Riester Rente vs. other pension schemes

228 posts in this topic

Hi,

I recently started a Riester contract so I thought I'd share my experiences.

I have a financial advisor from the AWD. I got on to them because a friend works for them too. I like their system and this is how it works, followed by my Riester experiences.

 

AWD

My advisor is a freelancer, working on behalf of AWD. The advisor's job is to tell you what you need e.g. Altersvorsorge and find you all the best deals for the amount you want to save. He gets rewarded when he gets you to sign a contract, but not directly from the bank you buy the scheme from. The bank already has a relationship set up with AWD head office in Hamburg and when you sign a contract the bank gives AWD an agreed comission. Your advisor doesn't know how much as therefore is (in theory) independent of which bank to offer. The advisor then gets a reward (which constitues his free-lance salary) from AWD and the more he makes/saves for the client, the more he should get. The idea is that he is fully committed to finding his customer the best deal to ensure that he gets the best commission. The only dissadvantage should be that he persuades you to save more than you want! I joined up sceptical, I still have my doubts, but on the whole I am happy with the way it works. I think there is no perfect financial advisor-customer relationship.

 

My Reister

So my advisor advised me to get a Riester. We'd talked about how much I want to have set by in retirement and how much I could afford to save now. He did the calcs and picked out a bank that offered a good deal. Now comes this question of gezillmert or ungezillmert, as discussed above. He set me up with a gezillmert contract. Only after signing did I read this forum and phone him up and find out that it was gezillmert. My position is that I may only stay in Germany for the next 5 years, then go back to the UK, or who knows? So if I do leave in 5 years, I'll have paid a huge fee for the Riester and will not get the best out of my investment. My advisor, not having dealt with a foriegner in such a situation before, professed to have just be trying to offer me the best deal as he does his normal German clients. I was worried he was after the bigger comission, as mentioned in other posts, though also not sure how he could have a conflict of interest due to the AWD system.

 

I now believe he was honestly offering me what he thought was best for me (and thus for him). We reevaluated and cancelled my contract in favour of the ungezillmert. I understand that if I do leave in 5 years, I'm better off this way in that I'll pay less charges and if I stay over 10 years it shouldn't make a difference which I'm on. As for my advisor's position I believe that he really didn't have a conflict of interest. However he explained that the advantage to many advisors to offer the gezillmert contract is that the bank lets him keep his commission providing the customer doesn't cancel within the first 3 years. For the ungezillmert contract, he has to wait longer before his commission is safely his. In the case of AWD, he tells me, there is no difference. AWD average it out to 3 years, immaterial of whether the contract is gezillmert or not, thereby keeping him independent.

 

I can't be sure everything I learnt is 100% true and I still proceed with a watchful eye, but I'm reasonably happy that I know what's going on with my money.

Hope that helps somone. Thanks to you all for the posts above which helped a lot. When I decide I was wrong in 5 years time I shall try to remember to post here again!

 

Roland

0

Share this post


Link to post
Share on other sites

Hi Roland: first of all: AWD advisors are not entirely free in their choice of products from the market for you. They are multi-tied agents according to the new rating of financial advise. So they are better than a tied insurance agent but not on par with a realy independent broker. A really independent broker must follow the best-advise principal in full... there is a huge difference here. I myself would not like to be seen in the same boat like someone from AWD, MLP or OVB or any other of those structured/pyramid distribution organisations. But thats just me ;-)

 

The scheme you were told about how the agent gets paid does not sound convincing to me. In the end he/she is dependant from the commission the bank or insurance company pays for the contract to AWD from which he receives a certain percentage. He/she will always know beforehand if and how much commission comes out from a contract... but most RIESTER plans with Zuillmerung all offer about the same commission, hence there will not be much incentive to go for a certain plan amongst those just for comission reasons, that much is true.

