Pension factor, costs, fund selection: How to recognize a good ETF pension insurance
Digital innovations - Tax-optimized investments - Individual consulting
Pension factor, costs, fund selection: How to recognize a good ETF pension insurance
Digital innovations - Tax-optimized investments - Individual consulting
Why two almost identical offers result in different pensions
Two offers for an ETF-based pension plan are on the table. Identical contribution, identical fund, identical retirement age. Yet one offer shows a significantly higher pension than the other. The reason almost never lies with the fund itself, but with three crucial factors that are often only superficially addressed in the consultation: the pension factor, the effective costs, and the rights you retain in the contract regarding your funds.
I'm an independent insurance broker in Weinheim, and I don't compare unit-linked policies based on the projections on the last page, but rather on the policy terms and conditions. This article shows you which figures and clauses actually determine your future pension and how you can assess an offer yourself in just a few minutes.
What the actual significance of the pension factor is
The pension factor indicates how much monthly pension you receive for every €10,000 of contract balance. With a factor of 30 and a balance of €200,000, this equates to €600 per month, while with a factor of 25, it's only €500. Over a pension period of 25 years, this seemingly small difference amounts to approximately €30,000.
I recommend always converting the factor into a life expectancy; this makes it more understandable. A factor of 30 means that, theoretically, you would receive your capital back after about 28 years, so if you start your pension at age 67, that would be around age 95. With a factor of 25, this point shifts to about 100 years. This isn't an argument against an annuity, as the policy is specifically designed to cover this longevity risk. However, it is an argument for comparing factors very carefully.
Pension factors are only comparable under identical conditions. A factor for retirement at age 67 will be higher than one for retirement at age 62, because the expected pension payment period is shorter. An agreed guaranteed pension period, survivor's benefits, or a dynamic pension also lower the factor. Therefore, anyone comparing two offers must first check whether the retirement age, guaranteed period, and surplus distribution are identical.
Sure, guaranteed, or merely predicted
Every offer includes two factors. The current or projected annuity factor appears attractive, but it is non-binding and only applies if interest rates and mortality rates remain at their current levels at the start of the pension. Only the guaranteed annuity factor is binding, and this is regularly significantly lower.
The guaranteed factor is not fixed with every provider. According to Section 163 of the German Insurance Contract Act (VVG), an insurer may reduce guaranteed benefits with the consent of an independent trustee if their continued fulfillment is no longer assured. Older contracts often contain a separate trustee clause in their terms and conditions for this purpose. Only a few companies explicitly waive the application of Section 163 VVG, thus making the factor unconditionally guaranteed.
Therefore, check three points in the terms and conditions:
- Height: What is the guaranteed factor at your planned retirement start date?
- Trustee clause: Do the terms and conditions contain a separate adjustment clause?
- Abstaining: Does the insurer explicitly exclude the application of Section 163 of the German Insurance Contract Act (VVG) in writing?
A low factor with strict sacrifices can ultimately be more valuable than a high factor that can be adjusted at any time.
Another point concerns the basis for calculation. The maximum guaranteed interest rate remains unchanged at 1.0 percent in 2026. Contracts calculated before 2025 at 0.25 percent therefore often have a significantly less favorable guaranteed factor than current offers.
Effective costs: the only metric that combines all aspects
Comparing separate acquisition costs, administrative costs, unit costs, and fund costs is misleading, as each insurer reports these differently. The comparable figure can be found in the product information sheet under the heading "Effective Costs." This indicates by how many percentage points your gross return is reduced annually by the contract costs.
For reference: With a unit-linked life insurance policy, rates below 1.0 percent per year are good, while rates above 1.5 percent quickly erode the tax advantages of the insurance wrapper. Half a percentage point in additional costs will cost you roughly one-tenth of your final capital over a 30-year term.
Important: Check whether the fund costs are already included in the stated rate or if they are additional.
Also consider the cost distribution. With gross tariffs, the initial costs are spread over the first five years, making any subsequent contract changes expensive. Net tariffs, on the other hand, use a separate fee and are often cheaper in the long run, but require discipline, as the fee is payable regardless of the contract's performance.
A third aspect concerns guarantees. Every promised contribution guarantee must be secured by the insurer, and this guarantee reduces returns. With a high guarantee, a significant portion of your contribution never even reaches the ETF. Those who have 30 years to invest are usually better off with a low guarantee or none at all; those who need access to the money in twelve years will assess the situation differently.
