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INVESTMENT

Is it worthwhile for expats in Germany to have an offshore pension plan?

If you've ever wondered whether it's a wise or cost-saving idea to invest in an offshore pension plan, there's a good chance you aren't alone. A tax expert for internationals based in Germany has given The Local some insight on the topic.

Is it worthwhile for expats in Germany to have an offshore pension plan?
Photo: DPA

This article is available to Members of The Local. Read more Membership Exclusives here.

Whether or not you plan on retiring soon, like many others across Deutschland you may already be saving for your pension. 

Offshore pension plans differ from usual pension plans in that they specifically allow people who live abroad or frequently move from country to country for work to contribute to a retirement plan outside of their usual place of residence.

But how beneficial (if at all) are they particularly for foreigners in the Bundesrepublik?

The costs for maintaining an offshore pension plan for foreigners here can be quite high, both on the commissions side and administrative costs side, financial advisor Patrick Ott told The Local.

As such, Ott usually advises expat clients in Germany to set up a new pension plan or use one which they have already set up in their own country, such as the 401(k) plan in the US, which is a retirement savings plan sponsored by an employer. Yet there are a few exceptions, Ott added. 

“It makes more sense to just open an account with a German or international platform for investing into investment funds directly rather than using an overly expensive offshore pension plan,” he said.

“There are only very few that do not work based on commissions and therefore the vast majority come with very high closing and running costs,” Ott added. One key criticism of offshore pension plans is that they're an expensive way to invest in the world stock market.

German pension plans are moreover usually tax subsidized, which isn't the case for many offshore retirement plans, according to Ott. Some of the big names in Germany include RIESTER (a pension plan specifically designed for families), RÜRUP (a pension for the self-employed) and betriebliche Altersvorsorge, or a company pension scheme.

While even simple private retirement plans in Germany – if set up correctly with high enough coverage for biological risks like sudden death – can be used for tax deferral, the vast majority of offshore pension plans fail to comply with the relevant German tax rules, Ott said.

When an offshore plan makes sense (and when it doesn't)

Nevertheless, for globetrotters who know they’ll stay mobile in their work, such a plan could be wise. “An offshore pension plan would most likely be a huge advantage for someone who works globally and will move on to many countries for many years to come,” the tax expert said.

Ott recommends seeking out commission-free plans in which the advisor charges fees directly and only to the client. He finds them a “much more transparent and cost-reduced solution.” He also recommends passive investment funds, which are lower in costs than pension plans which are actively managed. 

But even if you decide to go with an offshore plan, Ott warns that “you won't have special tax advantages if you reside in Germany.” This is because German tax legislation – much like many other countries around the world – does not recognize offshore plans in their own tax legislation.

Photo: DPA

Starting this year, Germany has introduced a so-called ongoing taxation, meaning that a person “has to report profits even if they are only on paper every year.” This basically means that on your tax declaration, you would need to list the price of the fund at the beginning of the year and the price of the fund at the end of the year, with the difference being taxable profit in Germany.

In this regard, an offshore plan can have a slight advantage if it can work to defer those ongoing tax payments. But most of the offshore pension plans lack certain criteria under German law. Furthermore, since they undergo “transparent taxation” in Germany, their profits also need to be declared and taxed yearly.

Even if an offshore pension plan is not taxed at a high rate, the costs of setting one up can be prohibitively expensive, Ott emphasizes. Some plans could also cause serious problems among tax authorities, depending on the country of origin of the foreigner.

For example, there’s a German-US double tax recognition agreement, meaning that pension plans set up in Germany would not cause any issues for Americans, whereas an offshore plan could be problematic.

FOR MEMBERS: How to file taxes as an American in Germany

Looking at a foreigner's country of origin

If an expat snags a job in Germany, but is unsure whether they want to plant roots in Deutschland, they can simply continue to invest in their home country's plan, advises Ott. They wouldn’t have any tax advantages but wouldn’t have any disadvantages either, with the ability to pay into the already established plan of their native country.

