bAV - Have I got the right end of the stick?

21 posts in this topic

Evening all!

 

My employer has offered to contribute to a Betriebliche Altersversorgung and today was an initial conversation with the agent.

 

I find the idea intriguing and am loathe to leave my employer's tax free money on the table, but was concerned by a couple of things.

 

  1. For 26 years of contributions of 254€ a month (costing me directly 75€ a month, or ca. 29.000€ all in) I'm only g'teed to get around 72k€ (around 10% less than all the inputs).
  2. Only max. 15% will be invested in anything which may give me higher returns
  3. According to online calculators, this is an annualised compound return of around 3.15%
  4. The agent gets around 10% of my first 5 years worth of contributions

 

This really doesn't feel either like a lot of money nor high interest (I take this positively, as it is a sign I am not too German, not yet, anyway…).

 

What am I missing here? Are these crappy returns normal?

 

Would it not make sense (with 26 years to go till retirement) to invest privately with my NET salary into something with more Va-va-voom and miss out on paying the Sozialabgaben in 2043?

 

Assuming long term index returns of 7% and a post-tax sum invested of 145€ each month I get a similar lumpsum at the end.

 

I see the offer as suitable for the risk-averse, but unlikely to fund my champagne and caviar lifestyle in my well-earned retirement.

 

For a nod in the right direction I'd be greatful!

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And who knows how high the social security deductions will be once you reach pension age, they will certainly be higher than the ones now...

Don't forget that you also get to pay income tax on 100% of that monthly pension once you reach pension age...

 

Please read:

and (same reasoning for employee bAV as for Rürup plans for self-employed):

 

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39 minutes ago, Edd.Turner said:

Evening all!

 

My employer has offered to contribute to a Betriebliche Altersversorgung and today was an initial conversation with the agent.

 

I find the idea intriguing and am loathe to leave my employer's tax free money on the table, but was concerned by a couple of things.

 

  1. For 26 years of contributions of 254€ a month (costing me directly 75€ a month, or ca. 29.000€ all in) I'm only g'teed to get around 72k€ (around 10% less than all the inputs).
  2. Only max. 15% will be invested in anything which may give me higher returns
  3. According to online calculators, this is an annualised compound return of around 3.15%
  4. The agent gets around 10% of my first 5 years worth of contributions

 

This really doesn't feel either like a lot of money nor high interest (I take this positively, as it is a sign I am not too German, not yet, anyway…).

 

What am I missing here? Are these crappy returns normal?

 

Would it not make sense (with 26 years to go till retirement) to invest privately with my NET salary into something with more Va-va-voom and miss out on paying the Sozialabgaben in 2043?

 

Assuming long term index returns of 7% and a post-tax sum invested of 145€ each month I get a similar lumpsum at the end.

 

I see the offer as suitable for the risk-averse, but unlikely to fund my champagne and caviar lifestyle in my well-earned retirement.

 

For a nod in the right direction I'd be greatful!

Do you have a free choice of how to invest your money? Or is the employer tied to a particular company/tariff? Why do you say only max. 15% will be invested in anything which may give you higher returns? How conservative is the quote re how your money is invested?

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25 minutes ago, Edd.Turner said:

Evening all!

 

My employer has offered to contribute to a Betriebliche Altersversorgung and today was an initial conversation with the agent.

 

I find the idea intriguing and am loathe to leave my employer's tax free money on the table, but was concerned by a couple of things.

 

  1. For 26 years of contributions of 254€ a month (costing me directly 75€ a month, or ca. 29.000€ all in) I'm only g'teed to get around 72k€ (around 10% less than all the inputs).
  2. Only max. 15% will be invested in anything which may give me higher returns
  3. According to online calculators, this is an annualised compound return of around 3.15%
  4. The agent gets around 10% of my first 5 years worth of contributions

 

This really doesn't feel either like a lot of money nor high interest (I take this positively, as it is a sign I am not too German, not yet, anyway…).

 

What am I missing here? Are these crappy returns normal?

 

Would it not make sense (with 26 years to go till retirement) to invest privately with my NET salary into something with more Va-va-voom and miss out on paying the Sozialabgaben in 2043?

 

Assuming long term index returns of 7% and a post-tax sum invested of 145€ each month I get a similar lumpsum at the end.

 

I see the offer as suitable for the risk-averse, but unlikely to fund my champagne and caviar lifestyle in my well-earned retirement.

 

For a nod in the right direction I'd be greatful!

 

Hi there - a couple of questions:

a )  does your employer limit your selection to just this particular bAV Direktversicherung and this particular intermediary ? He can do so (especially if there is a "Versorgungsordnung" effective in the company that regulates this). Others leave the selection open to the individual employee.

