Private pension insurance cancellation and taxes: Your guide to optimisation
15 Apr 2025
11
Minutes
Katrin Straub
CEO at nextsure
The cancellation of a private pension plan can have unexpected tax implications. Find out how to avoid pitfalls and what alternatives exist to secure your financial future.
The topic in brief and concise terms
When cancelling a private pension insurance, the taxation of the returns largely depends on the contract's date of conclusion (before/after 2005).
The half-income policy can halve the tax burden for contracts from 2005 onwards, provided the contract has lasted at least twelve years and the payout occurs at age 62/60.
A cancellation often involves financial disadvantages; alternatives such as withdrawal, sale, or contribution suspension should be considered.
Understanding the tax basics when cancelling a private pension
The decision to cancel a private pension plan is often associated with financial expectations. However, the tax aspects are frequently underestimated. Since the Pension Income Act came into force on 1 January 2005, the taxation of pensions has fundamentally changed.
Upon termination, you usually receive the so-called surrender value. This value can be lower than your contributions paid, especially in the early years of the contract, due to initial and administrative costs. Losses are therefore not uncommon in the case of an early termination.
The tax treatment of profits from a cancelled private pension plan depends significantly on the contract date. Contracts concluded before 2005 often have more favourable regulations. For more recent contracts, the profits are usually taxable. Therefore, a thorough review of your contract is essential before making a decision on the payout.
Older contracts (concluded before 2005): Take advantage of tax benefits on termination
If you took out your private pension insurance before the first of January 2005, you may be eligible for tax exemptions under certain circumstances. An important requirement often is a minimum contract term of twelve years.
Additionally, a minimum contribution payment period of five years often needs to be met. If these and other contract-specific conditions are satisfied, the capital payout upon termination can be completely tax-free. This presents a significant advantage over newer contracts.
It is crucial to examine the exact terms of your old contract. Not every contract concluded before 2005 is automatically tax-free upon termination. Sometimes, contributions to these old contracts can still be claimed as special expenses in the tax return. The complexity of these regulations necessitates an individual examination.
New contracts (concluded from 2005): Tax liability and structuring options
For private retirement insurance policies concluded after January 1, 2005, the tax situation is different. The income from these contracts is generally taxable upon cancellation.
However, there is an important tax advantage: the partial income taxation method. This can be applied if the contract has existed for at least twelve years and the payout occurs only after the age of 62 (for contracts concluded after 2012, otherwise at age 60). In this case, only half of the income must be taxed at the personal income tax rate. This regulation can significantly reduce the tax burden.
If these conditions are not met, the entire income is subject to capital gains tax. This is a flat rate of 25 percent plus solidarity surcharge and possibly church tax. Correct dispensing in the KAP appendix of your tax return is crucial here to reclaim any overpaid taxes. A unit-linked pension insurance is subject to similar tax regulations.
Our expert tip: Before cancelling, carefully check whether the conditions for partial income taxation are met or can be met in the near future. Delaying the cancellation by a few months could save real money.
Case Studies: Tax Calculation on Termination of a Private Pension Insurance
To illustrate the tax implications of a termination, we consider two scenarios. Scenario one: A contract from 2008 is terminated after ten years, and the insured person is 55 years old. The returns amount to 5,000 euros. As neither the duration of twelve years nor the minimum age is met, the full 5,000 euros are taxed with the withholding tax (25 percent) plus solidarity surcharge and possibly church tax.
Scenario two: A contract from 2006 is terminated after 15 years, and the insured person is 63 years old. The returns also amount to 5,000 euros. Here, the half-income method is applied. Only 2,500 euros (half of the returns) are taxed at the personal income tax rate. If this is, for example, 30 percent, the tax burden amounts to 750 euros, significantly less than in the first scenario. Adhering to the deadlines can make a difference of several hundred euros.
The following points are relevant for the calculation:
Contract conclusion date (before/after 2005)
Duration of the contract at the time of termination
Age of the insured at the time of payout
Amount of returns achieved (difference between payout and contributions made)
Personal income tax rate (relevant for the half-income method)
These examples show how important exact calculations are. A tax calculator for life insurance policies can provide initial guidance here but does not replace individual advice.
Losses on Termination: Tax Treatment and Pitfalls
It is not uncommon for the surrender value of a cancelled private pension insurance to be lower than the sum of the contributions paid. This means a financial loss for the insured. The tax treatment of such losses is complex.
