New private pension scheme is coming

[murphaph]

A replacement for the failed Riester is coming in 2027 with any luck. It passed through cabinet today

https://www.bundesfinanzministerium.de/ ... sorge.html

Quick summary:
-You can invest in low cost ETFs with no guaranteed returns, hopefully delivering higher returns in the end
-Up to €1800 per annum is subsidisable. For the first €1200, the state will give you 30c/€ (max €360) on top. For the next €600 it will give you 20c/€ (max €120) for a total subsidy of €480 per annum. For each child you have (the age seems to be irrelevant) you will receive an additional 25c/€ up to a maximum of €300 for each child. So, a person with one child who invests €1800 would be entitled to €780 in subsidy which is extraordinarily generous and for most people far far better than the fixed base subsidy paid to Riester holders
-No capital gains tax as long as the fund is not touched until retirement age
-The drawdowns during retirement are simply taxed at your marginal rate of income tax
-Contributions are tax deductible up to certain thresholds.
-Highest risk investments are not allowed so no crypto, no individual share but bog standard MSCI World ETFs etc. will be no problem presumably.
-You will still be allowed to cash out before retirement age without losing the subsidy and tax breaks as long as it is to fund the purchase of property (not sure of the exact provisions here)
-Under 25s who sign up will receive an additional €200 subsidy on a once-off basis
-During retirement, it will be allowed to exhaust the fund on or after your 85th birthday. It does NOT have to provide an annuity pension for life. This is a good thing. Most people become steadily less active as they get older. In early retirement you will generally be travelling more and spending more money. As you get older you actually tend to spend less money (at least in countries with decent medical care like Germany).
-It will be permitted to draw up to 30% of the value of the fund down in early retirement in one lump sum if so desired (obviously the income tax implications mean you'd want a good reason to do so)
-The subsidy will increase to 35c/€ from 2029.

In short I can't think of much to complain about apart from the fact it took so long to reform Riester.

[alma.freya]

Thanks for the overview. Is there any expectation regarding provider fees?

[murphaph]

The draft called for a maximum 1.5% but the fees have to be spread over the whole lifetime of the product, so that there is no penalty for switching provider. No more front loading of the fees. It's reasonably likely that the passive funds like ETFs will be significantly cheaper than that though because the idea is to get rid of all the admin overhead associated with Riester and allow providers to offer "no guarantees" products. These will be easy for all the big depot providers to offer at rates they currently charge for ETFs so there is expected to be plenty of competition and hence, lower prices. They want to explicitly avoid a repeat of Riester and its high costs eating all the returns.

[Nixon]

"Up to €1800 per annum is subsidisable"

Is this pretax money?
Can more be invested after initial 1800 EUR, with no Government matching but as pre-taxed money from income?

Thanks,

Nixon

[murphaph]

My understanding is it is not pretax money like a Betreibliche Altersvorge but you can claim the expense as a Sonderausgabenabzug in your tax return (Anlage AV). This is effectively the same thing however as it reduces your taxable income by that amount.

You can receive either the subsidy or you get to make the deduction as a Sonderausgabenabzug in Anlage AV. You do not get both. The Finanzamt will perform a Günstigerprüfung to see which method is more beneficial to you, just like they do with Kindergeld.

There is a limit to the amount you can deduct as a Sonderausgabenabzug. This is if I am not mistaken is the €1800 + the applicable subsidy (you may have children which means this subsidy can vary), so by way of example for a single person with no children the max they could enter as a Sonderausgabenabzug would be €2280. It sounds counterintuitive that you add the subsidy but I am sure this is correct and has to do with how the Günstigerprüfung works. So the simple answer to your question is "no".

I believe you would theoretically be able to contribute more to the scheme but it would not be tax deductible so I don't see the point unless one expects their income in retirement to be so low that the income tax they would expect to pay would be less than the Abgeltungssteuer if one were to simply invest the money in regular ETFs etc.

[Nixon]

As I understand you, you get either a 30% match from the Government OR you get a tax reduction on those EUR1800?

I am pretty sure our income after we stop doing what I am doing now will be way lower than now, so I would currently put into a plan that reduces taxes as much as I can. Especially since we are US citizens and we have an issue finding a way to invest in Germany.

[murphaph]

As I understand you, you get either a 30% match from the Government OR you get a tax reduction on those EUR1800?

So you get the 30%/20% subsidy as you make your investments during the year. For example, you invest €150 per month and the government gives you another €40 so €190 are invested. The following year you do your tax return. The tax office checks to see if the subsidy or allowing the €190 x 12 months to be deducted from your pre-tax income would be worth more to you. If the subsidy is worth more, nothing happens. If the tax deduction is worth more, the tax office issues a tax refund for the difference. Your money + the subsidy remains invested.

As for the US stuff: I don't know if the banks/brokers will allow US citizens to invest in these schemes. That remains to be seen I guess. The growth in the fund is tax free for German residents but I have no idea how the IRS will view these things. They might well want to tax the growth in the fund and then you may have difficulty finding a broker who will let you invest. Hopefully it's an option for you.

[Nixon]

We will have to wait and see.
Thanks for explaining.