Riester or Rürup pension for employed person

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Hello Toytown forum. First, I would like to thank all of the contributors to this forum as this website has helped me with a number of things in preparing my move to Germany. I am now settled in Berlin and looking forward to a nice life here in Germany.

 

Now I’d like to pick your brains for some info on the German pension system. I have recently been hired on a full-time salaried contract by the German branch of a large US software company here in Berlin. I am looking into pensions to supplement my obligatory DRV contributions. In brief, my situation is as follows:

 

- Dual UK / US citizen

- Domestic partnership with German citizen

- Resident in Berlin

- Expecting child this year

- Health insurance through TK

- Planning on living in Germany for at least 5 years

- Potentially moving to another country in the EU or to the US (my job may require this) for a few years

- Most likely returning to work in Germany after sojourn abroad

- I would intend to make contributions while living and working abroad.

 

I have read a lot of information on this website, and it seems that the best option for me would be the Riester without frontloaded costs. I would appreciate it if anyone can offer any additional advice perhaps pertinent to my situation. I am willing to receive quotes and additional information from a professional firm as I have seen legitimate representatives on this website and in fact, this website seems to be the best source of English-language information about these topics. Thank you for reading my post.

 

Kind regards,

 

Brockman

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I am now settled in Berlin and looking forward to a nice life here in Germany.

 

I have recently been hired on a full-time salaried contract by the German branch of a large US software company here in Berlin.

I am looking into pensions to supplement my obligatory DRV contributions. In brief, my situation is as follows:

 

- Dual UK / US citizen

- Domestic partnership with German citizen

- Resident in Berlin

- Expecting child this year

- Health insurance through TK

- Planning on living in Germany for at least 5 years

- Potentially moving to another country in the EU or to the US (my job may require this) for a few years

- Most likely returning to work in Germany after sojourn abroad

- I would intend to make contributions while living and working abroad.

 

I have read a lot of information on this website, and it seems that the best option for me would be the Riester without frontloaded costs.

HI there!

 

For every full-time employee, the first and best private means to supplement the public pension is the company pension schemes in Germany, called bAV (betriebliche Altersvorsorge).

With a bAV you can shave off money from your gross salary directly into your own pension plan and thus save the taxes you'd otherwise pay for this chunk of your salary into your own pension capital. And, also important: when you reach pension age you have the right to chose between an annuity for life based on your accumulated capital - or a total cash payout. The latter is often very attractive for Expats who might enjoy retirement someplace else in the world

 

You'll just need to ask your HRM about bAV - every employee has a right to chose such a plan and often employers actually co-contribute. You can compute your own tax savings and potentially those of the employer (if your gross salary is below 60k EUR p.a.) here at our website for free: http://www.crcie.com/financial-advice/employees/tax-benefit-calculator-bav-company-pension-plans/ You can put inthere 4% of your gross salary up to max 384 EUR p.m. total (so if your employer contributes something, too, reduce your own share of the monthly investments accordingly)

 

Often the employer allows you to chose your own plan thru a broker of your choice. If that is the case, feel free to contact one of the independent broker and advisors here on Toytown who are specialized in catering to Expats as they know better which plans are suitable for you (especially with your US citizenship). Sometimes employers demand that you can only use a broker/agent exclusively which the company preselected. Legally they can only do that if they co-contribute to your plan, but no employee will pick a fight with HR over this... so if that is the case, hope you'll get at least some decent advice. You can of course try to protest and ask HR to use your own broker still :rolleyes:

 

RIESTER can be interesting especially when you have a child finally - but the total you can put away each year is only 2100 EUR, so not much of a help for serious pension planning.

 

RÜRUP can be added to all of the above, but it has some pros and cons you'll need to understand in full before chosing it.

 

Last but not least, my standard advice for everyone: also earmark some money every month for mid-term investment planning. Too often people put money away for the proverbial nest-egg for retirement only and forget to built up capital for midterm goals. And when they then need money to start a business, take a sabatical, buy a house, they need to sell some of their pension plans for cash which always comes at penalties/losses.