Yet: of course the agent has a huge incentive not to offer a "ungezillmerte" plan to you, the difference being around 1.500 - 3.000 EUR commission paid or not to him/her

 

You or anyone can always see the real costs (and commissions) from the quotes you receive. Since summer last year, any such quote has to show the full costs for administration and commissions paid so that you can learn easily, if a given plan or product makes sense to you.

 

Anyway: I am glad that the agent you were in contact with was willing to cancel the old contract and switch you into one without "Zillmerung". It is indeed the only way it makes sense for you. Should you decide to leave in a couple of years you can keep the invested money running in Germany and claim a deferal for your back-payment of tax-breaks and subsidies received, thus turning them into an interest free loan from the German governement for you for as many years to come as you want. That way even a period of 3-5 years only for investment makes sense on the long run.

 

If you have any further questions, please do not hesitate to contact me for second and unbiased/independent opinion

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

since I just got a message about the "multi-tied agent" status of AWD in contrast to a really independent broker:

 

this is the legal statement from AWD website (Impressum) as required by law:

AWD ist als Vermittler von Versicherungsverträgen als Mehrfachagent (Versicherungsvertreter mit Erlaubnis nach §34d Abs. 1 GewO) gemäß § 59 Abs. 2 VVG i.V.m. §§ 84 ff., 92 HGB tätig.

A "Mehrfachagent" is just that, a multi-tied agent, not an independent broker.

 

If you want to lear more about the difference between tied agent, multi-tied agent and broker, read here on our website: http://www.crcie.com/pageID_5814397.html

 

Having said that: not every multi-tied agent is "bad" and not every independent broker is "good". But there is a clear distinction and I as an independent broker to not like others, who are not, to pose like as they were independent, too. Its just not cricket...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

If you really see a possibility of going back to your home country after 5 years, I don't think you should be seriously considering the Riester Rente program.

0

Share this post


Link to post
Share on other sites

Hutcho: while I usually agree with you in many points (especially your take on real estate), I do have to say that you are mistaken here. For someone who is working as an employee in Germany (and perhaps with some children to come by), a RIESTER-plan without "Zillmerung" (i.e. upfront costdeduction) makes perfect sense.

So why is you it you would not want to go for it...? Eager to learn your reasons as well as to what would be the alternative if someone wants to start saving money for retirement.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

Hey,

 

I am thinking of starting a Riesterrente this year. What happens if you leave Germany 5 years down the line but want to continue with your Riesterrente? Is this allowed and if so, how does it work with regards to the benefits? Thanks in advance.

0

Share this post


Link to post
Share on other sites

sorry for the delay in answering that question, was down with a bad cold for a couple of days (and since this is MY area of expertise - among others) I guess nobody else wanted to answer that:

 

1. currently the law says, that if you give up your residence in Germany and move to another country, you will have to repay the subsidies (ZUlagen) and tax break monies received. Therefore you should only look into plans without "Zillmerung" or up-front-costdeduction, the costs for administration and commission for the broker should only be charged "pro rata", i.e. as you go.

 

1.1. However: you can simply claim a defereal of the backpayment until pension time when leaving Germany. Through this simple process you turn the money you legally would have to return to the German authorities into an interest free loan from the German governement to you for the duration (and you decide how long this duration actually lasts). This makes sense in so far as you will be allowed to keep the profits/yield generated with this "loaned" money, i.e. it works as an additional leverage for the yield on your own invested money (that works well only, of course, if you invest in funds). So, even under the current regulation and laws a RIESTER plan without Zillermung makes sense on the long run.

 

1.2. the European Commission has challenged the German gov. with regards to this rule and is currently sueing Germany at the European court. I am pretty sure that at least for EU citizens and/or for people moving within the EU, the current requirement to return said subsidies and tax break money will be overthrown eventually. It might than even happen that because it is so hard to administer that they forget about this all along, regardless of where you move to in the end. So, there is a good chance that if you claim this deferal for the time being you will live to see that the requirement to pay back anything at all...

 

If you unsure where to get a good plan without Zillmerung, contact me or any good and independent advisor...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

 

Hutcho: while I usually agree with you in many points (especially your take on real estate), I do have to say that you are mistaken here.

