Unit-linked pension insurance tax before 2005: How to protect your benefits
07.04.25
12
Minutes
Katrin Straub
Managing Director at nextsure
Do you have a unit-linked pension insurance policy taken out before 2005? The tax treatment of such older contracts offers opportunities, but also pitfalls. Understand the rules now so you can make the most of your returns.
The topic in brief and concise terms
Capital payouts from unit-linked pension insurance policies (taken out before 2005) can be completely tax-free under certain conditions (e.g. a twelve-year term, five years of premium payments).
For pension payments from such legacy contracts, a BFH ruling from 2021 allowed tax exemption in certain circumstances, but the 2024 Annual Tax Act may have reintroduced taxation of the income portion.
If the criteria for tax exemption are not met, or for contracts from 2005 onwards, the half-income method often applies (half of the returns are taxable) or the flat-rate withholding tax.
Make the most of tax privileges for legacy contracts (pre-2005)
For contracts for unit-linked pension insurance taken out before 2005, special tax rules apply. These so-called legacy contracts often enjoy significant tax advantages when benefits are paid out. The exact conditions depend on the payout option: lump-sum payment or annuity. It is crucial to know the differences. Your private pension insurance can thus be optimised. This knowledge helps you avoid financial disadvantages.
Capital payouts from legacy contracts: check the conditions for tax exemption
A one-off payment from your unit-linked pension insurance (policy taken out before 2005) can be completely tax-free. Certain conditions must be met for this to apply. The contract term must be at least twelve years. In addition, you must have paid contributions in for at least five years. Often, a minimum death cover of sixty per cent of the total premium sum was also a condition. For example: Max paid into his policy for 15 years and receives €50,000 tax-free. So check your contract details carefully. Further information on endowment life insurance can be found here.
Pension payments from older contracts: Understanding the current legal position and important rulings
For pension payments from older contracts, taxation on the taxable portion has long been common. A ruling by the Federal Fiscal Court (BFH) from 2021 briefly brought clarity here. It stated that pensions from older contracts can be tax-free under certain conditions. This applied until the total amount of the pensions exceeded the saved capital. However, the Annual Tax Act 2024 may have changed this rule again. It is likely that the taxable portion under Section 22 of the German Income Tax Act (EStG) is now taxable again. Our expert tip: if anything is unclear, be sure to consult a tax adviser. This is particularly relevant if you are considering cancelling your private pension insurance and optimising tax.
Analyse the tax implications if the criteria for tax exemption are not met
What happens if your unit-linked pension insurance taken out before 2005 does not meet the criteria for complete tax exemption? In this case, the returns from the contract are taxable. The returns are the difference between the payout and the contributions paid in. The half-income method may apply. In this case, only half of the returns are taxed at your personal income tax rate. This applies if the contract ran for at least twelve years and the payout is made from the age of 60. An example calculation: With EUR 10,000 in returns and a personal tax rate of thirty per cent, EUR 1,500 in tax would be due (EUR 10,000 * 0.5 * 0.3). Find out more about insurance and tax in general.
Contribution deduction during the savings phase: check options for existing contracts
Could contributions to unit-linked pension insurance (before 2005) be deducted for tax purposes? Yes, under certain circumstances this was possible. Contributions could be claimed as special expenses. To do so, the requirements under § 10 Abs. 1 Nr. 2 lit. b EStG (2004 version) had to be met. This often included a minimum term of twelve years. In practice, however, the deduction was often limited by other retirement provision expenses. Contributions to health and long-term care insurance took priority, for example. You can find details in your retirement provision tax return.
Formulate practical recommendations for holders of legacy contracts
For holders of a unit-linked pension policy taken out before 2005, there are specific steps to take. These help to optimise the tax situation.
Here is a checklist for you:
Check the exact start date of your policy.
Check the contract term and the duration of premium payments.
Find out the level of the agreed death benefit protection.
Weigh up the pros and cons of a lump-sum payment versus an annuity payment.
Have the tax consequences of both options calculated.
Take the current Annual Tax Act 2024 and its possible effects into account.
Our expert tip: Careful review of your documents is essential. In complex cases or where there is uncertainty regarding the tax on unit-linked pension policies before 2005, professional advice is invaluable. This allows you to avoid costly mistakes and make optimal use of your endowment life insurance. The right strategy secures you financial advantages in retirement.
The tax treatment of your unit-linked pension insurance before 2005 is complex. Many individual factors play a role. A blanket statement is therefore difficult. Do you still have questions about your unit-linked pension insurance? We at nextsure can provide you with initial guidance. An individual analysis of your situation is the next logical step. This is how you can ensure that you make full use of all the benefits of your existing contract. Do not hesitate to contact us for a consultation.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific optimisation suggestions.
More useful links
Haufe provides information on tax-privileged insurance contracts concluded in annuity form before 1 January 2005.
Lohnsteuer-Kompakt discusses the possible risk to tax exemption for pensions from old contracts concluded before 2005.
Finanzamt NRW provides information on income from capital assets, in particular returns from capital life insurance policies.
Bund der Versicherten offers a PDF document on unit-linked life and pension insurance policies.
Bundesfinanzministerium provides relevant annexes to the Income Tax Act.
Bund der Steuerzahler informs readers in an article about the tax-free status of private pensions.
Die Versicherer offer a news article on taxes on life insurance policies.
Handelsblatt publishes an article on when and how life insurance policies must be taxed.
Deubner Steuern provides information on the taxation of private pension insurance policies.
FAQ
How is a unit-linked pension insurance policy concluded before 2005 taxed when paid out as a lump sum?
If the contract meets certain criteria (including a minimum term of twelve years, at least five years of contributions and, where applicable, minimum death benefit cover), the capital payout is generally completely tax-free. Otherwise, the returns are taxed, possibly under the half-income method.
What are the tax rules for annuity payments from a unit-linked pension insurance policy taken out before 2005?
Originally, the income portion was taxed. A 2021 Federal Fiscal Court ruling made tax-free pensions possible under the same conditions as tax-free capital withdrawals (until the capital was exhausted). However, the 2024 Annual Tax Act has probably changed this again, so taxation of the income portion is likely to apply once more. Clarification on a case-by-case basis is important.
What role does the date the contract is concluded play in taxation?
The date the contract was concluded is crucial. For contracts concluded before 1 January 2005 (existing contracts), potentially more favourable tax rules apply than for contracts concluded later, in particular the possibility of tax-free capital payouts.
What is the half-income method and when does it apply to existing contracts?
Under the half-income method, only half of capital income is taxed at the personal income tax rate. For older contracts (before 2005), it may apply if the strict conditions for complete tax exemption are not met, but the conditions for the half-income method (minimum term of twelve years, payout from age 60/62) are met.
Do I have to declare my unit-linked pension insurance taken out before 2005 in my tax return?
Yes, income from life and annuity insurance policies must generally be declared in Schedule KAP or Schedule R (for pensions), even if it may be tax-free. If there is any uncertainty or if you wish to exercise optional choices (e.g. the more favourable tax assessment for the half-income method), it is advisable to declare it and, if necessary, seek advice from a tax adviser.
Where can I find information on the tax treatment of my specific policy?
You can find the detailed terms and the exact contract date in your original contract documents (policy certificate). For an up-to-date tax assessment, especially in light of new legislation, you should consult a tax adviser or your insurance provider.
