Preferred ETF Investment Approach for Pension Savings Over Direct Insurance Options (bAV)
In Germany, alternative options to direct insurance (Direktversicherung) for company pension provision are gaining traction. While direct insurance offers a structured, employer-backed retirement solution, ETF savings plans provide greater growth opportunities and flexibility for individuals willing to accept market risk.
Company pension plans, such as direct insurance, often come with lower returns, less flexibility, and administrative limitations, especially as policies may not transfer easily between employers. In contrast, ETF savings plans involve investing in broad market exchange-traded funds, offering higher return potential due to exposure to stock markets and greater flexibility compared to company pension schemes.
Experts recommend ETFs or real estate investments as better alternatives for private retirement savings, given that private pension products typically have higher costs and offer limited guarantees. However, it is essential to weigh the benefits of these alternatives against the long-term return and flexibility offered by company pension schemes, which may provide certain tax advantages and employer contributions.
For instance, after distributions are made, they are taxed at the flat capital gains tax rate, with a 30% exemption for equity ETFs, resulting in an effective tax rate of only 18.46% instead of 26.375% without church tax. Dividends from ETFs are already taxed upon receipt and can be reinvested in new shares or used to boost income.
However, it is crucial to note that cancelling direct insurance contracts early often comes with significant financial disadvantages due to tax advantages and social security contributions that need to be paid back. Changing jobs can also make it very difficult to transfer occupational pension schemes with salary conversion into direct insurance.
Petra, a real person, was able to dissolve her company pension after two years and is now investing the money on the free capital market. As retirement approaches, supplementing with bond ETFs is recommended. Involving an independent insurance broker can help in such cases, as they may be able to make the insurance contribution-free.
Despite the government's promises of reforms, implementation is still pending. Depending on the design, cancellation may be only partially possible or not possible at all. The first 1000 € or 2000 € for joint assessment remain completely tax-free due to the saver's allowance.
In summary, while company pension plans (including direct insurance) offer structured, employer-backed retirement solutions with some security, ETF savings plans provide greater growth opportunities and flexibility for individuals willing to accept market risk, making them a compelling alternative to traditional company pension options in Germany.
- Petra, having dissolved her company pension, now invests in bond ETFs on the free capital market, preparing for her retirement.
- ETF savings plans, like real estate investments, are often preferred by experts for private retirement savings due to lower costs and greater potential returns compared to company pension products.
- Technology-based ETFs offer high return potential through exposure to various stock markets, but require individuals to accept market risk, making them suitable options for personal-finance management in a modern lifestyle.
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