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Is a private pension insurance policy worthwhile?

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Is a private pension insurance policy worthwhile?

Private pension insurance supplements the statutory pension and provides financial security in old age. But is that really the case? In recent years, private pension insurance has increasingly gained a negative reputation, as many savers have to wait decades to achieve a worthwhile return. However, interest rates, which had been declining for years, have now stabilized again. What does this mean for savers? Is it worthwhile to invest in a private pension insurance policy, and what advantages and disadvantages should be considered?

Challenges of the German pension system and the importance of private pension insurance

The pension system in Germany is based on the generational contract: those currently employed finance the pensions of current pensioners, while they themselves will later be entitled to a pension that is supported by the next generation.

This system, however, faces significant challenges. People are living longer while the number of contributors is declining. In addition, costs are rising, and the persistently low interest rates are adding to the strain. These factors are causing the statutory pension insurance system to increasingly lose its function as a reliable form of retirement provision. Benefits are often no longer sufficient to maintain one's accustomed standard of living. Future retirees must expect significant financial losses, which can even lead to the risk of poverty in old age.

This is where private pension insurance comes in. It can help close the gap between previous income and the statutory pension. It is undisputed that private retirement savings are necessary to secure one's standard of living in retirement and to look forward to a worry-free future.

Private pension insurance explained briefly

A private pension plan is a form of retirement savings where you regularly pay contributions into an insurance contract. In return, you later receive either a monthly pension or a lump-sum payment to close the pension gap. It supplements the statutory pension insurance and is intended to help secure your standard of living in retirement. There are different types of private pension plans:

Classic private pension insurance
In a traditional pension insurance policy, also known as an interest-bearing life insurance policy, savers regularly pay into their contract. The capital earns interest, so that the insured receive a guaranteed pension payment.

Unit-linked pension insurance
With unit-linked pension insurance, the capital does not accrue interest but is invested in investment funds such as stocks, bonds, and real estate funds. The return – and therefore the subsequent pension payment – depends on the performance of the capital markets. There is no guaranteed pension, but a higher potential return compared to fixed-income products.

New Classics
New Classic products offer a lifelong pension and a surrender value, similar to interest-bearing annuities. However, the guarantees are lower because the capital is invested in the capital market. This hybrid form combines the guarantees of a traditional annuity with the opportunities of the stock market.

Capital life insurance
A whole life insurance policy combines retirement savings with survivor protection. At the end of the savings phase, the insured receives a pension or a lump-sum payment, depending on the contract. If the insured person dies before then, the surviving dependents receive a death benefit. Whole life insurance policies are available with a guaranteed interest rate or as unit-linked policies.

Advantages and disadvantages of private pension insurance

Advantages of private pension insurance	Disadvantages of private pension insurance
Flexibility and individualityThe contribution amount can be adjusted to individual needs, and premiums can be adjusted in the event of changing life circumstances. Policyholders can choose between a pension or a lump-sum payment.	High costs and feesPrivate pension insurance involves high initial costs, administrative fees and commissions, which can significantly reduce returns.
Closing the pension gapIt supplements the statutory pension insurance and helps to secure the standard of living in old age.	Low interest ratesThe return on traditional private pension insurance policies is often very low, as guaranteed interest rates are below inflation.
Tax advantages upon payoutOnly the income portion (difference between contributions and pension payment) is taxed.	Opaque contracts and investment optionsThe contract terms are often opaque, and fees as well as the exact use of money in unit-linked products are difficult to ascertain.
Potentially guaranteed services: With traditional pension insurance, there is a guaranteed minimum pension.	Losses upon terminationEarly termination often leads to significant losses, as contributions and fees already paid are not fully refunded.
Secure retirement provisionCompared to other investments such as stocks or real estate, it is safe and easy to plan, especially with classic interest-bearing products.	Long contract durations requiredTo benefit from a private pension insurance policy, it should run for as long as possible, which makes it less suitable for savers with a short to medium-term investment horizon.

Is a private pension insurance policy worthwhile?

A private pension plan can be a sensible option if you want to supplement your retirement savings and look to the future with peace of mind. It offers planning security, guaranteed pension payments, and tax advantages upon payout. However, you often face high costs and fees that can significantly reduce the already low returns. In the worst-case scenario, your accumulated capital decreases instead of growing. Furthermore, the contracts are often difficult to understand, and you are bound to the terms and conditions for the long term. Therefore, it is advisable to compare private pension plans with alternative investment options such as ETFs to find the best solution for your personal goals and needs.

Alternatives to private pension insurance

Private retirement savings are just one of many options for building wealth. For them to be successful, they must be tailored to individual circumstances. Savers should keep in mind that:

that the retirement plan fits their private and professional situation,
it meets its risk profile,
The costs are as low as possible and the return is as high as possible.

A recommended alternative to private pension insurance is an ETF savings plan. An ETF tracks a specific stock index by investing in the stocks and bonds it contains. ETFs offer a cost-effective way to acquire a broad range of securities. Their diversification, low costs, transparency, and good return potential make them very popular. Furthermore, contributions can be adjusted flexibly, and capital withdrawals are possible when needed.

Depending on individual circumstances, government-subsidized products can also be an attractive option. For employees, company pension schemes are a good choice, especially if the employer contributes to the savings. Low-income earners and families with several children benefit from the Riester pension and the associated government subsidies.

Support from our BK consultants

Whether it's a private pension plan, ETF savings plan, Riester pension, company pension scheme, or another solution – supplementary retirement savings are essential for a secure retirement. In many cases, the statutory pension is insufficient, and rising living costs are widening the pension gap. Starting your retirement savings early ensures you won't have to worry about your financial future later on.

Our BK advisors are here to help you find the right retirement plan for your needs. They'll answer all your questions about private pension insurance, explain its advantages and disadvantages, and present you with other alternatives. Schedule an appointment today and start planning your retirement.