Why do you need a pension insurance?
Pension insurances make one thing certain: that you receive money when you are old, as simple as it sounds. Most people are dependant on a source of income when they want to retire and pension insurances give you just that.
As a freelancer / self-employed person you usually do not participate in the public pension insurance, so that private pension insurances are a great option to generate income for the golden years.
What pension insurances are available for you?
You can join the public pension insurance but it is often not highly recommendable because the returns are very little, currently hovering at around 1 % per year.
With private pensions you have two basic options:
1. Basisrente: pay into a pension plan and receive tax benefits on the premiums
2. Regular pension plan: same as above but without the tax benefits (why that still could be good, you will see shortly)
Like everything in life, there are pros and cons to both options:
To make it very short: the tax benefit is what separates the Basisrente from regular pension plans and the tax benefit forces the Basisrente to:
Our recommendation for most clients is still the Basisrente because the tax benefit Is substantial and having a lifelong source of income is incredibly important.
How do pension insurance work?
The basic premise is simple: you give an insurance company money, they invest it for you and you receive more money back. The devil Is of course in the detail.
Choosing a guaranty level:
With private insurances, you get to choose how much risk you want to take in the form of the guarantee level. That means when you start a plan you can choose any percentage between 0 % - 100 % and this will be the minimum amount of money you receive back: ou can join the public pension insurance but it is often not highly recommendable because the returns are very little, currently hovering at around 1 % per year.
100 % guarantee: with a 100 % guarantee, the insurance will give you a guarantee that you will receive at least all the money you gave them back (minus the costs involved), no matter what happens.
50 % guarantee: with a 50 % guarantee, the insurance will give you a guarantee that you will receive at least 50 % of the money you gave them back (minus the costs involved). The other 50 % of your premiums depends on how the investments are doing over the runtime.
0 % guarantee: with a 0 % guarantee, the insurance will give you no guarantee at all. That means that technically you could receive no money at all and the return depends on how the investments are doing over the runtime.
For most clients we still recommend to go with 0 % guarantee, if the runtime is minimum 20 years. The reason is that only with no or little guarantee does your money get invested in things that actually generate return: stock and funds.
However, this choice is entirely up to you and you need to be comfortable with your choice over the years.
Choosing the investment type:
With private insurances, you can choose the investment type quite freely:
1. You can choose individual funds, e.g. 10 % into fund A, 20 % fund B and the rest fund C.
2. You can choose basket or portfolios, where the carrier chooses the investment for you based on your preference. You can for example choose a global basket where global funds / stocks are chosen.
Same as above, the choice is entirely yours and depends on what you are comfortable with.
Choosing additional features:
Most carriers allow you to choose three additional features to the plan:
1. Annual rebalancing - Especially if you invest in funds and stocks, your original distribution of investment (e.g. fund A 10 %, fund B 20 %, fund C 70 %) can change over the time. The annual rebalancing makes sure, by selling and buying the funds accordingly, that the distribution will be held over time.
2. "Ablaufmanagement" - Many people that choose little guarantee fear that a big crash will lose all their money shortly before retirement. Ablaufmanagement means that over the last 5 years of the runtime, your money will slowly be shifted to safe investments, making sure that the money is actually there when you want to receive it.
3. Pension guarantee time - Once you start to receive a pension there is one major risk: that you die shortly after that and that most of your money is gone. The pension guarantee time makes sure that your dependants will keep on receiving the pension regardless, with a maximum of 25 years, you can make sure that no matter what happens to you, the money will flow for minimum 25 years.
Once again, the choice Is up to you but our recommendation is to go with all three.
Choosing how much money to invest:
This is probably one of the hardest decisions and this one, we cannot make for you. The more money you invest now, the higher your return later will be but you of course also live in the now and need money for your life. One thing that is certain, is that you will most likely need income when you retire.
The Germans coined a term for the difference between your net income and the likely pension that you will receive from public pension insurance, passive income etc. and it is called the "Rentenlücke".
Essentially, it shows you the difference between what you are earning now and what you will receive when you retire and there are many tools to calculate it when you google Rentenlücke. This gap you will need to close and private pensions are one tool to do that.
How much money you should invest depends on your personal circumstances: how much income you have, whether you have other sources of income for retirement, whether you receive other pensions, your standard of living etc. You should definitely give the Rentenlücke a thought, see how much you roughly need when you retire and try to invest accordingly.
What do I get for my money?
Since no one can foretell the future (yet), you usually get to see two sets of numbers:
1. Guaranteed pension payments / capital
2. Probably pension payments / capital
The guaranteed numbers you will of course only see if you chose a pension plan with a guarantee level. All these numbers depend on a range of factors (how long you pay into the plan, how much you pay, how much costs the carrier has, etc.) that in turn are dependent on your Individual situation. But let's give you an example nonetheless:
This is the basic trade-off at play: a guarantee gives you a minimum amount you will receive, even if the investments go totally down and everything goes bad. But if that is not the case, you will probably receive a less money than in the case without guarantees because here the money gets invested into potentially high-return investments such as ETFs and index funds (or whatever you choose).
One major difference here also is between Basisrente and regular pension: with the Basisrente the 100 € Lucy pays into the plan are not the actual real costs she has to pay since she gets a tax break.
How does the tax break with Basisrente work?
The basic premise is quite simple: up to around 25.000 € per year that you pay into the Basisrente, you can claim back the following year from your taxes. The basis for this is your personal tax rate.
Let's take Lucy again as an example:
Combined with the table from point 4, that leads to the following numbers:
That means that if Lucy's tax rate is 30 % she has net costs of 70 € / month to have a probably pension of 281,85 € when she retires, a 400 % return on investment.
Can you sum this all up for me?
Yes we can:
Ultimately, what the best option and combination of factors for you are depends on one aspect: you. Your personal situation and what goals you have. Our recommendation for you therefore is always based on your individual situation, your personal needs and wants for a pension insurance.
