The statutory pension alone will not be enough to maintain the standard of living in old age. “Unfortunately, we failed to set up our pension system to be demographically proof,” says Rolf Tilmes, Chairman of the Financial Planning Standards Board Germany. And that’s why it’s a mistake to rely only on the state pension. “The consequence can only be that every citizen puts even more focus on their private old-age provision,” says the expert.
A unit-linked pension insurance – fund pension for short – can be a component of private old-age provision. It is an alternative to classic policies and combines a fund savings plan with a lifelong annuity payment. “Fund annuities are suitable for savers who want to shift their investments more often during the term,” says Klaus Morgenstern, spokesman for DIA German Institute for Old-Age Provision. Since there is no final withholding tax in the cover of the fund pension, the advantage over a fund deposit is noticeable.
“The investment sum is not reduced by the resulting withholding tax, which can be of considerable importance in the case of long terms, as is usual with old-age provision.” The prerequisite, however, is that the costs of the fund policy are kept within reasonable limits. Otherwise, the higher administration costs of the fund policy would nullify the tax advantage.
Alexander Kukovic, Senior Consult at the insurance broker Hoesch & Partner, is convinced that a fund pension is suitable for everyone. “I would even go so far as to recommend families to organize a fund pension for their children from the very first breath,” he says. “If you start with a fund pension early enough, you can pre-finance your offspring’s pension right from the start and benefit in particular from compound interest.” There are different types of fund pension. “Depending on your risk appetite, unit-linked pensions with a more or less high contribution guarantee or tariffs without a guarantee are a good choice,” says Benjamin Kitschun, insurance expert at the analysis company Morgen & Morgen (M&M).
However, many Germans are extremely conservative when it comes to their investments and thus also their retirement provisions, shy away from any risk and prefer guarantees. “Guarantee eats into returns,” warns Kukovic. Morgenstern is also more than aware of the often low risk appetite of his compatriots. “A private pension with a guarantee is only recommended for savers with a pronounced need for security, who can only sleep peacefully if they get a guaranteed commitment,” says the spokesman for the DIA German Institute for Old-Age Provision. “But you have to be aware that you are buying this supposed security at a high price, with a considerable loss of return.” In addition, savers must be aware that with such a nominal guarantee of these pensions, they only have supposed security. “The real value of the guarantee decreases, especially in times of high inflation like we have now,” he emphasizes.
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Morgen & Morgen has exclusively chosen the best fund pensions with a guarantee for WirtschaftsWoche. Two sample cases were considered: A 50-year-old concludes a contract with a monthly contribution of 750 euros for a period of twelve years. A 37-year-old provides for over 30 years with a monthly contribution of 250 euros. Both choose a gross premium guarantee of 80 percent and a pension guarantee period of ten years. They also opt for the medium opportunity-risk class 3. The contracts with the best price-performance ratio were awarded.
A total of eight policies were rated “very good”. The 50-year-old can choose between unit-linked pension insurance from the houses HanseMerkur, Allianz, Continentale and Canada Life. The 37-year-old also has the choice between four tariffs. Continentale, Canada Life, HanseMerkur and Alte Leipziger were awarded. But what lifelong pension can both expect? This pension is calculated from the accumulated capital. How high that turns out to be and how big the monthly pension is in the end depends on the development of the capital markets. M&M expert Kitschun has therefore gone through two scenarios - with a bad and a medium capital market development. The pension in the ranking is calculated on the average capital. So it can be better, but it can also be worse.
The 50-year-old can count on a monthly payment of between 305 and 316 euros for the top tariffs, the 37-year-old with a pension of between 476 and 701 euros. In the case of the 50-year-old, pensions would be guaranteed between just under 179 and 244 euros and in the case of the 37-year-old between 170 and 218 euros. Guarantees and return opportunities influence each other: the higher the guarantee, the lower the chance of a high return, because a large part of the contribution has to be invested in a low-risk manner for the purpose of securing the guarantee. Here it is important – also with a view to the contract period – to weigh up which guarantee level is selected on an individual basis. In the ranking it is at least 80 percent. Kitschun adds that the shorter the contract term, the more important security mechanisms such as guarantees or secure investments become.
The policies have some advantages but also disadvantages. The advantage of unit-linked pension insurance is a higher return compared to traditional private pension insurance. But there is also clear criticism. Constantin Papaspyratos, chief economist at the Association of Insured Persons, considers them fundamentally unsuitable.
"Consumers should separate insurance protection and investments," he emphasizes. Sandra Klug, head of the investment, pension and insurance department at the Hamburg Consumer Advice Center, also advises against fund pensions. The products are usually much too expensive and thus significantly reduce the return. "If it has to be a contract, the costs have to be as low as possible and the fund should also be good and cheap," she emphasizes. You should seek independent advice from a fee-based consultant or a consumer advice centre.
“Just looking at the cost alone should be avoided. Whoever chooses the cheapest offer does not always do well,” Kukovic points out. "When it comes to your own retirement provision, it makes sense to choose a large, established, stable insurance carrier to ensure that this company will also be solvent in 20 or 30 years." And as always, retirement provision is one very individual matter. Everyone has to decide for themselves which building blocks are suitable.
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