 

All in all: get yourself an independent financial advisor to assist you with decent planning. You might also want to try our simple pension planning tool to build up some first understanding about your goals for the future and how much you'll need to invest for that:http://www.crcie.com/financial-advice/pension-planning/c-r-cie-pension-planner-light/

 

Last but not least: in lilght of your family planning, also please think early enough about term life insurance and income protection (occupational disability insurance/critical illness coverage ) in order to make sure your loved ones are protected in case something happens to you.

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Thank you. Regarding the bAV, I will ask my HR Manager about it. What happens if I change jobs or leave the country? Can I still contribute to it?

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Hi Brockman,

 

1. if you change company, you can take the bAV with you (either as complete plan or, if the new employer has its own system, just the capital from the old plan into a new one)

2. if you leave the country, you can continue to contribute as long as you keep a bank account in Germany (not sure if transfers from other Eu countries work, probably yes)

 

Cheerio

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Hi Brockman!

As Starshollow points out, you can continue paying in if you leave Germany but you wouldn´t have the tax/social insurance benefits as you wouldn´t be in the German tax/social insurance system anymore. Another thing to think out in that case....

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Tks John - sometimes one gets blind to the obvious in day-to-day business. This is of course entirely true and needs to be mentioned.

Btw: I have had word that in the UK the continuing contribution to a German RÜRUP plan would actually be considered for tax benefits still - but of course only like a similar plan in the UK would. Have not seen proof yet, though...

 

Cheerio

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HI there!

 

For every full-time employee, the first and best private means to supplement the public pension is the company pension schemes in Germany, called bAV (betriebliche Altersvorsorge).

With a bAV you can shave off money from your gross salary directly into your own pension plan and thus save the taxes you'd otherwise pay for this chunk of your salary into your own pension capital. And, also important: when you reach pension age you have the right to chose between an annuity for life based on your accumulated capital - or a total cash payout. The latter is often very attractive for Expats who might enjoy retirement someplace else in the world

 

You'll just need to ask your HRM about bAV - every employee has a right to chose such a plan and often employers actually co-contribute. You can compute your own tax savings and potentially those of the employer (if your gross salary is below 60k EUR p.a.) here at our website for free: You can put inthere 4% of your gross salary up to max 384 EUR p.m. total (so if your employer contributes something, too, reduce your own share of the monthly investments accordingly)

 

Often the employer allows you to chose your own plan thru a broker of your choice. If that is the case, feel free to contact one of the independent broker and advisors here on Toytown who are specialized in catering to Expats as they know better which plans are suitable for you (especially with your US citizenship). Sometimes employers demand that you can only use a broker/agent exclusively which the company preselected. Legally they can only do that if they co-contribute to your plan, but no employee will pick a fight with HR over this... so if that is the case, hope you'll get at least some decent advice. You can of course try to protest and ask HR to use your own broker still

 

RIESTER can be interesting especially when you have a child finally - but the total you can put away each year is only 2100 EUR, so not much of a help for serious pension planning.

 

RÜRUP can be added to all of the above, but it has some pros and cons you'll need to understand in full before chosing it.

 

Last but not least, my standard advice for everyone: also earmark some money every month for mid-term investment planning. Too often people put money away for the proverbial nest-egg for retirement only and forget to built up capital for midterm goals. And when they then need money to start a business, take a sabatical, buy a house, they need to sell some of their pension plans for cash which always comes at penalties/losses.

 

All in all: get yourself an independent financial advisor to assist you with decent planning. You might also want to try our simple pension planning tool to build up some first understanding about your goals for the future and how much you'll need to invest for that:http://www.crcie.com/financial-advice/pension-planning/c-r-cie-pension-planner-light/

 

Last but not least: in lilght of your family planning, also please think early enough about term life insurance and income protection (occupational disability insurance/critical illness coverage ) in order to make sure your loved ones are protected in case something happens to you.

