Riester Rente vs. other pension schemes

228 posts in this topic

d_mat: once again my apologies for the delay, we have just been snowed under workwise and I was down with a stomach flu for a couple of days as well, hence I could not reply to your interesting inquiry in a more timely fashion. Thanks for posting my info to you here - I am sure it will be of service and help to others as well.

 

Generally speaking: everyone, including every German, should - where possible - avoid front-loaded costs in investment or pension plans. It is not always possible, for instance there are no existing company pension schemes (bAV) without frontloaded costs available on the market nor can savings in tangible assets be obtained without initial lump-sum costs either.

But RIESTER and RÜRUP plans are available without and should be considered thus.

There is, as I indicated in my mail to you above, one more alternative if you want to have the best of two worlds, i.e. free choice out of a good and long list of investment funds AND relatively low initial costs, a combination which many of our clients prefer to the pure DWS TOP-Rente plan: both RIESTER and RÜRUP plans allow for lump sum payments anytime during the year (for instance in December) to make up the total amount you should or want to write off tax wise.

Since the initial costs in the front-loaded plans are always computed "monthly premium times duration times 4-5%" you can reduce the total initial costs by setting up the plan with as low a monthly contractual premium as the plans allow. With most providers that would be either 25 or 50 EUR per month.

So, compare this to full front loaded:

167 EUR per month (for highest RIESTER contribution, single, no children) for 30 years at 5% comes to total costs of 3.006 EUR. This amount at least will be deducted from your net investments during the first 5 years and thus reduces your actually invested capital within the first 5 years by a total of around 30%!!! (total investment 10.020 EUR minus 3.006 EUR)

Now set it up instead with, say, 50 EUR per month. Initial costs now only 900 EUR. Then you make additional lump sum payments each year in order to make up for the same total each as required in order to get max tax benefits and direct subsidies (ZUlage). Each lump-sum payment is charged with 5% costs. That would be each year 1.404 EUR each year at costs of 70,20 EUR, total 351 EUR. So, instead of 3.006 EUR costs during the first 5 years, you only have 1.251 EUR now... much better for you on your compound interest effect after those 30 years of investing for your pension.

Of course, if you chose the RIESTER TOP-Rente instead, you will only have paid around 501 EUR total costs during the initial 5 years.

 

Therefore my advice is this:

1. if you know that you are only going to invest in your RIESTER plan for a couple of years, always chose the plan entirely without front-loaded costs

2. if you think about your RIESTER plan as a long-term investment/pension plan for yourself, you can think about the option as described above with low monthly premiums and lump-sum top-ups as in my opinion a well self-managed portfolio of investmend funds can and will outperform the blind-pool investment at DWS.

 

Which brings me to

JEANNIE: if you are only into your front-loaded plan for the first two years, it may make sense to cancel it and switch to the variation without front-loaded costs still. Only when you are in the fourth or fifth year does it make no sense anymore as you have already paid so much in initial costs anyway.

With regards to the advisor: he is probably not a bad person and doing the best within his limits. which could be set by the company he works for, for instance. Problem is that not many people do the maths properly on this and it is because of this that 99% of the Riester plans are with front-loaded costs and most agents, multi-tied agents and even broker in Germany sell those instead of the options described above by me which offer better benefits and profits for the clients (instead of for the advisor who usually likes 3.000 EUR in his hand better than 900, obviously). What they all most often overlook is the devastating effect on the total outcome due to loss of profit/interest based on compound interest from the investments in the first years. And you can actually - as I did for d_mat and many others, show the difference by using the original DWS software when you put both the DWS PREMIUM and the DWS TOP-RENTE quotes with the exact same data side by side.

So, you might want to consider switching after all, but really and definitely only to the DWS TOP-RENTE - the other option shown above would most likely not work for you properly anymore.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Very informative thread. I'm wondering if any one can enlighten me on the following. I recently looked into getting a DWS RiesterRente and was told that because I am a US Citizen they won't sell me one. I don't understand this. I've been living and working in Germany for nearly twenty years. I have a family here now and am totally integrated into German society. At this point it's very unlikely I will ever return to live in the States. So it makes sense to me to take advantage of all the German State benefits and start up a RiesterRente. But apparently I cannot. Can anyone help me understand this? I'm not keen on the idea of renouncing my citizenship just yet (although at the rate things are going I might have to). Thanks in advance!

