German endowment policies have been temporarily saved from damaging changes in taxation following fai...
The legislation to disallow tax re-endowment policies had attracted criticism from product providers and BVI, the German mutual funds association, which was against the change as it left annuity products as the only tax efficient alternative for German investors.
As it currently stands, any 12-year endowment policy that receives five years of premiums is exempt from tax. Endowment policies have therefore been a popular structure for private pensions. The sudden imposition of tax on these products could have a devastating effect on the whole sector.
The government's attempt to pass this legislation was part of a broad attempt to reform the life sector. Efforts to introduce legislation in this area have been postponed while arguments rage between politicians as to which would be the most suitable structures for pension products. The plan is to re-review the entire sector, possibly in the late summer, along with a flotilla of legislation.
The only tax-efficient alternative to the endowment policy is to use an annuity product.
The BVI has complained that annuity products' lack of flexibility makes them unsuitable for people who already have state and corporate pension plans and want the freedom to access their assets at short notice. Annuity products continue to gain popularity in Germany. Nonetheless, the BVI's preferred pension vehicle is one that closely follows the US and UK model.
It is called the Pension Investment Fund (PIF). The PIF is a mutual fund dedicated to pensions, currently taxed at the same rate as other mutuals.
PIFs have a minimum investment of 51% in 'real' assets - equity - and a maximum of 30% in real estate. They follow the model of US and UK pension funds that historically have achieved a higher return than traditional, fixed interest dominated German pension vehicles. PIFs also fall under the BVI's sphere of influence.
The ministry of finance has indicated that in their revamp of the life product taxation system they are looking at putting PIFs on an equal footing to other life products - not by deferring taxation, but by reducing tax on premiums. The long-term aim is to level the playing field for any sort of life product.
Unfortunately, any reduction in taxation for PIFs couldhave severe repercussions on the already stretched German finances, so there would be a short-term political cost as any reform that involved the tax cuts could cripple the government in other areas. Nonetheless, the DM100bn government subsidy in the sector is so huge that reform might come sooner than expected.
Aside from the important changes that would be required from life companies to accommodate any increased popularity of PIFs, such a trend would have the potential to shift investment patterns in the enormous German fixed interest sector in favour of equities.
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