 

Cheerio

 

Starshollow´s whole post is fine ( of course ) and I´d really like to back up Starshollow´s point here, especially the last full sentence! Pensions? Fine! Great idea!But first you have to work 30 or 40 years or more to get one paid out..lots of stuff can happen before then, as Starshollow mentions: the main breadwinner can die or have a serious accident or get cancer or whatever...earnings then? What earnings...! THESE are existentialist priorities for an adult reflection on which provisions to have in place. Plus, of course, personal liability insurance/private Haftpflichtversicherung.

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Do bAV plans create any sort of problems for American citizens when it comes time to file US taxes?

 

No - and Straightpoop verified this in another thread already: the contribution to pension plans does not fall under the FATCA reporting problems. I'll check later the exact info again and re-post it here.

 

Cheerio

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Thanks as always for the great investment tips from Starshallow and John G on these boards.

 

I would like to ask some finepoint questions to bAV...:

 

- I have read on various websites that if you are not privately health insured (GKV), at the time of retirement age you will have to pay the entire social and health insurance contributions in addition to income tax... I understand that usually at retirement you make less money than what you make during working life so the total taxes you pay should be less overall, but is still safe to say, as a general rule of thumb, that the advantages that one gets from deferred compensation outweigh what one would have to pay additionally (i.e. without employer contributions for health insurance and social security)?

The decision is probably much easier if the employer contributes something to the bAV scheme...But if the employer contributes nothing, is a bAV still a good idea?

 

- In total you mention the limit of 384€/mth. (Maybe this is the limit for 2014?) Which i assume includes the 150€/mth which can be additionally contributed to the bAV plan without tax income deduction but with social security deductions. Does this mean that if someone contributes more than 242€/mth or 2904€/yr, these additional contributions up to 150€/mth will be taxed twice??

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Another thing - if I understood correctly, a Riester pension is fairly useless if you are going to retire outside of the EU, as only EU residents get the payout.

Starshollow, did I get that right?

 

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Thanks as always for the great investment tips from Starshallow and John G on these boards.

 

I would like to ask some finepoint questions to bAV...:

 

- I have read on various websites that if you are not privately health insured (GKV), at the time of retirement age you will have to pay the entire social and health insurance contributions in addition to income tax... I understand that usually at retirement you make less money than what you make during working life so the total taxes you pay should be less overall, but is still safe to say, as a general rule of thumb, that the advantages that one gets from deferred compensation outweigh what one would have to pay additionally (i.e. without employer contributions for health insurance and social security)?#

 

it is not easy to give a correct answer to that as it all hinges on how much income you'll have when retiring, i.e. how much of it is liable for taxation and social welfare contributions anyway. If your pension income puts you in the highest bracket anyway, it is of little concern to you if your pension payouts from bAV would theoretically be levied upon with public health insurance costs as they are capped at a certain threshold anyway.  At significantly lower income the computation may come to a different result.

 

But as a rule of the thumb you'll be saving more in taxes and social welfare contributions (the latter only if your gross income is below 72.600 EUR p.a., though) now than you'll have to pay later. Especially if you take the compound-interest-effect of your saved taxes (and at the same time the investment creating yields as well) into the calculation.

 

 

 

The decision is probably much easier if the employer contributes something to the bAV scheme...But if the employer contributes nothing, is a bAV still a good idea?

 

Even if the employer does not contribute a dime you are still doing something good with the money you'd otherwise hand over to the taxman when investing into your very personal pension plan.

 

Two things can indeed improve the total benefits for you:

a) employer contribution: if your gross salary is below 72.600 EUR this year, your putting part of your gross salary into the bAV also saves money for the employer, who has then less to contribute on top of your contributions for taxes and social welfare contributions. A good advisor can compute these benefits for you and you'll take them to HR for negotiating that they just pay in what they save, thus it remains a zero-sum result for them but improves your alpha. Furthermore, an employer can award up to 40 EUR each month tax free for an employee, which, too, can be used for bAV. And finally the "Vermögenswirksame Leistungen", which can add another up to 40 EUR to the total, can be used here, too

b ) on the other side, savings costs is also important. Especially if your employer more or less demands that you only use plan XYZ thru agent/broker ABC (which the employer can in a manner of speaking, in order to keep administration costs low for himself and have better supervision on the plans the employees put their money in) there should be a massive rebate on the administration and commission charges that come with these plans in order to make it worth your while. I would normally expect a 50% rebate to be offered to all employees in such a case and if you can't find this, ask HR/employer why they did not negotiate such a rebate for the employees when they are giving so much business in the hand of just one insurance or agent/broker.