 

b ) if the employer limits you to choosing just from this particular pension insurance, does he co-contribute (your computation ref. 254 gross vs 75 net sounds like this)  to this, if so, how much per month ?

 

c ) did the employer negotiate a serious (and I mean really serious!) discount with the agent/insurance company for these plans? Usually, you should have at least a 50% rebate on normal costs. (your numbers sound like the agent/insurance is deducting the FULL commission and administrative costs and that should not happen if there is a binding agreement set up by the employer.

 

The total capital is, of course, limited by reduced initial investment (due to commission deductions)  and the low return if it is mainly a pension plan based on "safe" investments.  Both could be altered if your employer allows. He should definitly check to lower the costs/get a rebate anyway. 

 

What you'll also get with these kind of pension plans is a guaranteed pension factor, i.e. a guarantee how much pension is being paid to you for the rest of your natural life. With the ever increasing "risk of longevity", this is important in my professional opinion.

 

Regarding investing in mutual funds or an ETF, please bear in mind the changes in taxation (ongoing now every years) starting from new January. You will now have to pay taxes on interims profits every year and thus loose an important benefit that investment funds so far had (and any ETF that is not fully replicating will incur comparatively high taxes as compared to a normal investment fund based on directly investing into shares/stocks.  This will be avoided within pension plans, hence they suddenly become a better alternative than they were until now.

 

So, yes, a bAV company pension plan can be really good for you. But it is important that the initial costs are strongly reduced and, if possible, you should have a good choice of investment funds and said funds should be invested in full pretty early into the game (WWK and Canada Life offer good options to this regards).

 

If you or rather your employer can't get a serious rebate on the standard/normal costs, you should decline - unless the employer pays in full.

Btw: on the other hand you can - for tax optimization - increase your monthly gross contributions to 404 EUR per month even.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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It sounds like what's throwing you is the guaranteed payout at the end, which is less than what you and your employer will have paid in. But remember that it's the guaranteed sum, it's the minimum amount, and it's based on the expectation that interest rates will remain near zero for the foreseeable future - which they might or might not. If interest rates go up, so will returns, which means your final payout/annuity sum will be larger in the end.

 

PandaMunich's cautions about higher social security deductions and having to tax 100% of your pension payments are true, but I don't see them as a reason to turn down what is essentially free money - your employer will be paying more than 2/3 of the total premiums.

 

When figuring out whether it wouldn't be better to just invest the money yourself, you assume a long-term index returns of 7%. We're currently far below that. But if you're willing to invest €145/month, why not do both - pay the €75 for the employer-subsidized scheme and put another €70-75 into a savings plan or index fund privately?

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PS: I am a big fan of PandaMunich myself.  But for once I do not fully agree with her assessment of pension plans in Germany like bAV Direktversicherung. And not just because I earn money from advising those.

 

Yet, she is right --of course :-) - in general with the kind of crap that is too often sold in Germany for company pension (or RÜRUP and RIESTER for that matter).

With commission costs in the range of 4,5 % on the total capital yet to be invested being deducted from your input during the first 5 years, you are paying an awful lot of costs and lose out on a lot of compound interest, too, because of these early deductions. The insurance adds some extra costs to the commisison just for pre-financing and administerin it - hence you'll easily end up with 6-7 % in costs with fully front-loaded plans. To this regards PandaMunich is fully correct, these are not really good options for you or anyone

 

However, if you get a serious rebate/discount  on the initial costs and your employer co-contributes a serious number, this becomes a different ballgame entirely.

 

And sometimes that needs to be added to a real comparison of a simple direct investment vs a pension plan with guaranteed pension payments is the costs for the latter.

If you die early enough, so to speak, you are better off with your direct investment. If, on the other hand, you live longer than late 80s

by then. Hence this needs to be factored in, unless you are sure to die early.  Cheerio

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13 minutes ago, El Jeffo said:

It sounds like what's throwing you is the guaranteed payout at the end, which is less than what you and your employer will have paid in. But remember that it's the guaranteed sum, it's the minimum amount, and it's based on the expectation that interest rates will remain near zero for the foreseeable future - which they might or might not. If interest rates go up, so will returns, which means your final payout/annuity sum will be larger in the end.

 

PandaMunich's cautions about higher social security deductions and having to tax 100% of your pension payments are true, but I don't see them as a reason to turn down what is essentially free money - your employer will be paying more than 2/3 of the total premiums.

