Unit-linked pension insurances: Tax deductibility and smart design options for your retirement provision
27 May 2025
6
Minutes
Katrin Straub
CEO at nextsure
Are contributions to unit-linked annuity insurances tax-deductible? This question concerns many savers who are return-oriented in their old-age provisions. The answer is nuanced and presents both challenges and attractive tax opportunities, especially upon payout.
The topic in brief and concise terms
Contributions to private unit-linked pension insurances are generally not tax-deductible, but significant tax advantages await during the payout phase (assessment portion or partial income method).
For Riester and Rürup pensions (including fund-based), contributions can be claimed as special expenses, but the payouts are (partially) taxable later.
The 12/62 rule (minimum term of twelve years, payout from age 62) is crucial for the favourable taxation of capital payouts from private contracts.
Tax Treatment of Contributions: A Reality Check
Many investors hope to deduct their contributions to unit-linked pension insurance from their taxes, similar to other pension expenses. However, for purely private unit-linked pension insurance (often referred to as third-pillar provision), the rule is: Contributions paid during the accumulation phase are not deductible as special expenses under § 10 of the Income Tax Act (EStG). This means you pay these contributions from your already taxed net income. However, there are exceptions for government-subsidised variants. For a Riester pension, for example, up to 2,100 euros per year can be claimed as special expenses. For the Rürup pension, up to 27,566 euros (for singles) or 55,132 euros (for married couples) could be tax-deductible in 2024. For 2025, this amount rises to 29,344 euros or 58,688 euros, with one hundred percent of the contributions being deductible. The good news for private contracts: During the accumulation phase, the earnings within the insurance wrapper are generally not subject to tax, which optimizes the compound interest effect. This differentiates it from direct fund investments, where withholding tax on earnings may apply annually.
The tax treatment during the accumulation phase is therefore clearly defined, but the true benefits often become apparent later.
Payout phase: Here lie the tax advantages
Although contributions to private unit-linked pension insurance are usually not deductible, you benefit from attractive tax regulations during the payout phase. There are two main options: lifetime annuity payments or a one-off capital payout. With a lifetime monthly annuity, only the so-called earnings portion is taxed. This is legally defined in § 22 No. 1 Sentence 3 Letter a Double letter bb of the Income Tax Act (EStG) and is determined by your age at the start of the annuity. For example, if your annuity starts at age 67, the earnings portion is only seventeen percent. This means that for a monthly annuity of, say, 1,000 euros, only 170 euros would need to be taxed at your personal income tax rate. Here's an example: For an annuity of 1,500 euros with an earnings portion of seventeen percent, 255 euros are taxable; with a personal tax rate of thirty percent, that would be 76.50 euros in tax per month.
If you choose the one-off capital payout, the half-income procedure applies under certain conditions. The conditions for this are:
The contract must have been in place for at least twelve years.
The payout occurs no earlier than after reaching the age of 62 (for contracts concluded before 2012, after the age of 60).
If these criteria are met, only half of the earned income (difference between payout amount and contributions paid) must be taxed at the personal rate. An example: You receive a payout of 100,000 euros and have paid 60,000 euros in contributions. The earnings amount to 40,000 euros. Of this, only 20,000 euros are taxable. These regulations make unit-linked pension insurance attractive despite non-deductible contributions. Careful consideration should be given to the precise entry in the tax return.
These tax advantages during the pension phase can often more than compensate for the non-deductibility of contributions.
Special case for investment income: The partial exemption as an additional bonus
For unit-linked pension insurances, where the capital is invested in equity or mixed funds with a certain equity share, there may be an additional tax relief: partial exemption. This regulation from the Investment Tax Act provides that a certain percentage of the returns from these funds is initially tax-free. For pure equity funds, the partial exemption is thirty percent, and for mixed funds with at least twenty-five percent equity share, it is fifteen percent of the returns. When paying out a unit-linked pension insurance that meets the requirements for the half-income procedure (12/62 rule), this partial exemption is considered before the half-income procedure is applied. This means that often, effectively, less than half of the gross returns have to be taxed. An example: With returns of 10,000 euros from an equity fund within the policy and a partial exemption of fifteen percent (assumed for the insurance contract), only 8,500 euros of the returns would initially be tax-relevant. Then, within the scope of the half-income procedure, half of that amount, 4,250 euros, is taxed at the personal tax rate. This can significantly reduce the tax burden compared to a direct investment in funds, where the capital gains tax is levied on the full returns (after partial exemption). It is an important aspect that optimises the connection between insurance and tax.
However, the correct application of these regulations requires expertise to fully exploit all advantages.
Expert knowledge: Old contracts, Riester and Rürup pensions in detail
For contracts regarding unit-linked pension insurance policies concluded before the first of January 2005 (so-called old contracts), often more favourable tax regulations still apply. Under certain conditions, such as a minimum term of twelve years and a payment period of at least five years, capital withdrawals could be completely tax-free. Contributions to such old contracts could under certain circumstances be claimed as other retirement expenses in the annex Vorsorgeaufwand (line 49 for contracts before 2005), although often only limited by maximum amounts, which were already exhausted by health and long-term care insurance contributions. The exact tax treatment of pension payments from these old contracts has recently been the subject of legal discussions and legislative clarifications.