Fair call. Makes sense what you say.

0

Share this post


Link to post
Share on other sites

lets just say that you are entirely right with regards to the standard RIESTER plan being offered by 99% of the insurance salesmen and banks because they usually only offer the plans with upfront costdeduction and that is definetly not working for an Expat who only intends to stay in Germany a couple of years.

 

However, I am right when one looks at those RIESTER plans without upfront cost-deduction and one factors in additionally the deferal of back-payment until pension time for those tax refunds and subsidies received during the time one paid into the contract - something not many even among the financial advisory crowd know about.

 

There is also one good reason to invest into a RIESTER plan even after leaving Germany and even if one does not intend ever to return to Germany: the invested money is protected against claims from third parties. So even if you hit a major pothole in your future life and have some creditors screaming for you blood (and money), nobody can touch this money until pension time, so it is safe haven for you even in times of dire straits - this also makes it some kind of secret chest hidden away for someone who needs some cash to bounce back after a bankrupcy - because oneself can always stop the deferal-time and cash in even before reaching pension time. Needless to say: RIESTER plans are also excempt from "Abgeltungssteuer", the new capital gains tax in Germany...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

I have 2 one for me and one for the wife with the Stuttgarter.Supposed to be a good investment according to the statistics.

0

Share this post


Link to post
Share on other sites

...but Stuttgarter would be definetly one with upfront cost-deduction within the first 5 years. So do please make sure that you continue to pay into this plan for the whole duration until pension time, otherwise your yield will be severly harmed from the costs and commissions deducted upfront. I would never recommend the plan for Expats who plan to leave the country in a couple of years without intending to continue paying into the plan for the remainder of the duration. In effect: I would not even recommend these plans (Suttgarter or any other similar ones) to Germans for the loss of compound interest from the first year's payments in comparison to a plan without "Zillmerung".

Hope I did not spoil your weekend with that comment, Mik?

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

@Starshollow Thanks for the info in this thread. All very valuable

 

i have just had a meeting with my Bank (HVB) where they were pushing a riester Rente on me. I asked about the fact that possibly i may leave German in 1- 5 or 10 years time and how would that work. I was told that if I wanted to cash it in, i would have to payback all tax benefits and the Zulage. This made sense to me. However, i was also told that if i kept my Bank account open but put the payments on hold, then when i reach my pension age, this will be paid into my bank account like normal and i would receive my full benefits in Germany, even if i was living in the UK or Us. This sounded a little flaky to me... Has anyone heard of this before and would it really work?

0

Share this post


Link to post
Share on other sites

For once the HVB has given you the correct information (in most parts of their info, that is). If and when you leave Germany you can basically claim with a small note to the responsible "Zulagenstelle" a deferral of the repayment of both direct subsidies (ZUlagen) and tax returns received until pension time. By doing this you convert the money you "owe" the German gov. into an interest free loan from the gov. to you because 30 years from now you would still only "owe" the same amount than now (of course depcreciated by inflation in value) while you may kepp all the profits generated with it (which is why a RIESTER plan investing in investment funds makes the most sense IMO for such a strategy). When you keep ithe plan up/on hold until pension age and you'll have to decisions to make: cash in (and repay the dues) or receive a monthly pension payment from which, if you are not living in Germany, they will deduct 15% monthly as long as it takes to repay the dues (thus you extend the interest free loan once more for some time). This is why the right RIESTER plan makes a lot of sense for Expats.

Besides: the European Union is sueing Germany because of this "repayment" rule when leaving Germany ( violates the fredom to move within the EU, among other things) and chances are that over the next say 5-10 years, this stupid rule gets cashiered anyway, so you might not even have to repay anything.