 

When figuring out whether it wouldn't be better to just invest the money yourself, you assume a long-term index returns of 7%. We're currently far below that. But if you're willing to invest €145/month, why not do both - pay the €75 for the employer-subsidized scheme and put another €70-75 into a savings plan or index fund privately?

Jeffo:in your first paragraph,  you are assuming the plan is based on the classical and shitty German Kapitallebensversicherung/Rentenversicherung whereby the money goes into a Black Box and SOME of the money is " invested " according to interest rates eg 1% a year etc. Investment in eg equity plans and a whole range of them has nothing to do with interest rates and a diversified portfolio can be very profitable long term, bearing in mind the Cost Average Effect..ok, tax stuff changes and no guarantees of anything in this world re long term plans but the absolute greatest rip off is a classical Kapitallebensversicherung/Renterversicherung and the Germans have long been suckers for this.

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3 minutes ago, john g. said:

Jeffo:in your first paragraph,  you are assuming the plan is based on the classical and shitty German Kapitallebensversicherung/Rentenversicherung whereby the money goes into a Black Box and SOME of the money is " invested " according to interest rates eg 1% a year etc. Investment in eg equity plans and a whole range of them has nothing to do with interest rates and a diversified portfolio can be very profitable long term, bearing in mind the Cost Average Effect..ok, tax stuff changes and no guarantees of anything in this world re long term plans but the absolute greatest rip off is a classical Kapitallebensversicherung/Renterversicherung and the Germans have long been suckers for this.

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All true, John, but given that his employer is paying more than 70% of the costs, I don't see any reason why he'd be worse off for doing it than for leaving it. Like I said, it's free money.

 

Of course it would be better if he got to choose the plan and how the money was invested, but given the employer subsidy, he'll come out ahead no matter what.

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I agree he should do SOMETHING, Jeffo, but best if he can choose a more profitable arrangement long term (Disclaimer: he should have the choice to decide how to invest the money not only financially, shall we say, but also ethically if preferred. " I want ecologically sound investment or I want Coca Cola all over the place ", as examples.)

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1 hour ago, El Jeffo said:

All true, John, but given that his employer is paying more than 70% of the costs, I don't see any reason why he'd be worse off for doing it than for leaving it. Like I said, it's free money.

 

Ok, and now think about this: how about you propose to your employer to give you a pay rise instead, of the same gross amount.

 

It would still cost your employer the same, but you would get money to invest just like you want to, no strings attached, no looming income tax and social security deductions at pension age, since it has all been taken care of now (after all, this way it's "after tax, after social security" money you would be investing).

 

If you want to improve on that, suggest to the employer to give you 44€ a month of that raise in Gutscheine, which would be free of income tax and free of social security deductions every month: https://www.edenred.de/steuerfreier-sachbezug.html

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Thank you to all commenters. I will go through this tomorrow and (for the benefit of future askers of the same question) will do my best to answer them.

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OK, 24 hours later and I've found out a bit more:

 

Quote


And who knows how high the social security deductions will be once you reach pension age, they will certainly be higher than the ones now...
Don't forget that you also get to pay income tax on 100% of that monthly pension once you reach pension age...

 

 

@PandaMunich - Yikes! Not to mention Abgaben zur Krankenversichuerung…

 

Quote


Do you have a free choice of how to invest your money? Or is the employer tied to a particular company/tariff? Why do you say only max. 15% will be invested in anything which may give you higher returns? How conservative is the quote re how your money is invested?

 

 

@john g. - No, they claim that the rules of the bAV mean only 15% of the funds can be risked, the chosen fund is EuroStoxx 600 (0.2% fee, already accounted for in their calculations). The rest is put in Bonds and other lower-interest products. Apparently this was the choice my boss made, it's presumably been imposed on everyone and can't be (easily) changed. The fund is apparently returning around 7% YOY at the moment.

 

Quote

 

Hi there - a couple of questions:

a )  does your employer limit your selection to just this particular bAV Direktversicherung and this particular intermediary ? He can do so (especially if there is a "Versorgungsordnung" effective in the company that regulates this). Others leave the selection open to the individual employee.

 

b ) if the employer limits you to choosing just from this particular pension insurance, does he co-contribute (your computation ref. 254 gross vs 75 net sounds like this)  to this, if so, how much per month ?

 

c ) did the employer negotiate a serious (and I mean really serious!) discount with the agent/insurance company for these plans? Usually, you should have at least a 50% rebate on normal costs. (your numbers sound like the agent/insurance is deducting the FULL commission and administrative costs and that should not happen if there is a binding agreement set up by the employer.

 

 

 

@Starshollow

 

a) Yes he does - just this guy and just this package if want to see any of his 100€ a month.

