To summarise very briefly: You can do it, but you need to know a few things.
Once again, I've been asked by friends what I think of one or other pension scheme. My visitors realise that although I don't come from the world of finance at all, I do have a lot to do with it when charts of my largest share positions are thrown up on the ceiling of my living room at stock market times. The bitter lesson from my losses back then with Wirecard. Yes, it was pretty rubbish back then. But you learn from your mistakes and that's why today I disclose my tax data and denounce the fact that high earners like me pay so little tax...
At this point, I would like to help you find your way through the insurance jungle. If it weren't for this purely legal dilemma:
I don't give investment advice, I can't, I don't want to and I'm not allowed to. There are a whole series of legal requirements, none of which I fulfil because I have no relevant training. I just want to try to explain what all this means, what is written on a typical pension insurance offer, so that you can judge for yourself whether the offer is "right" for you.
If I don't give investment advice, why all the effort?
Simple answer: Because (again) a friend asked me for my personal opinion. And if a friend asks me for advice and I can help him, then I help. Even if the law says that I'm not actually allowed to. And because I spend several hours working on a text like this - in case you don't know me: AS a patient, paralysed except for my eyes, I'm writing this by eye control - I don't want to throw it in the bin after sending it to a friend exactly.
Therefore an urgent request:
Think of this as a recording of a private conversation in which I explain to friends how they should understand the offer from their insurance company. Nothing more and nothing less; and by no means investment advice.
This is a classic capital market investment. The money you pay in is invested by the insurance company in various shares and funds. Depending on how well these perform, you have a higher or lower return. In all the examples, they calculate with plus 6% and always add that it can also be less if the stock market performs badly.
And that's the big guesswork. You don't know whether the 6% will be reached or not.
The only thing that is certain is that the insurance employee will receive his commission. For the first few months, you only pay his commission. And you pay the insurance company's administration fee every year. And if it makes a profit at some point, it will also be taxed. You shouldn't forget that either.
But you always have all these things - no matter what kind of investment you have. Nobody gives anything away for free, and only rip-off artists work in the financial world anyway.
lol
Which could possibly be an idea: If you have a contact person at your bank, ask them for a comparative offer, because I don't know the usual conditions.
I do a bit with shares myself, and I have a hard time when I read how little the customer receives. Let me give you a simple maths example:
You simply invest in Germany's 40 largest companies. Roughly speaking, this is the German share index. You've probably heard about it in the news, the DAX.
Why do I use the DAX to explain things when it is obviously a boring, conservative index? I wouldn't see an ETF on the DAX as particularly progressive. With an investment in the DAX - what can you expect? 8, 9, 10% perhaps. Doesn't sound exciting. But what's so interesting about it is the reliability. You can calculate it mathematically, and you'll be surprised what maths can reveal to you with what accuracy.
The average annual return of the DAX over a 30-year period was around 8.8% per year. Even in the worst 30-year period, the annual return was still 6.8%, in the best case even 10.9%. These figures take into account both price gains and dividends, as the DAX as a performance index automatically includes dividends.
DAX ETFs are very cost-effective, with many providers charging just 0.08-0.16% annual management fee.
The DAX only tracks the 40 largest German companies. A broader diversification (e.g. with an MSCI World ETF) can further reduce the risk.
A DAX ETF savings plan is generally suitable as a building block for private pension provision, especially with a long term (20-30 years). If you want maximum risk diversification and potentially higher returns, you could also consider globally diversified ETFs (e.g. MSCI World).
So. Why am I talking so much about the DAX and DAX ETFs as a pension plan when I should be talking about a specific unit-linked pension insurance policy? Because the principle is similar. Just a little "smaller" and easier to explain. The standard pension insurance policies in our case work according to the same principle. Only not "only" with the DAX, but the providers invest in a broader range of funds and ETFs. In this way, they try to spread the risk on the one hand and increase the return on the other. Ultimately, however, everything stands and falls with the capital market in which investments are made. Investors have no influence over exactly what is invested in.
To put it graphically: If the world's crises cause the stock market to crash every year, you may get out less than you paid in. The only people who are sure to make money are the seller and the insurance company. You simply have to be aware of this and take it into account in your own considerations.
