For those who qualify, in particular employees, investment in a state-subsidised Riester pension scheme can be a very profitable option to increase their pension payments. Riester is strictly regulated by the government, making the investment very secure but also less flexible. Beneficiaries with an international background need to take into account that spending their retirement outside of the EU/EEA reduces the benefit gained out of Riester. In light of the complexity of the subject, clients should seek professional advice by an independent financial advisor (e.g. to be found here ;-) ).
The Idea of the “Riester Rente” (Riester Pension)
The so called “Riester Rente” (Riester pension) was introduced in 2002, named after the former Minster of Labour and Social Affairs, Walter Riester. The Riester pension was supposed to compensate for a parallel reduction in the German Statutory Retirement Insurance System (“Gesetzliche Rente”). The basic idea is to use government subsidies as an incentive for people to secure their old age income with additional private old age provision. A simple but efficient certification system ensures the quality of the investment products.
The target group of the Riester pension includes those who will be affected most by decreasing public pensions: compulsorily insured employees, agricultural workers and civil servants. It also includes soldiers, people who receive un-employment or reduced earning capacity benefits and those who care for others at home. The concept aims inter alia at
- households with relatively low incomes, obtaining full subsidies for a very moderate contribution
- households with a high income / high tax rate, obtaining considerable tax advantages in excess of the subsidiy amount
Riester pensions are not available to the self-employed and employees who are not compulsorily insured, although self-employed persons can use the Riester system if their spouses are members of the income groups cited above (“indirect beneficiaries”).
Terms and Conditions
People who provide for their retirement with Riester have to invest at least 60 € per annum as a basic contribution. In order to receive government subsidies of 154 € per annum (308 € for married couples), a Riester saver has to contribute 4% of his/her annual income before taxes (but only to a maximum of 2,100 € minus subsidies) into his/her Riester account. If he or she has children, an additional 185 € or 300 € (for children born after January 1st 2008) can be received. Alternatively, all Riester savings up to 2,100 € (including subsidies) can be claimed as a special expense deduction in the worker’s annual income tax return if that is more profitable for the Riester saver than receiving the subsidies. Upon retirement, the monthly Riester pension payments are fully taxable, but usually due to a lower income and lower tax rates at that time, tax benefits over the entire period are substantial. If Riester savers are not paying 4%, the government pay-out will be reduced to the percentage that is paid into the account.
One prerequisite for receiving these government pension payments is to invest in a certified Riester product. According to the Riester regulations, bank savings plans, classical private pension insurance, unit-linked pension insurance, fund savings plans, pension funds or even direct insurance can be included in the range of Riester products if they fulfil the certification criteria. This range of products has developed over a time span of 10 years and the variety it represents can be viewed as an additional set of incentives.
Although the Riester pension plans guarantee that pensions are received, each Riester client still needs to compare different types of Riester pension plans and consider other forms of investment and saving (that may not receive beneficial tax treatment) to fit his or her individual needs and ability to make contributions. Or, much more efficiently, he or she should seek professional advice by an independent financial advisor (e.g. to be found here ;-) ).
In comparison to other savings options, such as life insurance, Riester savings cannot be pledged and do not have to be used up before their owners can qualify for long-term unemployment benefits or social assistance. If a beneficiary accesses the Riester assets before the age of 60 (remark: for contracts concluded from 2012 onwards: 62), cancels a Riester contract, or dies without qualifying heirs (i.e. a spouse or children for which children allowances / “Kindergeld” are paid), all government benefits (subsidies and tax savings) so far must be repaid in monthly installments (“förderschädliche Verwendung“). Therefore, Riester contracts are usually not cancelled before retirement. Beneficiaries spending their retirement outside of the EU/EEA also have to repay the benefits as described above. Due to the very strict government regulations, certified Riester pension plans are one of the safest options for old age savings in Germany.
Riester Incentive and Regulation Structure
The Riester pension has gone through quite a few changes since its introduction. Not only has the range of Riester products been gradually expanded and its rules and regulations simplified, but more incentives for various income groups have also been created.
