Investing in ETFs:
Broker or Pension?

Many people seem to wonder whether they should invest in ETFs with a savings plan in a broker or pension 🤔. In this article, we will compare these two options

Key Takeaways

  • The costs of a pension are usually higher than for a brokerage account. Here, you pay usually between 0.60% and 0.99%.
  • While the investment account may run out of money, you will receive a monthly pension throughout your lifetime.
  • Pension insurance is very useful for long-term saving, while mid-term saving is better in a brokerage account.
  • On an investment account, you pay 25% capital gains tax. In a pension, these taxes decrease from year to year from the age of 62.

Is it Better to Invest in ETFs with a Broker or in a Pension?

Many of our clients love investing in ETFs. Nevertheless, many do not know that this does not necessarily have to be done in an investment account, but can also be done within a private pension insurance. So you can just as well invest your normal savings plans in pension insurance. But is it worth it at all, or what exactly is the better way to invest in ETFs?

That’s exactly what we want to clarify for you here once and for all. Essentially, there are four differences between ETFs in a broker or pension insurance. In this blog post, we will explain the differences as well as the advantages and disadvantages so that you can make the best decision for yourself and your financial situation.

Broker or Pension: Differences in Costs

Investing in ETFs offers several advantages and disadvantages for both brokers and pension funds. Often the disadvantages are then offset by other advantages. Anyway, let’s start with the cost differences.

There are costs in both a regular investment account and a pension. As you have probably correctly assumed, the costs of pension insurance are slightly more expensive. More precisely, while in an investment account you only pay for the ETF costs, within the pension insurance you also pay a fee. However, contrary to popular belief, this is often not that high and is usually between 0.60% and 0.99% (ETF costs included) for good products.

Of course, the costs can be much higher, but this is usually due to the investment products chosen. If you invest in mutual funds, for example, they can easily have running costs of 1.8%, bringing the total costs up to 2.4%. By the way: you would also pay this 1.8% if you bought mutual funds in a brokerage account.

Of course, costs are never good, as they reduce returns, but the real question here should be: What exactly are you getting for these costs? If you have high fees and don’t get much back, it’s not worth it (obviously!) However, most pensions have reasonable costs, so you’re likely to get something for your money. We’ll get to that in the next few sections.

Broker or Pension: Monthly Pension

When it comes to your monthly retirement income, ETFs in a pension can give you the best of both worlds. Let’s look at an example of this. Therefore, let’s say you’ve saved 100.000€ in an ETF account, which you’ll deduct from monthly during retirement. Here’s how much you’ll get per month after you retire:

  • If you live 10 years, you’ll get 833€.
  • If you live 15 years, you’ll get 556€.
  • If you live 20 years, you’ll get 417€.
  • If you live 25 years, you’ll get 333€.
  • If you live 30 years, you’ll get 278€.

Clearly, the longer you live after retirement, the less you’ll have per month. So what happens if you live longer than you planned? A brokerage account can quickly run out of money, no matter how much you’ve saved. A pension cannot, which is why there’s a clear advantage to having a pension. If you live longer than expected, it’s the pension company’s problem – not yours!

At this point, you might think your dividends will be better than a pension – but this is still risky. No matter how much you diversify, dividends are never guaranteed. While dividends can be an excellent source of passive income, you shouldn’t plan for retirement on dividends alone. For example, global dividends fell sharply in 2020 due to the covid pandemic, declining 12.2% in 2020 to 1.26 trillion dollar.

Broker or Pension: Time Horizon

Does all of this mean you should get a pension instead of a brokerage account? No! You’ll need different accounts for short-term and long-term financial goals.

Short-term: Savings accounts

With short-term financial goals, like saving for a car or a home, a savings account is your best option. You can even gain a bit of interest on your savings with these savings accounts in Europe.

Investing your savings in ETFs is another option, but this could be riskier if the market crashes before you need the money. The best rule of thumb is to refrain from investing your savings if you need the money in the foreseeable future.

Mid-term: ETFs in a Broker

Over a period of 10 to 15 years, exchange-traded funds in a brokerage account are an excellent option because it gives you the flexibility you want in such an account.

Also, such a period gives you time to recover yourself if the market should crash. And, unfortunately, there will be a crash – we just don’t know when or how bad it will be. If you know that, you can mentally prepare for it so that you don’t get scared when it finally happens.

Long-term: ETFs in a Pension

A pension is the best option for long-term financial goals, such as retirement and end-of-life planning. This is mainly due to the payout until the end of life and the tax benefits, which we will get to later.

Of course, it takes time for a pension to pay off on the cost side, so it definitely only makes sense if you are saving precisely towards the goal of retirement. After all, for such a long period of time, the costs pay off and the benefits outweigh the costs when investing in a pension.

Broker or Pension: Differences in Taxation

Investing in ETFs offers tax benefits with both savings and pension plans. Everybody with a German Tax ID, even babies, gets 1.000 of capital gains each year, completely tax-free. Because of this, you probably won’t have to pay taxes in the first couple of years of your investing career since your profit will be smaller than 1.000€.

After making 1.000€  in capital gains, you’ll have to pay a 25% capital gains tax on all interest payments and dividends when you sell your ETFs at a profit. You could also be taxed for theoretical capital gains, but that’s a topic for another blog post.

With a pension, you won’t be taxed until you take money out, allowing your money to grow tax-free over time. Plus, if you withdraw money after age 62, you’ll get additional tax benefits. If you choose a one-time payout, only 50% of your profits from your pension level 3 will be taxed with your personal income tax rate.

For example, if you saved 100.000€ in ETFs and chose a one-time payout, you’ll have to pay 21% in taxes if you are in the highest income bracket. In contrast, you’d have to pay 25% with the savings plan.

While there’s not a huge difference in the tax savings, it really comes down to the monthly pension. Check out the table below to learn what percentage of your pension will be taxed.

Age % taxed with your income tax rate Effective tax rate

This means that if you are in the highest tax bracket and want to draw your pension from your private pension scheme at 62, you will have to pay a tax rate of 8.8%. That is a whopping 16.2% less than you have to pay with your investment account.

"If you need help building up the best possible private pension provision for your individual situation, you are welcome to book a free meeting with us."

Is It Better to Invest In ETFs With a Brokerage or a Pension?

After comparing all these differences between investing in a broker or pension, the question is: which is now best for your situation and what exactly should you do now?

Neither option is objectively better, but both offer different benefits depending on your goals, so investing in both options is a great way for many people to best provide for their future. Remember, there is no one best way to invest in ETFs, but the best way for you!

If you need help figuring out what’s best for you, you can always schedule a free meeting with us. Together we will then discuss the best investment option for your individual situation.

7 thoughts on “Investing in ETFs in Germany: Broker or Pension?”

  1. in the article you stated “While the investment account may expire, you will receive a monthly pension from the pension throughout your lifetime.” . So what doesn’t it mean “the investment account may expire”? Do you mean broker account can expire ? How

    1. Thanks for letting us know, this was written in a confusing way indeed. We changed “expire” to “run out of money” when it comes to the investment account. 👍

  2. Thank you for this article.

    Couple of things are still unclear to me:
    1. Is 1000€ tax free capital gain cumulative? I assume it is 1k per year and if not used then it goes to waste.
    2. Can we deduct the money we invest in ETFs from our income tax in the year when invested.


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