A German private pension plan works on the same principles than any other pension plan you can purchase in the world, i.e. the policy holder agrees to transfer a certain savings-amount for a certain period to the insurer, who in return guarantee to return a fixed capital payment or fixed pension, either for a pre-defined time frame or for life. On top of the guaranteed payment(s) the insurer will add a non-guaranteed amount on top, which is made up of various profit participation instruments.
Inflation
Inflation is the increase in the prices of goods and services over time and when moderate is healthy for economic activity.
Using 2015 as the base year the annual inflation rate in Germany averaged 1,786% between 2002 and 2022, yet since 1992 has been alarmingly low and therefore jointly responsible for leading the economy into another crisis, fuelled by recent events such as COVID-19 and the current war in Europe. Consequently, inflation has rocketed from 0.5% in 2020 to 6.9% in 2022 with serious impacts on the value of money and aftermaths no economist is currently able to predict.
How inflation affects Savings
Over time, inflation reduces the value of our savings as prices increase.
If exactly 10 years ago you had stashed 10,000€ in cash at home, considering Germany's very moderate average inflation rate of 1.786% per year during this period, today you would realise that not only its net worth has shrunk to 8,378€, but the prices too have increased exponentially. An item/ service available for 10,000€ then, costs 11,937€ at today's rate!
Without taking appropriate countermeasures the depreciation effect inflation has is not negligible therefore, the longer your money is not in cirrculation, the bigger your loss will be, demonstrated in the below charts.
For this reason, people prefer to park at least some of their savings in investments that at least weather inflation such a stocks, mutual funds, crypto currencies or private pension plans. Latter the more classic approach but still well accepted as not only do the insurers provide guaranteed interest-rates but offer integrated financial investment benefits with assurance that in a worst-case their clients' money will be returned wholly or at least partially.
Optional Add-on Benefits
Pension plans in accordance with the German Income Tax Act
