Private pension schemes: Saving early pays off

A private pension scheme to supplement the statutory pension is now more important than ever. Here’s why it pays off to start saving for retirement directly.

Regardless of the new pension package, nobody can rely on the statutory pension alone if they want to maintain the standard of living to which they are accustomed when they are old. There is a huge, gaping pension gap for younger people in particular. According to current calculations by Freiburg Professor of Finance Bernd Raffelhüschen, the statutory pension of those currently between the ages of 20 and 34 will not even amount to 40 per cent of their last gross income. Nevertheless, young people are particularly careless when it comes to saving for old age. According to the latest risk report from the Max Planck Institute, more than half of under-30s save less than 50 euros a month for pensions or not at all – some are lacking in awareness, while others don’t have the money required.

However, there are crucial benefits to starting supplementary pension schemes as early as possible.

Make consistent use of the compound interest effect

Benefit 1:

The longer you have to achieve a certain savings target, the less you have to invest overall. Example: A saver born in 1991 wishes to conclude a private unit-linked pension insurance for their supplementary retirement provision, guaranteeing an additional monthly pension of around 500 euros as part of their retirement budget from the age of 67. If they start saving at 27, with an assumed growth in value of 4 per cent annually, they will have to contribute around 42,000 euros less in total than if they start 20 years later (see info graphic). “This is due to the compound interest effect,” explains Miriam Michelsen, Head of Pension Schemes and Health Insurance at MLP. The returns that the insured person earns through their private pension insurance during the accumulation period also increase the current policy funds. This, in turn, increases the basis for the next returns. Depending on the solution chosen and subject to market-related fluctuations, the assets will grow more and more quickly.

Benefit 2:

Particularly in an environment with persistently low interest rates, it is advisable to consider unit-linked solutions (possibly with guarantees). The greater the share of equities, the higher the opportunity for returns. While it is true that the risk of price fluctuations also increases, savers can mitigate this risk considerably by starting early. “The longer the saving period is, the more time there is available to balance out temporary setbacks by the start of the pension and to achieve a good net savings,” explains Michelsen.

Saving early is compulsory, but the method used isn’t

It is always an individual decision for the saver which products to make use of in their supplementary pension provision and when and how to combine them. This depends in turn on the funds available, risk mentality and the phase of life. “Generally, it is advisable to employ different product types,” advises Miriam Michelsen. “For long-term saving processes in particular, a balanced and well-coordinated mix is of fundamental importance. Our advisors provide support with finding the right solutions.”

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