Freelancers: how does the Rürup pension work for the self-employed?
As with any topic in the German system, retirement and pensions is filled with nuanced information and very specific benefits and disadvantages, which ultimately depends on your individual circumstances. Today, we dive into how the Rürup pension works for the self employed. At this point, if you’re wanting to know about this topic we can assume you have read and completed our ultimate to-do list for relocating to Germany. You are starting to think long term, you’re working for yourself and maybe it is time to focus on the inevitable: paying for retirement. One option you’re likely to come across is the Rürup pension, one of the more basic options yet still a private pension. The Rürup pension is a basic pension, which was introduced in 2005 and is considered a private pension. By and large it is well funded. The main difference between the Rürup pension and other pension systems, however, is that a partial payment or a whole "free" payment from the Rürup pension is not possible. It is a model of lifelong payout. This basic pension has advantages and disadvantages.
What is the Rürup pension and how does it work?
The Rürup pension is a form of private pension and is based on the payment of amounts based on a contract. These amounts are used to create capital, which in turn should be increased by interest (and also by the pension provider's business). Accordingly, the sum insured is "subject of the market" - as an economist would say. What this means is that it is quite possible that your Rürup pension provider goes bankrupt - but, despite this, it does happen very rarely. Depending on the contract, you will be paid a certain amount of pension based on your deposits. The payout is then life-long, which is obviously highly secure.
As with any pension, you pay upfront to get money at the end. The interesting thing about the Rürup pension is the possibility of taxing the deposit as special expenses as well as the actual taxation of the pension itself. This too is a continuous system that changes each year in certain steps.
State promotion and taxation
Introduced in 2005, the Rürup pension was part of a package of measures designed to persuade citizens to transfer pensions from state to private hands (or their own). In order to provide sufficient incentives, the Rürup pension is subsidized by the state. In contrast to the Riester pension, for example, this is not a grant subsidy but a promotion based on the taxability of the Rürup pension contributions.
The taxability benefits you during the time in which you deposit money. With the Rürup pension for self-employed you have the advantage that you can do this monthly, annually and in between. The contracts are very flexible here, a much needed hand of grace for nearly all freelancers. Up to a certain maximum, part of the accumulated sum can be deducted from the income subject to income tax.
|Development in year||maximum rate||deductibility (relative to West Germany)|
In the East, the values are slightly lower. The deductibility in the accumulation phase will, therefore, rise to 100 per cent by the year 2025 (legally stipulated, the deductibility was 60 per cent in 2005). The maximum rate is variable. For employees, the taxable maximum is a few thousand euros lower, but that probably does not concern you. Furthermore, the Rürup pension - like other forms of private pension provision - is taxed at the end. Again, this is an ongoing model, but only from the year 2040, the contributions must be fully taxed. Currently, the tax burden on these pension contributions is 76 per cent. The tax burden increases by two percentage points, then by one percentage point each until 2040.
Conditions and restrictions
The Rürup pension is subject to conditions and if the Rürup pension is to be completed as a self-employed person, this applies a little more. First, it should be noted that it is basically attainable for anyone who has an income. However, the Rürup pension is far from having a same or standard application for all people.
Conditions apply to the taxability:
- The insurance contract must be certified by BZSt (Federal Tax Office)
- The basic pension may not begin before the age of 62
- The contributions are - with the exception of the defined subscription right - not inheritable
- The contributions are not transferable and can not be sold
Rürup pension contracts are contracts that you enter into with a private company. There are fees, administration fees - of course. The Rürup pension is expressly not a state benefit. You also have to pay for other services out of pocket. If you deposit in other pensions (Riester, pension schemes, etc.), then the maximum deductible maximum rate is reduced.
Rürup pension for the self-employed: when is it worthwhile?
Now comes the question of when the Rürup pension is worthwhile for self-employed. Well, it has already been noted that thanks to the generous deductibility of the amounts, there are nice tax advantages. This makes the Rürup pension a good model when it comes to saving taxes with private pensions. However, it should also be noted that from the year 2040 all amounts paid out will be taxed at 10%. So what does that mean?
