State grants and tax savings for both occupational and private pensions:
o This year wage earners can contribute a minimum of 1% of pensionable income to benefit from the Riester incentive, a package of state grants and income tax refunds. This minimum will increase by 0.5% every year to reach 4% by 2008.
o The minimum contribution entitles eligible people to a basic grant (the so-called Zulage) to cover the reduction in state social security. These grants will rise from e38 this year for a single person to a maximum of e154 by 2008. There is also a child grant which will rise from e46 for each child this year to e185 per child in 2008.
o Total contributions (own contributions plus government grants) per eligible employee are tax deductible up to e525 this year, increasing by e525 every two years to a maximum of e2,100 by 2008.
o Riester savers receive a tax rebate if the tax exemption within their respective tax allowance is larger than their government grant.
o Savings schemes qualifying as private plans include insurance contracts, mutual funds and bank savings products. Investments in real estate qualify although are hampered by restrictions.
Key requirements for the Riester-Products (private pension plans)
o Withdrawal of pension possible from age 60
o Providers must guarantee at least the paid-in contributions.
o Savers may switch between pension plans at three months’ notice.
o Possibility to take 20% lump sum if returns are in excess of 20% on capital invested.
o Plans must pay a life-long annuity, or for mutual funds and bank products provide beneficiaries with a capital withdrawal plan.
o At age 85 the pension plan reverts into a life annuity.
o Fees (distribution and implementation costs) are to be spread over at least 10 years.
o Providers must inform customers in writing about all costs associated with conclusion and execution of the pension contract.
Methods of occupational pension funding
o Direct Promise/book reserve (Direktzusage/Pensionsrückstellung (EET taxation method))
o Support fund (Unterstützungskasse) (EET)
o Pensionskasse (TET or EET or TEE)
o Direct insurance (Direktversicherung) (TET or TEE)
Both defined contribution (DC) and defined benefit (DB) occupational pension plans are allowed under the new law.
o New method of occupational pension financing – Pensionsfonds (EET)
Further requirements for occupational pension plans
o Three schemes are approved for Riester products – Direct Insurance, Pensionskasse or the new Pensionsfond. These products can receive the Riester tax benefits/subsidies for their investment. Book Reserves and Support Funds do not enjoy the same tax benefits/subsidies.
o Employees can ask employers to use 4% of salary (by 2008) up to contributions ceiling for company pension benefit (unless an employer already has an equivalent company pension scheme funded through salary conversion).
o Employees can also ask employers to ensure their pension benefit scheme is open to the Zulage government grants.
o Employees have a legal right to demand Entgeltumwandlung – deferred compensation – up to an annual maximum of E2,160 (4% of the upper earnings limit for the statutory pension scheme. Contributions are tax exempt until the disbursement phase.
o New Pensionsfonds enjoy investment freedom.
o No capital guarantee required (Employer must belong to the Pension Sicherungs Verein – collective group insurance company)
o Possibility for employee to take 20% lump sum on retirement.
o Employees can transfer between occupational vehicles.
Reform to existing schemes
o Vesting periods for company schemes reduced from 10 to 5 years. Minimum age required to reach vesting reduced from 35
o Tax deductible book reserves can be built up from age 28 onwards.
o From 2008 contributions to direct life insurance contracts to be subject to social security contributions.
o Up to 2009 deferred compensation (Entgeltumwandlung) contributions are not subject to social security deductions.
Individuals are able to withdraw from individual or company pension fund savings between e10,000 and e50,000 to build or buy their own home.
EET = exempt contributions, exempt capital gains, taxed draw-down.