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DEgory: unfortunately that is true - DWS (and many others) won't accept US citizen or greencard holders. Reason is that the US governement requires all kind of (expensive) compliance from banks and investment funds around the world even for their expatriate citizen and some banks and insurances just can't be bothered.

So, unfortunately for you, the only true RIESTER plan without Zillmerung is not available, I am afraid. However, there is a second best option still possible to cut down the initial costs: a good independent broker/advisor can set up a plan for you with a min. contribution per month of, say 25 or 50 EUR and a good fund selection - thus limiting your initial costs strongly as they are only computed based on the contractual amount per month for the contractual duration of the plan. You then top it up once or twice a year with lump sums (you put the money away every month just into a savings account or so) in which case you only pay extra fees for the money you actuall invest in this year. That makes more sense for most if not all people and is the only solution for US citizen thanks to Uncle Sam's interference here in Germany.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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So far this RIESTER RENTE looks like the 401K plan (in USA), except it seems you can choose to do unlimited tax-deferred investments into it... can you theoretically put in 100% of your income here?

 

I am more curious if this RIESTER RENTE is targeted against, some low-risk funds; or whether a person can choose to do more aggresive investments (stocks, metals, etc.)

 

My current 401K allows me to play with Stocks, and I manage to get a better return than any fund I do know; at least so far.

 

What choices are there in the underlying investment instruments of a RIESTER RENTE?

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Hi Aihal,

 

401K is much better - for sure.

 

The only way you can choose the investments a little bit is to go with a Riester in the version of a insurance (Riester-Versicherung with funds - Fondsgebundene Riester-Versicherung). If you want to do that you should choose a insurance without start up fees (Zilmerung).

There are a few available.

But the bottleneck is that they have to give a 100% guarantee - which results in the fact that you have influence after roughly about 10-15 years savings time on a percentage of about 20-60% of the investment (depends on your age and on the funds performance). In the beginning a high percentage of any insurance is invested in 100% secure investments - after 10-15 y. there is a reasonable amount of the money which you can influence / decide how to invest.

But to put it clear - from my very detailed know-how in the Riester topic it usually is better to go with a Riester from DWS (which gives a full fund investment - but you can not really have influence what and how they invest) with a full 100% rebate on the costs of the Riester. I can help you with both ways that if you want.

 

best regards

 

danny bauer from Erlangen

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Hi all,

 

It is possible to recieve many insurances or even some Riester plans without the "agent or marketing costs" (initial or lump sum costs)

...

but in order to receive these you have to go to a Honorarberater and pay a fee for the consultancy how to avoid these costs.

 

The question is: Are you willing to pay the consultant instead of the built in costs (insurances or investments) or won't you do that?

 

The more money you plan to invest and the more you want to receive a truly free opinion the more a Honorarberater with a consulting fee makes sense to cut costs and increase your net profit after tax and contracual cost.

 

regards

 

danny bauer

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There are a couple of points here, danny: going through an independent insurance broker for insurances does NOT add to the costs of the insurance. This is an urban myth.

 

Second point: I like the idea of Honorarberatung and this could be the way of the future but it will take a long time to seep through into the German conscience when you consider how most people here get their advice from banks and tied insurance agents and the hordes of 3-letter advisors (DVB, AWD etc ).. People will have to get used to the concept of paying for professional advice here. But there are grey areas:

 

http://www.finanztip.de/recht/bank/honorarberatung.htm

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I am going a bit off topic, but this thread is a treasure throve..

 

Can you guys put a pointer to this thread from one of the wiki pages that lists investment plans from the main page?

