Introduction
Many people in Germany have taken out a Riester contract to provide for their old age. In principle, this state-subsidized pension scheme offers several advantages, but it also faces significant challenges. One key problem is the guarantees that must be provided for all contributions and allowances paid in. This article sheds light on the problems associated with Riester contracts and highlights alternative uses, particularly in connection with the financing of owner-occupied residential property.
The problem of guarantees
A Riester contract must guarantee that the contributions and allowances paid in will be available at the end of the contract term. In order to fulfil this guarantee, part of the contributions are invested in secure investments such as bonds. Even if Riester contracts invest in funds and ETFs, part of the contributions remain in these safe investments.
In times of low interest rates, however, this creates difficulties: the performance of these safe investments is often so poor that an ever greater proportion of the contributions must be invested in them to fulfill the guarantees. As a result, Riester contracts generate little or no return, especially after deducting costs. Although the promised tax benefits and guarantees remain in place, the actual return is often disappointing.
Alternative use of the Riester contract: Homeownership
However, a Riester contract can also be used in another way, namely to finance owner-occupied residential property. Riester home loan and savings contracts and the option of withdrawing capital are particularly suitable here.
The capital from a Riester contract can be used for
- You buy or build a flat or house, or repay a loan taken out for this purpose,
- You buy compulsory shares in a housing cooperative in order to move into a cooperative flat or repay a loan taken out for this purpose,
- You are financing a remodeling project to reduce barriers in your home in an age-appropriate way, or
- You finance an energy-efficient refurbishment in or on the property.
Advantages for high earners
There is an interesting concept for high earners with a high tax burden: tax relief on the repayment of your property. Saving for a Riester contract is tax-incentivised. The maximum amount of 2,100 euros per year can lead to a tax refund of almost 1,000 euros. This amount can be used regularly for unscheduled repayments, which shortens the loan term and thus the interest burden. This means that even properties that otherwise offer hardly any tax advantages can generate tax benefits during the term of the loan thanks to the Riester subsidy.
The housing subsidy account: Tax aspects
An important aspect of using a Riester contract for home ownership is the housing subsidy account. Everything that is subsidized for tax purposes must ultimately be taxed again. The housing subsidy account is a fictitious account in which the subsidized capital is extrapolated at an annual rate of two percent and the amount must be taxed at the end of the savings phase.
Tax burden in old age
In most cases, the tax burden in old age is significantly lower than during working life. In addition, the tax system is subject to inflation, which further reduces the actual tax burden. The housing development account can also be closed once, with a discount of 30% being granted.
Conclusion
Riester contracts face considerable challenges, especially in times of low interest rates. Nevertheless, they offer interesting advantages due to the possibility of using them for owner-occupied residential property, especially for high earners. Tax incentives for amortization can shorten the loan term and generate tax benefits during the term of the loan. Although the housing subsidy account must be taxed, the actual tax burden in old age is often lower than the tax benefits during working life.
Overall, it is worth considering the use of a Riester contract in connection with home ownership to maximize the benefits.