I am kicking off a new series on financial topics used in Germany. The first financial product that I would like to talk about is Rürup or Basis Rente (Rente in German means pension). We also explore common terms and their meaning to build up the concept of Rürup.
Concept #1: What is altersvorsorge and Gesetzliche rentenversicherung?
Altervorsorge (old age provision) is a general term used to describe various products and options which are available to support you for your old age. These are usually described into three pillars (or categories):
- Basisvorsorge (basic provision) : This includes statutory pension insurance (also called gesetzliche rentenversicherung) scheme from the German state, and other products like Rürup . The products are usually tax efficient and are design to work as a pension should.
- Privat vorsorge (private provision) : This is a private measure, people can use products in this category to top-up their Basic provision. This will include products like Employer pension, Reisterrente or Directfonds. There is usually some subsidy available.
- Ungeförderte Private Vorsorge (unsubsidized prevention) : This is also a private measure usually focused on Lebensversicherung (Life insurance) products. It can also include products which offer pension with a life insurance.
Now, this post only focuses on Rürup , and I reserve some of the other topics for more posts in this series.
The question of Rürup Rente. Where does it fit in retirement planning
Rürup is a self invested pension scheme, this is well positioned for freelancers who may not be invested in the statutory pension program. At the same time it is also a choice for those who have statutory pension but want to top that with additional pension.
Rürup pension is named after Bert Rürup who is an economist and a politician. His focus was on pension reform and this pension scheme was launched in 2005 named after him. It is also often referred as Basis Rente
Why is this relevant as a top-up? The simple answer is that statutory pension payouts may not be sufficient to help you survive in old age. It is predicted that only around 48% of your last paid income will be your statutory pension (*the actual calculation is more complex). So Rürup is a way to supplement your pension and avoid
Key features of a Rürup pension program
- Behaves like a pension, you cannot withdraw this in advance and it is only paid as a pension after retirement. You cannot exit a Rürup but stop paying into it.
- There is no minimum contribution limit. Contributions can be stopped, this is helpful for freelancers.
- As it is a pure pension plan, it also gives you tax benefits. Upto 24,900 EUR investment are tax free.
- It cannot be transferred to another person, loaned against or inherited. It can be setup to get paid to your immediate dependent (spouse) or children if <25 years upon death.
- It is designed to save taxes if you have a lot of tax liability, upto 100% tax rebate during accumulation from 2025
- Pension will be taxable as per prevailing rules in future.
- It is possible usually to change providers, but there can be fees.
- Two versions usually exist: Fixed classic pension and Unit linked Pension
- Fixed Classic pension has returns around 1.25%, while Unit Linked is linked to market performance.
- Expense costs are high, between 3-6% annually.
Should I take a Rürup / Basis Rente?
This is a very debatable topic. Lets make it clear, if you are an immigrant and may move out of Germany, you will still get paid out but will need forwarding address. It might just add more hassle.
Having said that, many complain (and rightfully so), that Rürup has very small returns and when costs are considered the value of tax benefits is only realized when you are 70+ or something.
At the same time, you can think of Rürup as a bond investment, which is about capital preservation and not exactly about big returns. This is at the cost of losing access to capital, low returns and potentially high maintenance expenses.
Will Mr A invest in this?
No, I think I can potentially get better returns with index funds/ETFs and lower costs. I might think of it during the consolidation phase of retirement planning when capital protection is a goal.