 

BUT: ask them to show you exactly what costs for administration and commissions are deducted in the first years after you started the plan. They have to show you the exact amount so that you can see what costs you incure. Because if it is one of the plans where they collect the full adminsitrative costs and commissions for the entire duration of the plan (until pension age) in the first 5 years, the deal is not attractive to you. You should only consider a plan that collects the costs "pro rata", i.e. every month while you invest. Only under such circumstances does it make sense for you...

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

 

Besides: the European Union is sueing Germany because of this "repayment" rule when leaving Germany ( violates the fredom to move within the EU, among other things) and chances are that over the next say 5-10 years, this stupid rule gets cashiered anyway, so you might not even have to repay anything.

This might get solved actually faster than I thought. According to an info I read today in the recent edition of Focus Money magazine, the General Attorney at the European Court has published an opinion that the regulation by the German gov. about the repayment of subsidies and tax breakes received for RIESTER contract upon leaving Germany (i.e. giving up tax residence) violates EU laws and is thus to be ruled against by the court. It is the tradition of the European Court to follow usually closely the verdict of the General Attorney. It seems like a verdict is expected during this summer already, so that will be good news for all Expats contemplating a RIESTER or already having one!

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
0

Share this post


Link to post
Share on other sites

what is the difference between Riester and Rurup pension schemes? i have neither because many years ago when i looked into all this was told it is only valid for people staying in germany. now my ears have pricked up!

0

Share this post


Link to post
Share on other sites

Riester if employed and Rürup if you're freelance - or at least I think that's what I read somewhere.

 

Quick look at wiki suggests that Rürup can be used by employees but Riester cannot be used by self-employed/freelancers - so I was almost right.

0

Share this post


Link to post
Share on other sites

ok, here is a quick RIESTER & RÜRUP 101 for you. But in all earnesty: you should tlak or confer about this in more details with a financial advisor of your choice since it can be highly beneficial for you but it needs to be checked if this fits to you, your tax-situation and your life planning.

 

RIESTER: named after a former federal German minster and thought to balance through private means that part cut from all public pensions at that time (about 3%). So basically if many people believe by having a RIESTER plan that they beef up their public pension a lot, what they actually do is only to get even or a bit better than they were before the pension cut (I think in 2001).

 

Anyway: while everybody can pay into a RIESTER plan and while doing this may even make sense for those people who are not eligible for the full subsidies/tax returns due to preferential treatment in view of the new capital gains tax, RIESTER is primarily attracive for employees and their spouses, even more though if the employee/spouse have a number of children.

If you pay the required amounts into a RIESTER plan (which is at least 4% of your gross salary but caped at 2.100 EUR/year) you'll receive a direct subsidy from the gov. of 154.- EUR/year per person and for children born since Jan. 2008 even 300.- EUR/year. The rest of your investment is than fully tax deductible as "Sonderausgaben" under § 10 a income tax law (EstG).

 

How does this work out?

Example:

Family of four, one parent with income from employment, one parents without or with income only from freelancing/selfemployment

Employed parent earns 40.000 EUR gross per year

1. RIESTER contract for employed parent

 

Based on the gross salary, in order to get the full benefits (if you go lower, the subsidies and tax breakes will be reduced at the same percentage), the employee would have to pay in 1.422.- EUR per year (or 118,50 EUR/month) and will get credited to his RIESTER plan the 154 EUR/year for his own "head".

 

2. RIESTER contract for spouse w/o employment

 

The spouse gets her own 154.- EUR subsidy plus two times 154.- for the children (if one of the children would have been born in 2008 or later, this would increase for that child from 154.- to 300.- EUR) and received thus 524.- EUR per year in the spouses very own pension contract without contributing a dime. The children's head subsidy will be paid until they reach 25 years or start to earn their own income before (so eternal students still living in "Hotel Mama" are at least good for something)

 

3. Balance for the family: their investments in this pension plan amounts to a total of 2.100.- EUR per year, out of which 678.- EUR are contributed from the gov., i.e. nearly 1/3 ! If you use a RIESTER plan investing in funds (also because of the cost average effect over time) you get a huge profit on your own invested money in comparison to any other investment I know of.