Well, it means that a Rürup pension pays off for anyone who is about to retire or anyone who earns enough to make any tax savings feel right. The problem with the Rürup pension is that it is tax deductible but it is eaten up again, depending on the amount and duration of the pension. A Rürup pension is worthwhile only for high earners, as the tax savings already mean a big advantage. In addition, the contracts at Rürup-Renten are structured in such a way that increases in the value of the capital (for example through good investment in the market) benefit the policyholder. This means that with larger deposit amounts you can also achieve nominally better returns and accordingly the payouts are better in the end.
Furthermore, the Rürup pension for the self-employed and it’s benefits really work for you more if you are very healthy and the people in your family generally very old. The longer you live, the more you get from the payouts - after all, it's a lifetime annuity. So, if someday you got paid more than you paid, your insurer still has to pay pension contributions. In addition, the Rürup pension is primarily intended for people who find no place in the statutory pension insurance or in the Riester system or in a company pension scheme. As a self-employed person, you should belong to their target group. However, it is still true that a Rürup pension is now mathematically meaningless if you can not pay the maximum contributions.
However, since this refers to the EUR22,000 euros (twice as much for married couples), the retirement payment makes sense if at least this sum of income is taxable. Of course, this depends on what else you take in terms of precautionary measures. But the Rürup pension has a few small, fine advantages that will be explained again at the end.
What services does the Rürup pension offer?
There are additional insurance policies as part of the Rürup pension. The contributions also have a tax advantage. The most interesting additional benefits are probably the survivor insurance and disability insurance. The former makes it possible to register a spouse or registered partner (and their children) as the beneficiary of the pension in the event of death. The occupational disability insurance must have a lower contribution portion than the pension itself. In addition, the claim can be lost if no more contributions are paid.
Which providers are there?
It is important to distinguish how the amounts paid in are used and what guaranteed interest awaits you. The exact nature of the provider is secondary. When selecting providers you should compare because while the interest rates for the same contract models look the same, the acquisition costs and administrative costs are the actual quality difference. The guaranteed minimum pension in the payout phase results from the expected return on your investment. It should be noted that there are a number of different types of contract that all would explain the framework here.
Insurance companies are private companies that will provide you with an insurance contract. As a rule, the money you receive (contributions) is invested in a security-conscious manner; often in government bonds or very stable mixed funds. Almost all major insurance companies offer Rürup insurance. Of course, should you be interested in private routes, our article on insurance brokers might assist you in the process of finding a good plan to secure your future!
Banks have also entered the private pension market and if you like your banking business, you can ask for it with them. You probably have more opportunities at a bank to actively participate in the investment of your money, but also the higher risks. Deposits of private pension plans at the bank can also be invested in risky financial products. However, banks also offer ordinary Rürup pensions that have standard rates of return and are not subject to any significant risk. These are covered by your deposits and, where applicable, by investment methods that are considered safe.
Advantages and disadvantages of the Rürup pension
Advantages of the Rürup pension
- Pension is paid until the end of life
- Tax deductibility
- As a basic pension with sufficient height can make Riester and Co superfluous
- Contributions paid are not considered as assets (in case of unemployment etc.)
- The savings are flexible; fixed contributions are not planned
- Increases in the value of the savings do not have to be taxed (as is the case with stock profits, for example)
Disadvantages of the Rürup pension
- A termination of the contract is not possible
- A (partial) payout is not possible
- The Rürup pension is taxed
- For unmarried people capital expires in the event of death
- The Rürup pension can only be difficult to benefit survivors
It should also be mentioned that costs are mainly due to transaction fees and administration fees. However, management fees can be reduced by almost all providers if you pay your contributions annually rather than monthly. It is also not possible to leave the contract. This does not change your later claim to withdrawals.
The Rürup pension is an interesting model for the self-employed and is recommended everywhere for high earners who do not have other pension models available. A conversation with your accountant or a Rürup provider comparison can help you.