Private pension insurance: is it worth it?

A private pension insurance is one of the classic ways to close the pension gap. Here I explain calmly how it works, where its strengths and its catches lie, and how much it actually brings for two very different people. No jargon.

How it works

The idea is simple: over many years you pay in a fixed amount each month. From retirement the insurer pays you a lifelong monthly pension in return, however old you get. How high that pension is depends on two things: how much capital has built up by then, and the so-called pension factor, which turns the capital into a monthly pension.

For tax it is treated favourably: in retirement only the income share (Ertragsanteil) is taxed, that is a small, age-dependent part of the pension, not the full payout.

Strengths and catches

No product is right for everyone, so here are both sides openly:

• Predictable and lifelong: you know something comes in every month, right to the end. That takes away the fear of the money running out one day.
• Less flexible: the money is tied up. You cannot get at the saved capital as easily as with an investment account.
• Costs are decisive: acquisition and administration costs can noticeably dent the return. It pays to look closely here before you sign.
• The pension factor counts: it decides how much pension you get in the end per unit of saved capital, and it is not the same at every provider.

Lena and Thomas, how much does it bring?

Remember the two from the first part? Lena (30, big city) had a gap of around 1,334 € a month, Thomas (50, small village) around 572 €. Let's see what a private pension insurance makes of that. All figures are calculated with the same formulas as the app, in the realistic scenario and in today's purchasing power.

Lena pays in 150 € a month

Still 37 years to retirement. This is exactly where compounding shows: lots of time turns a small contribution into a decent pension.

Thomas pays in 300 € a month

Only 17 years to retirement. He pays twice as much as Lena, but has far less time for the money to work.

That is the most important lesson from the two: Lena pays only half of what Thomas pays and still gets more out, simply because she starts much earlier. With provision, time is almost more important than the amount.

Realistic scenario, pension factor and costs assumed as a flat rate, salary grows like the average. Examples for illustration, not a forecast and not advice. Other ways (ETF, pension points, property) we calculate separately, they are not added on top here.

Run it for your own situation

How much a private pension brings for you depends on your age, your contribution and the costs. In the app you can enter your own figures and try it out in peace, entirely local on your device, no sign-up and no tracking.