Fund selection and fund switching rights
A contract that includes ETFs merely as a token product is not recommended. A sensible approach is to choose a portfolio that offers a broadly diversified global index, allows for multiple funds to be held simultaneously, and doesn't prohibit you from rebalancing your portfolio.
- Fund universe: Are there cost-effective, broadly diversified ETFs available, or do expensive actively managed funds dominate?
- Bills of exchange law: How many fund switches are possible free of charge each year, and does this rule apply permanently or only in the initial years?
- Rebalancing: Is it possible to set up an automatic restoration of the target weighting, and are there any additional costs for this?
- Process management: Does the insurer automatically reallocate your assets to low-risk investments before retirement, and can you deactivate or influence this process?
Tax: The actual benefit of the insurance wrapper
The real advantage of a unit-linked life insurance policy lies not in the return, but in its tax treatment. During the savings phase, the advance lump-sum tax is waived, and reallocations remain tax-free. The situation is different for a securities account: For 2026, the Federal Ministry of Finance has set the base interest rate at 3.20 percent, with the basic return amounting to 70 percent of this, thus 2.24 percent of the initial value of the year, limited to the actual increase in value. After deducting a 30 percent partial exemption for equity funds, a withholding tax of 26.375 percent is due, provided the savings allowance has already been exhausted.
During the payout phase, you choose between two options. The 12/62 rule applies to the capital payout: If the contract runs for at least twelve years and you are at least 62 years old at the time of payout, 15 percent of the returns remain tax-free due to partial tax exemption; only half of the remaining amount is taxed at your individual tax rate. Effectively, approximately 42.5 percent of the capital gain is subject to taxation.
If you opt for a lifetime pension, only the taxable portion is subject to income tax. This amounts to 17 percent of the pension if you start receiving it at age 67, and 18 percent if you start at age 65. Therefore, someone with a moderate tax rate in retirement will pay very little in taxes on their pension.
An example: You save €300 per month for 30 years, contributing a total of €108,000, resulting in a balance of €250,000 at the end. The return is €142,000. With a policy that offers a lump-sum payout under the 12/62 rule, 15 percent of this remains tax-free due to the partial tax exemption. Half of the remaining €120,700 is taxable. At a personal tax rate of 30 percent, this results in approximately €18,100 in tax. In a direct investment account, after the 30 percent partial tax exemption, €99,400 would be taxed at 26.375 percent, amounting to approximately €26,200.
The difference of approximately €8,000 represents the actual value of the insurance wrapper. This is offset by the effective costs, which would not be incurred to this extent in a traditional investment account. This is precisely why the cost ratio determines whether you receive the tax advantage or it remains with the insurer.
I will gladly provide you with this calculation for your chosen duration and tax rate during an informational meeting, before you decide on a course of action.
Adaptability during the savings and retirement phases
A 30-year contract needs to be able to withstand disruptions. Therefore, I'll check whether additional payments are possible at any time without incurring further setup costs, whether you can make partial withdrawals, and how long the contract can be made contribution-free without voiding any guarantees.
The flexibility of postponing the pension start date is also important. Those who can flexibly postpone the date secure the option of reliably meeting the requirements of the 12/62 rule and shifting the payout to a year with a lower tax burden. Conversely, a partial withdrawal before the twelve years are up leads to the full taxation of the accrued income.
The retirement phase is almost always neglected in offers. Yet this is where it's decided what you actually receive. I clarify in advance whether you can agree on a guaranteed pension period so that capital still flows to your beneficiaries in the event of your early death. I also clarify how the surplus is used during the retirement phase, i.e., whether the pension remains constant or can increase over time, and whether your assets can remain invested in funds during the retirement phase.
The option to choose a lump sum should remain in place until shortly before retirement. Only then will you know whether an annuity or a lump sum payment is more suitable in your situation.
I regularly discover the following aspects in existing contracts.
When reviewing contracts, I repeatedly encounter the same patterns. Contracts from around 2010 with expensive actively managed funds and an effective cost ratio well over two percent. Guarantee contracts whose high contribution guarantees force almost all the capital into the protected portion, so that hardly anything actually reaches the stock market. And contracts with an open trustee clause whose guaranteed annuity factor has already been reduced without the customer noticing.