 

b) He will match 1:1 anything we put in up to 100€ p.m. (This is really why I am here - it seems a shame to get money for nothing and then get such a low return for it)

 

c) Remains to be seen - will arrange another meeting and ask again. As far as I know, he will be getting his hands on part of my money for the first 5 years. I forget the sum - I'd like to say it was between 1- 3 k as I remember thinking that over 5 years it seemed fair enough.

 

Quote

Regarding investing in mutual funds or an ETF, please bear in mind the changes in taxation (ongoing now every years) starting from new January. You will now have to pay taxes on interims profits every year and thus loose an important benefit that investment funds so far had (and any ETF that is not fully replicating will incur comparatively high taxes as compared to a normal investment fund based on directly investing into shares/stocks.  This will be avoided within pension plans, hence they suddenly become a better alternative than they were until now.

 

Noted, thank you.

 

Quote


If you or rather your employer can't get a serious rebate on the standard/normal costs, you should decline - unless the employer pays in full.

Btw: on the other hand you can - for tax optimization - increase your monthly gross contributions to 404 EUR per month even.

 

 

 

Now my questions:

 

1. Decline - and look for what sort of high-return alternative?

2. How to go to 404€?

 

Quote


But if you're willing to invest €145/month, why not do both - pay the €75 for the employer-subsidized scheme and put another €70-75 into a savings plan or index fund privately?

 

 

@El Jeffo - I like this idea, thank you.

Quote


If you want to improve on that, suggest to the employer to give you 44€ a month of that raise in Gutscheine, which would be free of income tax and free of social security deductions every month: https://www.edenred.de/steuerfreier-sachbezug.html

 

 

 

@PandaMunich We get 40€ a month of Fuel through that scheme (it's great, and it was my suggestion to him a couple of years ago), and I'm currently trying to get him to replace my laptop at his cost (which I read about somewhere as being an §EstG perk (?)) and then invest the money that I would have used for that.

 

I've also made an appointment at the Verbraucherzentrale to get an overview of the pension landscape and will be making some decisions about both my attitude to risk/return and informing myself on the tax position of alternatives - i.e. what could happen if I invest part of my net salary in something more exciting, run more than one scheme, etc… And checking the family tree for longevity genes. My dad reckons on hitting 90… 

 

Lots to think about, thank you all for your help!

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Hi @john g., Patrick fixed me up with one of them a while back; my boss is prepared to pay into that from January 2018 (he'll put upto 100€ in any mix of VwL or bAV).

 

I currently pay in 25€, whether or not I put in more (or ask my boss to do so) depends on what I decide to do about bAV. But thank you for tip!

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13 hours ago, Edd.Turner said:

 

@john g. - No, they claim that the rules of the bAV mean only 15% of the funds can be risked, the chosen fund is EuroStoxx 600 (0.2% fee, already accounted for in their calculations). The rest is put in Bonds and other lower-interest products. Apparently this was the choice my boss made, it's presumably been imposed on everyone and can't be (easily) changed. The fund is apparently returning around 7% YOY at the moment.

1

 

Edd: please ask both the agent and your boss/HR for the existing "Versorgungsordnung" (VO) . this is the legal framework set by the company to rule and regulate the company pension system set up there. if your company does not have one but still only works (and demands to limit all employees to that) with one agent and one kind of pension plan, there are in serious danger for liability suits from former employees in the future.

The selection you describe hints at the typical German-type "angst" about reasonably risks&chances in investing long-term. But that is, as said, typical and not uncommon. though it sadly limits your chances on making good returns.

 

 

13 hours ago, Edd.Turner said:

 

 

 

@Starshollow

 

a) Yes he does - just this guy and just this package if want to see any of his 100€ a month.

1

 

Figures - just ask about the VO. 

 

13 hours ago, Edd.Turner said:

 

B) He will match 1:1 anything we put in up to 100€ p.m. (This is really why I am here - it seems a shame to get money for nothing and then get such a low return for it)

 

 

Then you might want to limit yourself to an amount that is maxing this benefit for you and not more. I.e., you'll pay in 100 EUR, your employer puts in 100 EUR and due to your tax savings/deductions on your own 100 EUR you'll only pay around 45-50 EUR net for 200 EUR p.m. investment. Even with a bad cost-structure, it is something hard to beat with any other form of safe (!) investment. Because as a bottom line, you have a firm guarantee that in a worst-case you'll have all that money that is invested available as final capital when reaching pension age. This guarantee is an important parameter that belongs in any fair comparison with other investments, too. 