Our expert tip: Carefully check the original contract conditions and current legal regulations for old contracts, if necessary with professional assistance.
For unit-linked Riester pensions, the contributions, as mentioned, are tax-deductible as special expenses up to 2,100 euros annually (§ 10a EStG). However, the payouts in retirement are fully taxable according to § 22 Nr. five sentence one EStG. In the case of a lump-sum payment (up to thirty percent of the capital or for mini pensions), the fifth rule can be applied to mitigate tax progression.
The unit-linked Rürup pension (basic pension) allows the deduction of contributions as special expenses pursuant to § 10 paragraph one no. two b) EStG. For 2025, this is one hundred percent of contributions up to a maximum amount of 29,344 euros (single persons). Pension payments are taxed subsequently, with the taxable portion gradually increasing (§ 22 No. one sentence three letter a double letter aa EStG). For pensions starting in 2025, the taxable portion is 83.5 percent. A lump-sum payment is not provided for Rürup pensions. Understanding the tax rules for life insurance is helpful here.
Choosing the right form of retirement provision depends greatly on your individual situation and your tax goals.
Design tips and current rulings: What you should consider
To make the most of the tax benefits, you should consider some strategic tips. For private unit-linked pension insurance, adhering to the 12/62 rule for capital payout is crucial to benefit from the partial-income procedure. Consider early on whether an annuity payment or a capital payout is better suited for your financial situation in retirement. The flexibility of many modern contracts often allows for a combination or later adjustments. Also, bear in mind the possibility of termination and its tax implications, which are often disadvantageous.
Current court rulings can also impact taxation. For instance, the Federal Fiscal Court (Bundesfinanzhof, BFH) ruled on 13th March (Ref. I R 1/20) that foreign funds investing in German shares have been incorrectly paying capital gains tax on dividends for years, which could lead to refunds. Although this does not directly affect the deductibility of your contributions, it highlights the dynamics of tax law. It is advisable to keep an eye on current case law or seek professional advice.
The following points are important for your planning:
Document all deposits and contract details carefully for at least twelve years.
Check the equity ratio of your fund investment concerning partial exemption.
Have the tax implications of the different payout options calculated before signing a contract.
For Riester contracts, ensure the correct entry in the AV form to secure allowances and tax savings.
For the self-employed, the Rürup pension can be very advantageous despite deferred taxation due to the high deductibility of contributions during the accumulation phase.
Careful planning and knowledge of the tax conditions are essential for successful retirement provision with unit-linked products.
Request an individual risk analysis now: Have your insurance situation checked for free and receive specific optimisation suggestions.
More useful links
The Federal Ministry of Finance provides comprehensive information on the taxation of pensions in Germany.
The Stiftung Warentest offers a detailed comparison of unit-linked pension insurances.
Statista delivers relevant statistics and data on retirement provision in Germany.
The Federal Ministry of Labour and Social Affairs provides information on retirement income and supplementary pension options.
The German Pension Insurance explains the structure of the three pillars of retirement provision in Germany.
FAQ
Are unit-linked pension insurance policies generally tax-deductible?
No, contributions to purely private unit-linked pension insurance (third layer) are not tax-deductible as special expenses. Only contributions to state-subsidized variants such as the Riester pension (up to 2,100 euros annually) or the Rürup pension (up to 29,344 euros for singles in 2025) can be claimed for tax purposes.
What tax advantages are there when paying out a private unit-linked pension insurance?
For a lifelong pension payment, only the small yield portion (dependent on age at the start of the pension, e.g., seventeen percent at 67 years) is taxed. In the case of a capital payout after a contract term of at least twelve years and reaching the age of 62, only half of the earnings need to be taxed (half-income method).
What is the 12/62 rule in unit-linked pension insurance?
The 12/62 rule states that for a tax-privileged capital payout (partial income procedure) from a private unit-linked pension insurance, the contract must have been in effect for at least twelve years and the payout must not occur before the age of 62 (for older contracts before 2012: age 60).
How are returns from equity funds taxed within the policy?
Earnings from equity funds within a unit-linked pension insurance can benefit from a partial exemption (e.g., fifteen percent for mixed funds, thirty percent for equity funds). These tax-free portions reduce the taxable income before, for example, the half-income procedure is applied to capital payouts.
Are there differences in the tax treatment of old contracts (before 2005)?
Yes, for contracts concluded before the first of January 2005, capital payouts can be completely tax-free under certain conditions (e.g., twelve-year term, five-year premium payment). Contributions could partly be deducted as special expenses but were limited by maximum amounts.
Where can I receive personalized advice on tax optimization for my unit-linked pension insurance?
For tailored advice that takes into account your personal financial and tax situation, we recommend contacting a specialised insurance advisor or tax consultant. nextsure offers you a free individual risk analysis and optimisation suggestions.