Not every one of these contracts should be terminated. Often, a contribution holiday combined with a new policy is the better solution, because an older contract offers tax advantages that a new one no longer provides. This assessment can only be made based on the specific terms and conditions of each contract.
Your checklist in ten minutes:
- What is the guaranteed pension factor?
- Does the policy include a waiver of Section 163 of the German Insurance Contract Act (VVG)?
- What are the effective costs shown in the product information sheet?
- How many fund switches are free of charge per year?
- How is the workflow management regulated, and can it be deactivated?
If any of this information is missing or unclear, that already constitutes a result.
As part of my free contract review, I'll examine your existing unit-linked insurance policies and calculate the difference between a policy and a direct investment account for you. Book a no-obligation consultation, and I'll review your policy terms and conditions with you.
Frequently Asked Questions (FAQ)
What is a good pension factor?
Is it possible for my insurer to retroactively reduce the guaranteed pension factor?
Yes, this is possible. According to Section 163 of the German Insurance Contract Act (VVG), an adjustment is permissible with the consent of an independent trustee if the long-term fulfillment of the benefit is no longer guaranteed. Older contracts also contain a separate trustee clause. Only if the insurer expressly waives its application in the terms and conditions is the factor guaranteed.
What is the maximum permissible effective cost for a unit-linked life insurance policy?
Values below 1.0 percent annually are considered good; above approximately 1.5 percent, the tax advantage of the insurance wrapper is effectively eliminated. The crucial factor is whether the fund costs are already included in the rate. If this information is missing from the product information sheet, you should request it in writing.
Is an advance lump sum payment required for an ETF-based pension insurance policy?
No. Within the insurance policy, current returns and portfolio rebalancing are not subject to taxation. The situation is different with a direct investment account: For 2026, the base interest rate is 3.20 percent, resulting in a base return of 2.24 percent of the account value at the beginning of the year, although this is limited to the actual increase in value. This deferral effect represents one of the key advantages of the insurance wrapper.
What does the 12/62 rule mean?
If the capital is paid out in a lump sum after the contract has been in effect for at least twelve years and you have reached the age of 62, 15 percent of the returns remain tax-free due to the partial tax exemption. Only half of the remaining amount is taxed at your personal tax rate. Effectively, around 42.5 percent of the capital gain is subject to tax.
Which option is more tax-efficient: a pension or a lump-sum payment?
When receiving an annuity, only the taxable portion is relevant; this amounts to 17 percent of the pension if you start receiving it at age 67. For a lump-sum payment, the 12/62 rule applies, with a calculation basis of approximately 42.5 percent. Which option is more advantageous for you depends on your tax rate in retirement, your life expectancy, and whether you need the capital for other purposes. You only need to make this decision immediately before your pension begins.
Is a unit-linked life insurance policy more advantageous compared to an ETF savings plan in a portfolio?
This depends on three factors: the policy term, the effective costs, and your tax rate during the payout phase. The longer the term, the lower the costs, and the more frequently you rebalance, the greater the tax advantage of the insurance becomes. For short terms and high costs, a brokerage account is more advantageous. This calculation should be made before signing the contract, not afterward.
How does process management work, and is it useful for me?
With phased retirement management, the insurer gradually shifts your savings into less volatile investments in the years leading up to your retirement. This can be beneficial if you need a fixed payout date. However, if the shift starts automatically and cannot be deactivated, it will cost you precisely the years of returns for which you chose the equity allocation.
Is it possible to suspend contributions or withdraw money early?
Most plans allow for contribution holidays, additional payments, and partial withdrawals, although different time limits and minimum amounts apply. Caution is advised regarding tax implications: Withdrawals before the end of twelve years or before reaching age 62 will result in the full taxation of the accumulated income. I recommend reviewing the terms and conditions before signing the contract, not just when you need them.
When is a contract review advisable for an existing pension insurance policy?
This applies whenever your contract is older than ten years, you don't know the effective costs, or you've received correspondence regarding an adjustment to the pension factor in recent years. I'll review your policy terms and conditions free of charge to determine whether continuing, suspending contributions, or starting a new contract is financially worthwhile. I only recommend cancellation if it clearly justifies the cost.
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