With a private (unit-linked) life or pension insurance, millions of Germans provide for old age. But once the retirement has been achieved, the question arises of how much tax will actually be due on the capital saved. The issue of taxation will also be important to anyone who cancels their insurance prematurely or sells the contract to a specialized buyer.
Whether and how much taxes you have to pay depends on when you have signed the contract. The decisive factor is the date on your insurance policy. Also important is how long the contract was and how old you are when you call the money. Capital payments are treated differently than annuity payments. So, look which case applies to you.
- How you have to pay tax on your private life insurance depends on certain criteria. We distinguish four cases:
- Old contract: You have started your contract before 2005 and can pay off credits, cancel or sell the contract. The income is usually tax-free.
- New contract and payout: You have your contract from 2005 completed and can be credits to pay retirement or terminate the contract.
- In that case you pay income tax on the half or final withholding tax on the full profit. Depending on how long your contract has been running and how old you are at disbursement or termination.
- New contract and sale: Your contract has been running since 2005 or later and you are selling it to a specialized buyer. You pay withholding tax on the profit.
- Pension payment: You pay income tax on a small percentage of the lifelong private pension, the so-called income share. This is the same for all contracts.
What is taxed?
Depending on whether you withdraw your endowment insurance or private pension insurance at the beginning of your retirement or cancel or sell the contract beforehand, this will result in a termination benefit, a surrender value or a purchase price.
Not taxed is the respective full amount – but only your income, so the difference between the actually paid out sum and your deposited contributions.
This difference (profit) from life and annuity insurance is one of the capital income. As a result, a withholding tax of 25 percent is applied. In addition there are solidarity surcharge and, if necessary, church tax. Only in some cases does the personal income tax rate become payable instead. Read more below.
On the other hand, if you receive a term life insurance policy, for example as a spouse or a relative, the sum is tax-exempt. However, inheritance tax may apply if the allowances provided there are exceeded.
What is behind drain performance and Co?
Termination benefit is the sum of your accrued contributions less costs, the ongoing credits of the insurance and the final bonus. The repurchase value is usually the sum of your paid-in contributions less costs and less a cancellation deduction.
If you sell your contract, the purchase price is usually a few percentage points above the surrender value – because the buyer continues the contract and can still make good returns. Finanztip recommends getting several offers from specialized buyers. A termination should be only the last solution.
Disbursement: Has your contract been running since 2004 or longer?
In that case, you are fine. As a rule, you pay no cent tax if your endowment life insurance is due at retirement or you decide in your private pension insurance to pay off the income as a monthly pension. The expiration service flows one to one into your account.
The same applies to the surrender value in the case of a termination or the sale proceeds if you have sold your contract to a specialized buyer. You will receive this credit without deduction on your account.
- The exact conditions for the income of a life or annuity insurance to be exempt from tax at the time of retirement or termination are as follows:
- The amount of the expiry benefit is paid out in full.
- The insurance company has issued the contract until 31 December 2004.
- You paid the first contribution until March 31, 2005.
- You must have paid contributions for at least five years.
- At least 60 percent of your contributions must account for the death penalty.
The last point, the high enough death benefit to surviving dependents, should be met in almost all contracts. At that time, the insurers usually designed the contracts in such a way that all conditions for a tax-free payment were met.
Payout: Did you complete the contract in 2005 or later?
If you have your savings paid out of such a new life or pension insurance, you must – in contrast to older contracts – definitely pay taxes. This is stipulated in the Retirement Income Act. It assigns private capital life or pension insurance to the so-called third layer of old-age provision. Income of this category is generally subject to withholding tax.
Be sure to submit a tax return
For the 2017 tax return, you can for the first time take advantage of this so-called half-income rule – for the first time in 2017, contracts will have a 12-year term. However, to enjoy it, you have to take care of it yourself.
After all, your insurance company will pay the withholding tax on the full profit to the tax office. This means you will only get around a quarter less payout credited to your account.
To recover taxes, you must file a tax return. Enter the full profit from the disbursement of your life insurance in line 23 of the KAP appendix. How much the payout is, your insurance should have told you. If you fill in this line, the tax office automatically knows that your personal income tax rate is to be applied exceptionally to this capital income.
Make the most of the allowance
Now make sure that your full tax credit on capital income, 801 euros (1,602 euros for married people), is credited to your half-payout. To do so, enter in line 12 of the KAP appendix how much of the tax relief you have already used for other capital income and in line 13 of the KAP appendix how much tax credit you still have. In line 5 of Annex KAP, request that the tax office check the “tax deduction”.
In this case, the tax office will charge you the entire tax deduction on your profit from the payout. As a rule, you still have to pay the rest with income tax. In return, your regular capital income will now be subject to withholding tax from the first euro. However, if the income tax rate is higher than 25 percent, this “exchange” is worthwhile.
Further requirements for contracts from 2009
If you have concluded your contract as of April 1, 2009 and you only want to tax half the payout of your life insurance, your contract must fulfill further requirements: The death sum must amount to at least 50 percent of all paid contributions by the end of the contract period (§ 20 Abs. 1 No. 6 p. 6 EstG). Many contracts may already have been properly constructed. However, if you are not sure whether your contract meets the requirements, ask your insurance company.
What you should consider when selling
If you sell your contract to a buyer, you always pay withholding tax on the total difference between the purchase price and the paid contributions. The sales proceeds are classically part of the capital income. The withholding tax will be paid by your insurance company directly to the tax authorities.
You can have the tax return only the allowance for capital income, 801 euros (1,602 euros for married people), charged. To do this, enter the corresponding values in lines 7 and 12 of the KAP appendix. If you have no other capital gains, such as interest or dividends, your tax base will be reduced by this allowance.
If you absolutely need the money from the life or pension insurance, Finanztip recommends that you make several offers from specialized buyers. They usually get a bit more money on the sale compared to the termination.
In terms of tax, you are not worse off when selling compared to the termination, provided that you are younger than 60 or 62 respectively. In that case, you would have to pay tax on the proceeds in the event of termination.
How do you tax your private pension?
If you receive a life-long pension from a private insurance company, you do not have to worry about the date on which you signed the contract: the tax on pensions always works the same.
You only have to pay income tax on a small percentage of the pension, the so-called income share. This depends on how old you are when you retire. For example, if you retire at the age of 67, you will have to pay tax on 17 percent of your pension.
The table of income shares can be found in the income tax law. The pensions from private pension contracts, extrapolated for the year, are entered in Appendix R in the lower part.
Note: Anyone who is a member voluntarily in statutory health insurance at age, has to pay private pensioners 14 percent levies to the statutory health and long-term care insurance.
What is the benefit of changing the policyholder?
In the case of an insurance concluded after 31 December 2004, income tax may be saved by changing the policyholder. Example: Parents transfer the insurance contract to their son or daughter or a child transfers the contract to the parents.
This may be worthwhile, for example, when parents transfer their policy to the student son, who initially has no income of his own and is likely to have a lower tax burden even if he enters the profession after graduation. So as long as the son has no or a significantly lower income than his parents, the family can save so overall taxes.