 

Other EXAMPLE:

Single employee, earning 30.000 EUR gross per year

 

The employee has to pay into the plan a monthly 162,17 EUR in order to fulfill the 4% requirement. On top of this he receives the 154.- EUR direct subsidy per head PLUS a tax return of about 496.- EUR with the tax note. So for the emploee the total benefit from direct and indirect public contributions also amounts to about 30% - plus the profits hopefully generated with the monthly investments over time.

 

RESULT: from looking at the direct profits through subsidies and taxes it makes a lot of sense to invest into a RIESTER plan if one is eligible.

 

What is important to know for EXPATS:

1. you can continue to pay into the plan still from abroad, if you want. It may make sense to you to build up a pension claim in a different currency if you'll live outside the EURO area later

2. the money invested is guaranteed in full to you at the end of the contract time. So you can never lose the invested money (in effect if you only get back what you invested after 20 years it is still a loss due to depreciation of the value of the money, but I don't want this to get too complicated).

3. the money invested is protected against claims from third parties. If you ever fall into bad times where your creditors want to get their hands on everything you own, this is one money they can't touch and thus it is safe to you for old age

4. currently the legal situation is such that if you leave Germany (give up your tax residence) you would have to repay the subsidies and tax breake money received in the past years. However: a) you can claim a deferal until pension time and turn this into an interest free loan from the German gov. to you for many years to come while you may keep all profits earned with this (I elaborated about this at different threads already), thus RIESTER still works well for you even if you live only for a couple of years in Germany and

B) this regulation is bound to be cashiered by the courts in the near future, so we can probably forget about it anyway.

5. when you reach pension age (starting with 60 years) you can decide either just to draw a full pension, cash in 30% and receive a full pension from the remainder or cash in the full amount (in the latter case you will get the total of subsidies and tax breake amounts deducted from your total claim because the subsidy is for a pension plan after all!).

 

One thing is important from my point of view: for most EXPATS only a plan without ZILLMERUNG, i.e. upfront cost deduction, makes truly sense. Unless you can committ yourself to pay into the plan for the fullduration until pension age. 99% of the plans on the market deduct the entire costs/commission for the full duration (in case of a 30y old person that is the total of your monthly contributions for 35-37 years!) in equal shares during the first 5 years. If we take our example from the single employee above with 162,17 EUR contrbution per month and assuming the person was born in 1969, the total costs deducted in an average good plan (oterhs could be worse!!!) just as clsoing fees and for commissions would be around 2.300.- EUR. There would be additional small cost during the duration of the plan. Since these costs are collected in most RIESTER plans during the first 5 years, the cash value looks like this:

 

1st year: paid in total gross 2.100 EUR/net 1.450 --- redemption value 1.479.-

2nd year: paid in total gross 4.200 EUR/net 2.900 ---- redemption value 3.059.-

and so on and so forth... until year 5 is through, only afterwards will most of your money get fully invested.

 

As you can see, during these first 5 years, the costs basically gobble up most of the subsidies/tax benefits. Therefore, especially under the current still existing legal situation that people have to return theoretically all subsidies/tax break money upon leaving Germany, this would be not a win-situation for Expats and thus not recommendable (if someone has still made you start such an investment without discussing this with you, he/she has conned you and you have the right to dispute the whole thing).

While I am sure that the EU courts will indeed cashier this re-payment regulation, there is anyway a different option on the market where you just pay about 5% of your monthly contributions every month you continue investing. That way it stays more flexible and right from the beginning more of your own money gets actually invested - which, looking at the effect of compound interest is also very important. I charge my clients usually a closing fee directly paid to me of 200.-EUR per contract because for me like for any other advisor a commission of 80-90% out of the monthly 5% contributions is not exactly atttractive as a single business per se. But of course if you have a couple of hundred such contracts running, it ain't bad either. With the clsoing fee I charge basically the costs I have for doing all the paperwork (including the one when you finally leave the country etc). and my clients find this a pretty fair deal. But of course anyone is free to find the right plan wihtout Zillmerung by him-/herself, chose and manage the right investment funds etc over time. ;-)

