RETIREMENT: PENSION FUND JUST ANOTHER PILLAR
Doctors' pension funds are having to tighten their belts in times of low interest rates. Therefore it is very worthwhile for doctors to pursue a parallel provision strategy.
NEU-ISENBURG. Many clinicians nowadays are looking nervously towards retirement. This is because pension funds are also being affected by the persistently low interest rates. However is the fear of old-age poverty justified?
Dermatologist Dr Reinhard Müller from Ludwigshafen is appalled. During and after his intern post in Hesse, the doctor made contributions every month to the pension fund there. For seven years. Now the organisation has stated that the 54-year-old practice owner's pension has dropped "due to new calculation modalities" from Euro 380 a month to Euro 250 a month. This is a drop of just under 30 per cent.
"If Dr Müller had continued paying into this pension fund until the end of his professional career, the deficit would have been less," says Markus Sobau, the head of MediSecur, Mannheim. Mr Sobau knows the market, and he has been advising doctors on financial matters for 20 years. Although the majority of the 89 German pension funds have cut the actuarial interest from its previous normal four per cent to as low as two per cent, existing pension rights would only be foreshortened in the rarest of cases.
Increasing taxation
"Instead, pension rights are simply rising less quickly", explains the financial manager. This process is diluting the loss of value. The results, however, remain the same: less pension.
Stefan Strunk, Managing Director of the Working Community for Professional Pensions Funds (ABV), strikes a more calming note: "Despite a period of low interest, most pension funds are achieving yields above their actuarial interest rates." The reason for this is the elastic financing model. Unlike life insurance, for example, pension funds only have to invest a quarter of their capital assets in fixed-interest securities according to the investment ordinance. In a low-interest environment, therefore, many organisations are stepping up their investments in property and shares. According to statements from various press organisations, this is buffering the drops in interest rates - for now.
None of the organisations is keen to make any long-term forecasts, however. The capital market environment is too uncertain. The fact is that the average doctor's pension has only increased by just less than two per cent a year from 2004 to date. The differences from the average are considerable in some cases: from two per cent in 13 years overall to significantly above two per cent each year.
Another complicating factor, and what very few doctors are aware of, is that future pensioners will need to pay more tax on their retirement money. Crucial for this is the taxation situation in the year in which they retire. Anyone retiring in 2025 will pay tax on 85 per cent of their monthly payments, for the rest of their lives. The rule will hit pensioners particularly hard after 2040. "Their monthly contributions are fully taxable", confirms Björn Demuth, a specialist taxation lawyer in Stuttgart. So from a pension of Euro 4,000, only around Euro 2,500 nett will land in the recipient's bank account after 2030.
Private health insurance costs are also increasing
Another less commonly thought-about point in terms of costs is private health insurance (PHI). It is well known that this does not calculate contributions based on income like their statutory counterparts, but rather based on the individual risk at the start of the insurance term. Therefore as individuals age, the costs rise from Euro 600 to Euro 800 a month. PHI contributions are also deducted from the net pension. Unlike statutory pensions insurance, pension funds do not subsidise contribution payments.
To increase their rights, many doctors are responding with voluntary top-up payments. "The advantages are clear", says ABV expert Strunk, "more payments and a reduced tax burden during their active careers."
Doctors are not getting access to their savings
Financial planner Sobau, on the other hand, advises a more sceptical approach. "All financial means, including top-ups, are tied up in the pension fund until retirement and beyond", he warns. No matter what the difficult situation - during their working lives, doctors do not access their savings.
And even after retirement, a lump-sum payment is not possible. Instead of tying up free cash through top-up payments, doctors can therefore also consider setting up a personal and disposable additional old-age pension. This should take into account tax-related as well as personal aspects.
Useful options with more yield and security include property and assured securities deposits where the investment money remains available in the short and medium term.
Unfounded fear over poverty in old age
It must be borne in mind that the pension fund is no longer the infallible saviour that it once was. It does remain, however, a comparably stable pillar for retirement planning. Provided it's not the only one.
In times of low interest rates and uncertain capital markets, doctors should also not rely exclusively on one institution. Although doctors' pensions will not fall in the foreseeable future, they will not rise as much compared to tax-related and insurance-based costs either.
Anyone wanting to insure themselves should combine professional benefits with a second, private pension. The fear over poverty in old age is however unfounded at the present time.
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