 

13 hours ago, Edd.Turner said:

c) Remains to be seen - will arrange another meeting and ask again. As far as I know, he will be getting his hands on part of my money for the first 5 years. I forget the sum - I'd like to say it was between 1- 3 k as I remember thinking that over 5 years it seemed fair enough.

 

 

1-3 k is not bad per se. The advisor has to do a lot of legwork and paperwork not only now but also in many years to come. Plus, the money is also only earned in full by the advisor if you actually stay with the plan for 5+ years.

What matters is, if for such a company-run and -sponsored scheme the company negotiated a serious rebate on those costs. Because the actual costs for the advisor/agent reduce strongly if he'll just need to repeat the same kinda work several times for the employees in one company. Hence a 50% rebate on the commission and administrative costs is what every good employer should demand from the insurance company/advisor. And it is fairly easy to exchange the entire book of a company to another insurance company and advisor if the current one does not play ball.

 

13 hours ago, Edd.Turner said:

 

 

Noted, thank you.

 

 

 

Now my questions:

 

1. Decline - and look for what sort of high-return alternative?

 

 

as said above - if the plans come with full costs, just max. the amount to the level where you get the full employer contribution and do not go higher. But take it nevertheless. Invest your other/remaining money directly into investment funds or similar options.

 

 

13 hours ago, Edd.Turner said:

2. How to go to 404€?

 

 

 you can simply ask for that - and the employer cannot deny that to you. Actually starting January 1ast 2018, you can raise that to a total of 508 EUR per month from your gross salary. But, as now said several times in a row here: only - and really only only only only - if you are receiving a good discount/rebate on those upfront and ongoing costs.

You should still have my contact details from past, right? If you like, send me the quote you received and I can check the costs for you and show you (if they are fully loaded, which I fear is the case) what effect a plan with a 50% discount will make for your capital growth over time.

 

 

 

13 hours ago, Edd.Turner said:

 

@PandaMunich We get 40€ a month of Fuel through that scheme (it's great, and it was my suggestion to him a couple of years ago), and I'm currently trying to get him to replace my laptop at his cost (which I read about somewhere as being an §EstG perk (?)) and then invest the money that I would have used for that.

1

 

 

There are meanwhile even better solutions than just a Fuel scheme. There are several providers who offer something like a small purchase/credit-card that will be loaded by the company with 44 EUR tax free EUR for you every month and that you can use at filling stations but also at Amazon or restaurants or whatever. They can even be branded with the company Logo and I believe they are a great HR-marketing tool ...and make the employee happy at little costs for the employer.

 

 

13 hours ago, Edd.Turner said:

 

I've also made an appointment at the Verbraucherzentrale to get an overview of the pension landscape and will be making some decisions about both my attitude to risk/return and informing myself on the tax position of alternatives - i.e. what could happen if I invest part of my net salary in something more exciting, run more than one scheme, etc… And checking the family tree for longevity genes. My dad reckons on hitting 90… 

 

 

you can have a very good risk assessment check with us for free, since you are an "old" client and all. We use Finametrica, one of the best (scientifically set up) risk assessment tools on the market for financial advice IMO.

 

 

Cheerio

 

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

 

Scanned copy coming through on the old e-mail soon 

 

(as regards the 44€ / Mo, I decided to stay with Petrol, as it's one of my g'teed costs - vouchers get frittered away on 'Staubfänger', but money for fuel never gets old)

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On 11/10/2017, 11:53:13, Starshollow said:

There are meanwhile even better solutions than just a Fuel scheme. There are several providers who offer something like a small purchase/credit-card that will be loaded by the company with 44 EUR tax free EUR for you every month and that you can use at filling stations but also at Amazon or restaurants or whatever. They can even be branded with the company Logo and I believe they are a great HR-marketing tool ...and make the employee happy at little costs for the employer.

 

Sounds interesting. Noticed FinanzTip were saying the regulations changed from 01.01.2020. I have some employees and it would be interesting to provide such a card for them. Is there any additional administration needed on the part of the employer?

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17 hours ago, scook17 said:

 

Sounds interesting. Noticed FinanzTip were saying the regulations changed from 01.01.2020. I have some employees and it would be interesting to provide such a card for them. Is there any additional administration needed on the part of the employer?

it is fairly simple, actually.

What you should do for your employees are two things, actually:

- offer them a decent company pension scheme (they have a right to join one anyway, might as well make it something good that binds them even more to you)

- offer them those company paycard systems where you can put in tax free up to 40 EUR a month. this here in one of those providers that offer excellent services to this regards: https://www.spendit.de/spenditcard/

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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Thank you Starshollow! 

That looks a really interesting card. I don't yet see how it's non cash benefit, but I will take a more details look at it later.

 

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