 

 

 

- In total you mention the limit of 384€/mth. (Maybe this is the limit for 2014?) Which i assume includes the 150€/mth which can be additionally contributed to the bAV plan without tax income deduction but with social security deductions. Does this mean that if someone contributes more than 242€/mth or 2904€/yr, these additional contributions up to 150€/mth will be taxed twice??

yep, old numbers - in 2015 the total possible is max 392.- EUR per month, out of 242.- which can come with both tax and social welfare contribution savings and another 150.- with only (! :-) )tax savings.  so it is additional tax savings, not social welfare contributions on those 150 EUr p.m.

 

Cheerio

 

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Another thing - if I understood correctly, a Riester pension is fairly useless if you are going to retire outside of the EU, as only EU residents get the payout.

Starshollow, did I get that right?

 

well, yes and no. If you retire outside the EU, you'll have to pay back the tax savings and direct subsidy (Zulage). So you will be a bit worse off than anyone retiring in Germany or within the EU. But:

1. you'll only have to pay back the exact amount of tax savings and direct subsidy, there is no inflation adjustment or interest to be paid on that. That way, you'll enjoy 100% of your tax savings today while 20 years from now you'll only pay back maybe 80% or less, depending on inflation if you look at the future value of money. Plus: all the time the direct subsidy and the tax savings work for you in the way of generating either interest or additional yield from investment in EFTs or managed funds. These savings are your's to keep, too, which works like a performance-turbo on your actual net-investments because the tax savings and direct subsidies work like an interest-free loan for you all the time, leveraging your net-investment. 

2. when you reach pension age, you can cash in 30% right away as you know - or take an annuity for the entire capital instead. Now comes another neat thing: if you chose a monthly pension, only max 15% of that pension must be used to pay back those "loaned" tax savings and direct subsidies. That way you can stretch the interest-free loan yet again for years and have that loaned money continue to work for you (i.e. continue to earn interest or yield).

 

Therefore I think even in the case that someone already knows he'll be retiring outside the EU, a RIESTER can make a lot of sense if you take care of reducing the initial costs strongly, i..e. not signing up with any of those plans which comes loaded with upfront-cost-deductions in order to pay a hefty commission to the advisor.

 

Cheerio

 

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9 hours ago, Starshollow said:

 

yep, old numbers - in 2015 the total possible is max 392.- EUR per month, out of 242.- which can come with both tax and social welfare contribution savings and another 150.- with only (! :-) )tax savings.  so it is additional tax savings, not social welfare contributions on those 150 EUr p.m.

 

 

So i guess the next logical question: is it also a good idea, if you are in a position, to take advantage of the extra 150/1800 tax savings? (Especially I assume early on to reep the benefits of compound interest).. The idea of having to pay the social welfare contributions twice (once every month or per year and again at retirement) doesn't sound very attractive.. What am I missing here?

 

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there is a small error in your rational: the social welfare contributions are also capped, i.e. once you exceed the gross salary of the max. level, no new/additional costs for social welfare are being added. Just taxes continue to increase indefinitly with the income.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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On 10.11.2015, 12:23:03, Starshollow said:

there is a small error in your rational: the social welfare contributions are also capped, i.e. once you exceed the gross salary of the max. level, no new/additional costs for social welfare are being added. Just taxes continue to increase indefinitly with the income.

 

Cheerio

 

 

Yes, thank you for the further explanation Starshallow and allowing me to think outside of my own situation!

In the end, it's quite frustrating to think that the people who earn the most money are able to reep the most benefits out of the current system...

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