The German fund industry association, BVI, is proposing a fund saving accounts with tax incentives as a part of the reform of the third pillar pension system proposed by the governing coalition parties.
The core element of the concept put forward by BVI is a “special custody account” for saving plans with a minimum term of up to the age of 60.
Returns on investments conducted through saving accounts in funds are free of taxes, even in case of reallocations within the account.
Individuals would find an incentive to save in custody accounts by receiving a tax-free amount from investment returns paid out from the age of 60, and by increasing the tax exemptions by 2% per year once the minimum level of payment in the accounts has been made, meaning 50% tax-free after 25 years, according to BVI´s calculations.
Savers can withdraw their savings in installments or through a one-off payout, but without tax subsidies if they decide to take their money before the age of 60.
The assets saved in individual accounts would be invested in Undertakings for Collective Investments (UCITS), mixed and real estate funds, with a mechanism of “automatic reinvestment”, according to the proposal.
Payments would be made into saving accounts from the taxed income, establishing a minimum amount of payment per year, for example €120, and a maximum amount of payment per year, for example €15.736, linked to the contribution rate of statutory pensions.
Thomas Richter, BVI’s chief executive officer, said: “There is an urgent need to further develop private old-age provisions.”
The German government has tasked a group of experts to examine the introduction of private products with higher returns than Riester-Rente for pensions, in line with the coalition agreement: “Fund savings plans are an appropriate tool for this,” said Richter.
The group of experts should also assess whether it is realistic to set up a public fund to offer cost-effective private products with the the possibility of opting out.
“This controversial idea must be examined urgently in order to ensure that there is no intervention in the market for private old-age provisions that distorts competition,” Richter said, adding that BVI rejects the idea of a public fund for private pension provisions.