester contracts, they know the trick well.
She advises banks to inform their own Riester customers about this solution.
The fund company is currently paying out Riester contracts with payment plans to 75,000 seniors.
According to Union, it was not able to determine how many small pensions and 30 percent shares were paid out as quickly as I asked.
There are apparently no industry-wide figures either.
The General Association of the German Insurance Industry (GDV), which is responsible for the vast majority of the millions of Riester contracts, has no idea how many small pensions have been paid out.
That was the result of a conversation this week.
According to GDV, a total of around 442,000 Riester insurance contracts are currently in the performance phase.
Allianz Leben looks after 130,000 of these, and in the insurance sector it is the group with the most Riester customers with 1.6 million contracts.
The Ministry of Finance announced that it hoped to obtain meaningful figures about small pensioners in the course of 2024.
“New regulations in the pension notification process” should make this possible.
The situation is even worse at pension funds and other providers of company pension schemes.
The working group for company pension schemes (aba) has no empirical overview of the tax situation and health insurance contributions of company pensioners, admitted the otherwise well-informed Aba managing director Klaus Stiefermann.
It also “depends on many personal requirements.”
What you can do
Riester:
If you have not yet claimed your Riester pension, change the pension payment date.
Postpone it until you no longer receive normal employment income that year and therefore pay significantly less taxes.
This applies both if you have your entire Riester pension paid out at once and can divide it into fifths for tax purposes, as well as if you only want to have a 30 percent share paid out.
There are a few hundred euros in it, sometimes even four-digit tax savings.
But please note: If you want to wait until next year to pay out your proportional pension, you will have to wait that long before the entire Riester pension starts.
Company pension:
If you have not yet taken advantage of your company pension, you often still have the choice between a lump sum payment and a pension.
If you have an old contract concluded until 2004, this one-off payment is tax-free.
However, if you concluded such a contract with deferred compensation after 2004, you will have to pay taxes on the payment in full - with the corresponding tax burden.
There has been a regular dispute before the Federal Finance Court for years as to whether a one-off payment of such company pensions could not be taken into account by the tax office using the rule of fifths, which would lead to significantly lower taxes (BFH Ref. XR 23/15).
But in the vast majority of cases, the Federal Finance Court rejects such tax relief, as was the case again this week.
If the company pension is quite high, you will probably have to pay a lot of taxes on a one-off payment.
If that is the case, as with Riester, it is even more important to postpone the payment to a year in which you have as little other income as possible.
Even for an average earner who receives a company pension of 20,000 euros, a later payment saves 2,000 euros from the tax office.
Pension instead of payout:
If you took out your contract after 2004, you might want to reconsider whether paying out in one go is really the best option for you.
Of course, you can then have the money, go on that long-planned trip around the world, renovate the gazebo, help your children buy a house or afford a new car.
Or invest your money well in ETFs.
And when you die, your heirs inherit.
The
one-off payment
is very popular for retirement provision products in Germany.
In fact, German life insurers paid out 89 billion euros to their customers in 2022, but only twelve billion of it as pensions.
The customers who have stuck with such long-term contracts up to this point often want their money immediately.
So you should at least check the monthly payout.
Of course, this is only worth it if you really get old.
From a tax perspective, however, this would have two advantages.
On the one hand, you would then have to pay less taxes because your monthly pension only increases moderately.
On the other hand, the imaginary high contributions to your health insurance due to the ten-year rule no longer apply.
This means that your additional pension is smaller than with the ten-year calculation and you have to pay fewer contributions - if at all.
If your monthly company pension is less than 176.75 euros per month, you do not pay any health insurance contributions at all.
A win-win situation, potentially for millions of baby boomers.
Do the math.