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Aihal: as mentioned above, there are only very few plans left with no upfront costs (Zillmerung). The most/best know is from DWS - but be very carefull, more often than not, salesmen will try to sign you up with the WRONG (!) DWS plan, because they offer both, one with and one without upfront costs. The correct one with no upfront costs is called DWS RIESTER TOP RENTE, the wrong one is the RiesterREnte PREMIUM. It is funny or sad that some people still have the chuzpa to sell the PREMIUM plan because not only do the upfront costs harm your overall performance due to the loss you make in compound interest from all the money that is NOT invested for you in the first years (because it is taken away to pay for the admininistrative costs and commissions payments), the PREMIUM plan is actually more expensive in overall costs. Thus, how anyone who can offer both is actually able to sell the PREMIUM plan is beyond me.

Having said that, there is one downside to the DWS plan: your total lack of influence on the choice of investment funds your money is going to be invested in. As a professional advisor, that is something I do not like too much. As an alternative we are setting up our clients for RIESTER and RÜRUP plans wher we have a nice selection of investment funds we can actually manage for our clients with a low contractual monthly premium and then advise to put in lump-sum payments every year. The low monthly premium is the base to compute the upfront costs and if you put in, say, 50 EUR per month instead of the 167 EUR you should put into the plan in order to maximise your tax benefits, you decrease your initial costs/upfront fees by 60-70 % and only pay 4-5 % each time you pay in the extra lump sum in order to make up for the total. That way you also stay more flexible in the future when you have to decrease or freeze your investments for a while.

 

A good independent advisor/broker can help you with that. Honorarberatung (advice based on hourly fee or on a fee based on a percentage of total investment) is the thing to come for the future...but it will take a couple more years before this is will be the common thing in Germany. The UK is just about to abandon commission based advice next year, but they started regulating the financial advisory market in 1995 and Germany only in 2007... so exepct maybe 10-15 years more in Germany before we get there, unless the EU makes serious pressure to this regards on all other memberstates.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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I have a few questions relating to Riester Rente and the German State Pension schemes having read the previous posts:

 

1) Rieter Rente

i) Is the DWS Riester Top Rente therefore only available with non-front loaded costs?

ii) Does the DWS Top Rente give you a choice of funds to invest in?

iii) Is it suitable for those in their 50s or would a Banksparplan be better? and

iv) Can you take out a DWS Top Rente or other Riester product for a non-working spouse and therefore have 2 schemes of EUR 2100 each per annum?

 

2) German State Pension scheme

i) How does the points system work? I understand it to be related to salary.

ii) How can one calculate an estimated final pension?

iii) The 5 year minimum contribution period, is that calender years or actual years? i.e. someone who starts part way through a tax year do they then have to contribute a minimum 5 years thereafter

iv) Can a non-working spouse join the scheme or is it only for those are in employment? and

v) Why do the pension authorities want copies of school reports and details of university attendance? Is it really necessary or does it make a difference to the final pension paid?

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Greetings, layenpol! Your first two questions have been answered by Starshollow in his last post and previous ones on this thread. Non-working spouse can have it, too.

 

Is it suitable for those in their 50s or would a Banksparplan be better? The question is: what kind of Banksparplan? A Sparbuch? Or investment funds, thinking long-term? Depends partly on your mentality - are you extremely conservative investment-wise or willing to accept ups and downs? Would you accept a Banksparplan of 1-2% a year? If so, why?

 

The German State pension scheme: you call the Deutsche Rentenversicherung or visit them in your town and take all your paperwork with you - they can calculate your expected pension and let you know the alternatives for your spouse. You don´t have to believe them, though. Nobody knows what the future holds.

 

They want copies of school reports etc because the pension here is based not only on actual earnings, tax paid etc but on time spent at school, university, being a mother etc. They don´t like gaps here, though. You can´t remember your last job in a pub in from March-July 1997? And can´t prove it? That´ll be deducted from your pension estimate.

 

This is a complex area because it has to do with individual lives and not everyone fits into the exact square. Maybe Riester would be good...maybe something else. For some: Riester is a waste of money, for others a good idea..it depends.

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Hi, john g., I have a question concerning the German state pension system that you might be able to answer for me. Starshollow is also welcome to answer/comment.