Losses from private sales transactions can, under certain circumstances, be offset against gains from other capital investments. Whether this is possible with losses from a pension insurance cancellation depends on the specifics of the individual case and the current legal situation. A general statement is difficult here.
It is advisable to consult a tax advisor in the event of losses. They can examine whether and how the losses can be claimed in the tax return. Correct declaration is crucial to avoid any tax disadvantages. The question of where to enter insurances in the tax return is of central importance in this matter.
Expert Depth: Legal Foundations and Recent Judgments
The taxation of private pension insurances is primarily regulated in the Income Tax Act (EStG). In particular, § 20 EStG (income from capital assets) and § 22 EStG (other income, including pensions) are relevant. The Retirement Income Act of 2005 introduced deferred taxation for many retirement savings products and reformed the treatment of capital gains.
For the tax benefits of old contracts (concluded before 2005), § 10(1) No. 2 letter b EStG as per the 2004 version was decisive. For new contracts (concluded from 2005), § 20(1) No. 6 sentence 2 EStG is applicable for the half-income procedure. The withholding tax is regulated in § 32d EStG.
Recent judgments, for instance by the Federal Finance Court (BFH), can clarify the interpretation of these laws. There are always decisions on the calculation of taxable earnings or the offsetting of losses. It is important to stay updated here, as case law can evolve.
Our expert tip: In complex cases, especially regarding the interpretation of judgments or the offsetting of losses, consulting a specialist lawyer for tax law or a specialized tax advisor is often essential. This also applies to queries regarding insurance and tax in general.
Alternatives to Termination: Avoid Financial Disadvantages
Termination is often the most expensive option to exit a private pension insurance. However, there are alternatives that can be more financially advantageous. One option is the cancellation of the contract. This is possible if the cancellation policy was faulty, which can be the case with many contracts concluded between 1994 and 2007. With a successful cancellation, you often receive more than just the surrender value.
Further options are:
Suspension of contributions: You no longer pay contributions, but the contract continues with the capital accumulated so far. The insurance coverage remains, although reduced.
Selling the policy: On the secondary market for life insurance, you can sell your policy. The sale price is often above the surrender value.
Pledging the contract: You can pledge your policy and receive a loan. The contract remains in place.
Adjustment of contributions: In case of financial difficulties, a reduction of contributions can often be agreed upon.
Each of these alternatives has its own advantages and disadvantages, as well as tax implications. Before taking action, you should carefully examine the options. A question about mandatory health insurance in private pensions may also become relevant.
Recommendations for Action and Conclusion: Make Smart Decisions When Considering Termination
More useful links
Bundesfinanzministerium offers a BMF letter on the tax incentives for private retirement provision.
The Bundesfinanzministerium provides income tax notes (EstH) in Annex 22a related to private retirement provision.
The Verbraucherzentrale critically evaluates private pension insurance as a retirement savings option.
The Federal Statistical Office (Destatis) publishes press releases with statistical information.
The Deutsche Rentenversicherung offers comprehensive statistics and reports.
Wikipedia provides an article on private pension insurance.
Gesetze im Internet provides the legal text of the Insurance Contract Act (VVG).
The Federal Agency for Civic Education (bpb) offers an article on the topic of private provision.
The Bundesfinanzministerium provides comprehensive information on pension taxation.
FAQ
Do I need to declare the payout from my terminated private pension insurance in the tax return?
Yes, income from cancelled private pension insurance policies must be declared in the tax return, typically in the KAP form. For pension payments, the R form is relevant.
What costs are incurred when cancelling a private pension insurance?
In the event of a termination, high closing and administrative costs often arise, which can reduce the surrender value and lead to losses.
Is there a deadline for cancelling my private pension insurance?
The notice periods are contractually regulated and are usually one to three months at the end of the insurance period.
What is the difference between the surrender value and the contributions paid?
The surrender value is the amount paid out by the insurer upon cancellation. It may be lower than the total premiums paid due to fees.
Is it worth cancelling a private pension plan shortly before retirement starts?
Giving notice shortly before retirement is rarely advisable, as the tax advantages of regular retirement (taxation of the earnings share) or the semi-income method are often lost. Alternatives should be considered.
How does a termination affect my retirement provision?
Terminating a policy reduces your available capital for retirement provision, as losses often occur and the planned pension benefits are forfeited. This can lead to a gap in retirement coverage.
