Private pension insurance is one of the most popular retirement savings options in Germany. 
You contribute to your private pension plan and, upon retirement, receive a lifelong pension. 

The investment strategy can be tailored to your risk preference, allowing you to build your retirement savings in a way that suits you best.

• Private pension insurance guarantees a lifelong supplementary pension.

• As a retirement provision in the form of an investment strategy, private pension insurance is highly flexible – ranging from conservative to return-oriented.

• It is possible to provide for dependents with private pension insurance.

• The future pension payments from private pension insurance are only taxed based on the taxable portion (Ertragsanteil).

Anyone who relies solely on the statutory pension will most likely face significant income reductions upon retirement. 

This is because the pay-as-you-go state pension depends on future contributors. As fewer employees have to finance more retirees, the pension level decreases.

Private pension insurance is a form of funded retirement provision. You save capital over many years through private pension insurance, which is then paid out to you as an additional pension in retirement – guaranteed for life.

You pay a fixed amount into private pension insurance either as a one-time payment or monthly contributions for your future retirement. 

The insurer invests the capital according to the agreed strategy and, from the start of your retirement, pays you a monthly pension. 

The amount of your pension depends on the contributions paid into the insurance and the interest earned.

So far, this concept may sound similar to a savings plan. However, private pension insurance includes the following benefits that make it an insurance product:

• Your additional retirement pension is guaranteed for life through private pension insurance.

• With the contribution refund option, your beneficiaries receive the saved capital and the returns generated if you pass away during the accumulation phase.

• It is possible to arrange a survivor’s pension with private pension insurance.

Ideally, the savings phase of your retirement provision ends precisely when you reach retirement age. After that, you receive both your statutory pension and your private pension.  

With private pension insurance, you can freely choose when to start receiving your pension payments. You may want to reduce your working hours in your early 60s and use your private pension to cover the income gap. 

Or perhaps you already know that you want to work longer, delaying your retirement. In that case, you could choose to start receiving payments from your private pension insurance at age 70, for example.

Interest and compound interest have a significant impact on your private pension insurance. Therefore, the rule is: the longer your invested capital works for you, the higher your returns.

For this reason, experts recommend choosing private pension insurance for retirement planning as early as possible. This way, you can achieve substantial financial security for your retirement even with small contributions. 

If you start saving at a later age, the monthly contributions required for a similar supplementary pension will be significantly higher.

With a deferred pension, there are many years between signing the contract and receiving payments. You can make contributions to your retirement provision either monthly or as a one-time payment.

There is also the option to invest money from an inheritance, a term life insurance policy, or an endowment life insurance policy as a lump sum and immediately start receiving a pension – this is known as an immediate pension.

A traditional private pension insurance policy provides a lifelong monthly pension.

If you choose a contract with a capital option, you can decide at the start of your retirement whether you want to receive the accumulated and interest-bearing amount as a lump sum or as a pension.

For private pension insurance contracts concluded since 2005, the following rules apply:

Lump-Sum Payout from Private Pension Insurance
Lump-sum payouts from new private pension insurance policies are generally subject to capital gains tax. However, if the contract has existed for at least 12 years and the payout occurs at the earliest at age 62 (before 2012: age 60), the partial-income method can be applied in the tax return. In this case, only half of the investment gains are taxed at the personal tax rate.

Lifelong Pension
Pension payments are taxed based on the taxable portion (Ertragsanteil). The percentage of taxable income depends on the age at which pension payments begin. The later you start receiving your pension, the lower the taxable portion.

In the case of a divorce, private pension insurance is subject to pension equalization (Versorgungsausgleich). 

Just like statutory pension entitlements, the claims from the private pension insurance are divided between both partners.

In principle, you always have the option to cancel your private pension insurance during the savings phase. However, it is advisable to contact your insurer in advance to determine the exact payout amount, as this can depend on various factors, such as market conditions.

Depending on your financial needs, a partial withdrawal may be a good alternative. There are often flexible options that allow you to maintain at least part of your retirement savings and avoid losing any linked disability insurance coverage.