 

First, the background. Back in the far, dim and distant past when I was an employee (for the US Army here in Germany from 1989 to 1996), I was obviously paying into the above retirement insurance system. That continued while I was doing my Umschulung (1996 - 1998) and then when I was unemployed (1998-2000). When I went into business for myself in early 2001, the state benefits stopped and so, presumably, did the payments into the state pension system. Please note that I did not formally apply to pull out of the system because I was not aware at the time that that was required; I merely seem to have fallen through the cracks, so to speak. Anyway I am no longer paying into the system but I still get the occasional "Renteninformation", or whatever it's called, that tells me that I am entitled to a monthly pension of about €230.

 

My question is: in order to draw the €230, must I continue paying into the system for a minimum number of years before age 65 (I am currently 59 & 1/2)? I am thinking not so much of full contributions but more of the so-called "minimum amount of €78 or whatever it is these days. In other words, would I have to start paying €78 a month to be eligible for a state pension?

 

Thanks.

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No, the only condition is that you have paid in for at least 60 months, and that you have.

 

Anyway, you won't get your pension at age 65, but at age 65 and 7 months, since you were born in 1953, and you don't get it automatically when you hit that age but have to apply for it a 2-3 months before that date with a special form, the Rentenantrag.

 

Pension age is gradually being raised to 67, and for people born after 1946 this means that they get their pension later, to see how much later, please consult the green table at the bottom of this page.

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@ PandaMunich:

 

I know about the retirement date. I was speaking generally on purpose.

 

But thanks for the heads-up on the pension.

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Can you say as a rule of thumb that the Riester plan doesn't make a lot of sense if you know upfront you will retire outside the EU? What I understand from an article in Spiegel is that one would loose your tax benefits in this case.

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Luke: I would not say that - at least not if you signed up with a plan that comes without major front-loaded costs, that is.

 

it is correct that currently - after the EU reprimanded Germany for demanding tax benefits back from everyone who leaves Germany - that only if you move to an EU country you will not have to pay back the direct subsidies /Zulagen and tax benefits. However, if and when you leave to move to, say, the US or NZ, you can simply freeze in your current contract and demand that the decision about the repayment is defered until pension age. All you have to do is claiming that there might be a chance that you'll return to Germany/EU when you reach pension age. From that point on you change the money you technically "owe" to pay back, i.e the full amount of tax benefits and subsidies, into an interest free loan from the German government to you. Because if you leave Germany at age 40, for example, you can keep all the capital in your RIESTER plan until you reach age 62 or 67 and let this capital generate yield (interest or even better, increase of investment fund values). And when you reach pension age, you still have to repay only the exact same amount that you would owe now.

So, the value of the money you have to repay depreciates by inflation while you may keep all the yield/profits that this money (together with your own investments) have generated in those years until you cash in on your pension capital. And should you decide to take a monthly pension from this plan by then instead of a full capital payout, the interest free loan is even extended because only 15% of your due monthly pension may be deducted for as long as it takes to repay the tax benefits etc.

if you have saved for a couple of years in your RIESTER plan AND have not paid high initial set-up costs (for administration and commission), this interest free loan will basically boost up your own investment's yield by 1-2% every year, quite nice. And, while you claim deferal until pension age, you can always stop this from your side in the entire period of time if you want to have the cash early (for instance after some boom-time on the stock markets).

 

Thus I would think it makes sense for most people who plan to stay for 3-5 years min. in Germany or more. For shorter periods of time, the capital saved and invested may be simply too small to make any sense as described above, though.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Thanks for the replies. I will study this. I really meant leaving Germany at a pensionable age like 62-67 and don't come back to the EU, except for short visits. Now, I still have to go some time before retirement :)

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Meanwhile, I also looked into the possibility of "ComfortRente" (Eichel-Förderung) as extra pension. This comes very close to what I had in the Netherlands. If I plan to retire outside the EU, I wouldn't have a possible loss of tax benefits with the Riester Rente. Can this be confirmed?

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