 

So, this was the RIESTER 101

 

I'llput the RÜRUP 101 in a separate thread following swiftly. And of course I am happy to check-out your personal options and send you quotes which show your individual tax benefits etc. if you let me have your personal information as follows:

a) date of birth

B) family status (single, married, with children, DOB from spouse and children, occupational status and income p.a. of spouse)

c) your own occupational status and

d) your yearly gross income

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
3

Share this post


Link to post
Share on other sites

RÜRUP: named after a professor of eonomics who lead a so-called RÜRUP commission to consult the German gov. His idea was to put the BASIS-Rente (that is the real name, but Rürup-Rente is more common) side by side to the RIESTER plan in order to allow self-employed persons also to transfer tax money from income taxation into pension claims. While the full benefits for a RIESTER plan are indeed reserved to employees and their spouses, RÜRUP is open for everyone and can be used by both employees and self-employed. But from the tax situation it is more attractive usually to self-employed.

 

This is how it works:

Currently you can pay in a max of 20.000.- EUR per year into the RÜRUP pension plan. In 2009 you can write of 68% of this amount against your income (i.e. reduce it for the purpose of taxation).

This percentage moves up 2% points every year for the next years until it reaches 100% eventually. so in some years (do the math yourself) you can write of the full amount against your income.

If your tax bracket is in the 40% and if you invest, say, 10.000.- EUR per year, you'll turn around 2.700.- EUR of money otherwise lost in taxes into a contribution to your pension (10.000.- EUR times 68% to be written off with 40% tax rate). Not a bad deal.

 

There are things similar and some things very different in comparison to RIESTER, the differnces being usually the points which make people, especially Expats, hesitate to use a RÜRUP plan:

Similar

1) invested money is guaranteed in full at the end of the contract period

2) invested money is protected from third party claims, i.e. nobody can touch this money before you reach pension age, it is safe for your pension no matter what

 

Different

3) invested money can be paid out cash at any time in parts or in full. The money invested will only be paid out as lifelong pension

4) while you can arrange for the plan to pay a widow(er) pension to the ones you leave behind, the money per se can not be inherited after your death (similar to the public pension claims, which also are left behind to the public and not to your family).

 

So, if you are tired about all these high taxes you pay in Germany and if you want to turn some of the money in very secure pension claims for old age, this is an interesting alternative.

There is even a combination with an occupational disability insurance which would make a lot of sense tax-wise now and would encourage you to conitnue paying into the plan even from abroad in order to continue your disability insurance while living abroad.

 

Unfortunately there are nearly NO plans on the market without Zillmerung and definetly NO plans on the market in the combination of pension and disabilty plan wihtout Zillmerung. Since the idea in the latter case, however, is to keep up this very important insurance for your income protection until you reach pension age, it is not that bad since you are forced to keep on paying into the plan and thus the costs deducted upfront can iron themselves out over time. But it is a pity that there is no other choice on the market.

 

Again, I do offer anyone a free analyzis of the individual situation and quotes if they'll let me have the basic information.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
1

Share this post


Link to post
Share on other sites

Thanks for the above info regarding the differences between zillmerung and ungezillmert plans.

 

Now, a further question regarding Riesterrente... What level of annual charges should one expect to be charged for fund management in a Riesterente. An advisor has suggested that a policy he is offering me with a charge of 1,5% (unbrellafund) and 0,7%...0,75% (subfunds) per year (so between 2,2% and 2,25% in total) is "low cost".

 

I'm not actually a great fan of this umbrella fund concept as generally paying for multiple layers of management overhead can quickly mount up, although the cost spread of each individual part in this case does seem quite low. This is possibly because all the funds are offered by the company providing the Riesterrente (in this case DWS).

 

But does anyone have an idea as to the benchmark cost to be expected? Should I go and tell the advisor to go and sling his hook?

0

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now