The savings subsidy, combined with a certain percentage of income saved, can be regarded as the most obvious and effective incentive. This percentage of income to be invested in order to receive government subsidies and the amount of government subsidies have been gradually increased from 2002 to 2008. Those who sign up for a Riester savings plan now, have to pay 4% of their annual income before taxes (maximum 2,100 € minus subsidies) in order to receive the full government subsidy of
- 154 € for singles or each partner of a married couple where both qualify for Riester (i.e. maximum payment = 2100 – 154 = 1,946 € p.a. or 162.17 € per month / per person)
- 308 € for married couples where only one qualifies for direct subsidies and the other one is an indirect beneficiary (i.e. maximum payment = 2100 – 308 = 1,792 € p.a. or 149.33 € per month for both + an additional 60 € p.a. for the indirect contract / “Anhängselvertrag“)
- 185 € child benefit per child for children born before January 2008 and 300 € per child born after January 2008 for as long as the parents receive child allowances. The child benefit is paid to the mother, but can be paid to the father at the request of both parents.
Since 2008, any young professional has received a one-time bonus of 200 € if he/she signs up for a Riester pension plan before his/her 26th birthday. One of the greatest challenges for a non-mandatory pension system is to encourage young people to start saving for retirement. Setting incentives for a young age group to start saving even a few years earlier can make a big difference when these savers receive their pensions later on.
Riester’s incentive structure is attractive not only due to state subsidies, but also due to conceptual changes which have made the Riester pension gradually more attractive. As a major change, since 2008 the full amount of Riester savings can be used for building loan contracts or for buying real estate (“Wohnriester“). The real estate must be used directly by the Riester saver.
Since 2005, Riester savers have been permitted to receive 30% of their savings in a one-time payment at the time of retirement. The rest must be received as a life-long monthly pension.
With the Retirement Income Act (“Alterseinkünftegesetz”) of 2006, unisex pension calculation was introduced, which means that men and women now receive the same amount of pension for the same contribution amounts. Before the change, the pension was calculated according to sex-specific life expectancy. Due to the fact that women statistically have a higher life expectancy, they had to pay higher contribution amounts in order to receive the same level of benefits as men. Men now have to factor in 6.5% more for the level of benefits they would have received before the unisex calculation came into force.
In the Riester pension concept, consumer protection is very important. For this reason, the state supervises the Riester pension and all investment products. Strict and monitored minimum requirements have been stipulated by the government and certification criteria have to be met by any investment product that carries the name “Riester”. The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is responsible for the certification process to determine whether an investment product fulfils all the certification criteria. With this certification system, the government wants to make sure that only safe and proven Riester products are available on the market. Only certified investment products are subsidized by the state. Thus, the Riester pension certification system provides comprehensive consumer protection.
In order to receive a certificate for a Riester product, financial providers initially had to comply with a total of 11 conditions. In 2006, these conditions were changed to six rules to make it easier to understand and comply with certification requirements. Riester products receive government certification when they comply with the following criteria:
- A minimum payout corresponding to the full disbursement of contributions and government subsidies in a life-long pension payment is guaranteed.
- The pension contracts have to be gender neutral.
- The payment of the private pension cannot start be-fore the participant reaches 60 years of age (remark: for contracts concluded from 2012 onwards: 62 years).
- The Riester pension provider also has to make sure to use transparent terms and to inform his clients about all fees, costs, risks and different options of annual rates of return.
- Riester pension providers must also spread new business and distribution costs over a time span of five years.
- The contracts can be cancelled or temporarily suspended as of the end of any quarter, but cannot be pledged.
Conclusion and Recommendation
For those who qualify, in particular employees, investment in a state-subsidised Riester pension scheme can be a very profitable option to increase their pension payments. Riester is strictly regulated by the government, making the investment very secure but also less flexible. Beneficiaries with an international background need to take into account that spending their retirement outside of the EU/EEA reduces the benefit gained out of Riester. In light of the complexity of the subject, clients should seek advice by an independent financial advisor. Please do not hesitate to contact me to seek such professional advice.
Dr. Schlemann independent Financial Consulting Cologne
Your independent financial advisor, insurance broker and investment broker in Cologne
(Modified extract from GTZ’s “Lessons learnt from the German Riester pension scheme and their possible application in India” by Sandra Kissling”)
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