Typical investments are unit-linked pension insurance policies with a monthly payment of, for example, €500, an annual premium dynamic of 2% and a term until retirement. The investment is made in a broadly diversified portfolio of equity funds and ETFs, e.g. with a focus on global markets, technology, sustainability and emerging markets. The annual increase in contributions by 2% partially protects against inflation and ensures an increasing savings amount.
The benefits are directly dependent on the performance of the selected funds. There is no guarantee of the contributions paid in or a minimum benefit. In the event of poor stock market performance, the credit balance may be less than the contributions paid in. Acquisition, administration and fund costs reduce the return. In the first few years, a considerable proportion of the contributions is used for costs, which means that the fund balance may initially be less than the contributions paid in.
The pension and capital amounts stated at the start of the pension are not guaranteed and are based on assumed annual performance from 0% to 9%. Actual performance may differ significantly. In the event of premature contract termination or premium cancellation, the surrender value or the non-contributory credit balance in the first few years is significantly lower than the premiums paid in, as acquisition costs have already been incurred.
The subsequent taxation of the benefits depends on the tax law applicable at the time. Currently, pension payments are only subject to tax on the income portion, while lump-sum payments may be subject to withholding tax.
Who is the system suitable for?
- For investors with a long investment horizon (at least 20-25 years) who are prepared to bear capital market risks and withstand fluctuations in value.
Who is it less suitable for?
- For people with a short-term investment perspective or who want a premium guarantee.
- For security-oriented investors who do not accept fluctuations.
- For investors who want very flexible access to their capital or require high liquidity.
Unit-linked pension insurance offers good long-term return opportunities with a corresponding level of risk and is suitable as a building block for retirement provision, provided the risks are understood and accepted. As with many insurance products, the costs are high, which has a particularly negative impact in the event of early cancellation or premium cancellation. The investment is suitable for investors with a long term and a willingness to take risks, but less so for savers with a security or short-term focus.
The forecast returns of 0% to 9% per annum in the sample calculations for unit-linked pension insurance are model assumptions and are for illustrative purposes only. The actual performance may be higher or lower. The insurance company expressly points out that the values shown are non-binding and do not allow any conclusions to be drawn about actual performance. A specific amount of the fund assets or the subsequent pension cannot be guaranteed as it depends on the future development of the capital markets.
How realistic are these assumptions?
- 0% Performance: This scenario is very defensive and in practice would mean that the fund investment would not achieve any growth in value. This is historically very unlikely over a period of 25 years for a broadly diversified equity portfolio, but cannot be ruled out, especially after deducting all costs and in very unfavourable market phases.
- 3-6% Performance: This range is considered to be a realistic expected value for a globally diversified equity portfolio over a long period of time if historical average returns are considered. However, the costs of the insurance and the funds must be deducted from this, which means that the net return may be lower. Fluctuations and individual bad years are always possible.
- 9% Performance: This is an optimistic scenario and roughly corresponds to the long-term average returns of global share indices before costs. This is possible for individual years or particularly successful periods, but it is very unlikely to achieve sustainable returns after costs over 25 years. This scenario serves more to illustrate the maximum opportunities, not as a realistic expectation.
Conclusion:
- 3-6% per year is a realistic expectation for a broadly diversified equity portfolio after costs over a long period of time, taking into account market history and fluctuations. If that's what you're looking for and you're looking for a product where you don't have to worry about anything... I'm not legally allowed to give investment advice, but I think you understand the principle.
- 9% per year is a very optimistic long-term average return after costs and should not be used as a basis for planning.
- The actual return depends on many factors: Market development, costs, reallocations, premium dynamics and individual fund selection.
- The insurance company and the fund providers emphasise that the performance is uncertain and that the sample calculations do not represent a forecast, but only a model calculation.
Important note:
The actual return can deviate significantly from the model assumptions due to costs, taxes, market and exchange rate fluctuations. Investors should therefore not rely on the high scenarios and plan conservatively.
Furthermore, I am neither an investment advisor nor an insurance broker. I don't give investment advice, I can't, I don't want to and I'm not allowed to. There are a whole series of legal requirements, none of which I fulfil because I have no relevant training. I would just like to try to explain what all this means, what is written on a typical pension insurance offer, so that you can judge for yourself whether the offer is "right" for you.