Yet even some employees who aren't here for the long haul can take advantage of a German pension scheme, according to the advisor. For example, if someone moves to Germany as an employee with a very high income, “it would make sense to use tax-subsidized company pension schemes in order to minimize tax exposure for three or four years.”

It’s also possible to turn to a tax advisor to set up these often low cost, commission-free plans.

In general, if a person comes from America or elsewhere and does not know if they’re going to stay for longer, Ott recommends paying into the old pension plan if it’s legally possible. If not, a person is usually better off setting up an investment plan where they funnel savings directly into investment funds.

Once they choose the country they want to stay in for the long run, they can move that capital into either the pension plan in their home country or the one in Germany.

But for expats, the tax expert says he wouldn't recommend setting up a new pension plan “if you only have a short term perspective” with regards to your country of residence.

FOR MEMBERS: How to maximize your German pension – even if you plan to retire elsewhere

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RETIREMENT

Reader question: Can I get a retirement visa for Germany?

Unlike in EU countries such as Portugal or Spain, Germany does not have a visa specifically for pensioners. Yet applying to live in the Bundesrepublik post-retirement is not difficult if you follow these steps.

Reader question: Can I get a retirement visa for Germany?
Two pensioners enjoying a quiet moment in Dresden in August 2020. Photo: picture alliance/dpa/dpa-Zentralbild | Sebastian Kahnert

Due to its quality of life, financial security and health care, Germany snagged the number 10 spot in the 2020 Global Retirement Index. So just how easy is it to plant roots in Deutschland after your retirement?

Applying for a residency permit

As with any non-EU or European Economic Area (EEA) national looking to stay in Germany for longer than a 90-day period, retirees will need to apply for a general resident’s permit (Aufenthaltserlaubnis) under which it will be possible to select retirement as a category. 

READ ALSO: How does Germany’s pension system measure up worldwide?

This is the same permit for those looking to work and study in Germany – but if you would like to do either after receiving a residency permit, you will need to explicitly change the category of the visa.

Applicants from certain third countries (such as the US, UK, Australia, South Africa, Japan, South Korea, Israel, Canada, and New Zealand) can first come to Germany on a normal tourist visa, and then apply for a residency permit when in the country. 

However, for anyone looking to spend their later years in Germany, it’s still advisable to apply at their home country’s consulate at least three months in advance to avoid any problems while in Germany.

Retirement visas still aren’t as common as employment visas, for example, so there could be a longer processing time. 

What do you need to retire in Germany?

To apply for a retirement visa, you’ll need proof of sufficient savings (through pensions, savings and investments) as well as a valid German health insurance. 

If you have previously worked in Germany for at least five years, you could qualify for Pensioner’s Health Insurance. Otherwise you’ll need to apply for one of the country’s many private health insurance plans. 

Take note, though, that not all are automatically accepted by the Ausländerbehörde (foreigners office), so this is something you’ll need to inquire about before purchasing a plan. 

READ ALSO: The perks of private health insurance for expats in Germany

The decision is still at the discretion of German authorities, and your case could be made stronger for various reasons, such as if you’re joining a family member or are married to a German. Initially retirement visas are usually given out for a year, with the possibility of renewal. 

Once you’ve lived in Germany for at least five full years, you can apply for a permanent residency permit, or a Niederlassungserlaubnis. To receive this, you will have to show at least a basic knowledge of the German language and culture.

READ ALSO: How to secure permanent residency in Germany

Taxation as a pensioner

In the Bundesrepublik, pensions are still listed as taxable income, meaning that you could be paying a hefty amount on the pension from your home country. But this is likely to less in the coming years.

Tax is owed when a pensioner’s total income exceeds the basic tax-free allowance of €9,186 per year, or €764 per month. From 2020 the annual taxable income for pensioners will increase by one percent until 2040 when a full 100 percent of pensions will be taxable.

American retirees in Germany will also still have to file US income taxes, even if they don’t owe any taxes back in the States. 

In the last few years there has been a push around Germany to raise the pension age to 69, up from 65-67, in light of rising lifespans.

READ ALSO: EXPLAINED: Could people in Germany still be working until the age of 68?

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