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, Riesterrente or Directfonds. There is usually some tax 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.
What is 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 (as there is no regulation on freelancers to invest in state pension). 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 around 48-70% 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 old age poverty.
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 contributing into it.
- There is no lump sum payout, it can only be paid as an annuity on a monthly basis upon retirement.
- 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.
- Rürup pension is designed to save taxes if you have high tax liability, upto 100% tax rebate during accumulation from 2025
- Rürup Pension will be taxable as per prevailing rules in future, there is no benefit when you earn the pension.
- 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 2-6% annually. There are also fees during payout period.
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 will 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. In today’s high inflation environment, its a loss making endeavor.
Will I invest in this?
No, I think I can 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. I find it more inflexible than Riester but then you have the option of market linked returns. That means, switch when returns are already accounted by existing ETF investments.
Update: There is a new kid in the block, known as ETF Rürup, which offers lower costs and fixed many problems with the existing products. More analysis is required on its benefits