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Car Buying vs. Retirement Planning: Why Standard Comparisons Often Fall Short

  • 1 day ago
  • 4 min read

When you buy a car, comparison is easy: You look at horsepower, fuel consumption, and trunk volume. These metrics are standardized and tangible. Private retirement planning is different. Here, we are dealing with products that accompany you for 30, 40, or 50 years. Yet, the figures presented to you in glossy brochures often tell only half the truth.

We show you why the statutory standard calculations (PRIIPs) are often to your disadvantage and why many advisors completely forget the most important phase – namely, the time after your 67th birthday.



Part 1 The Problem with the Price Tag (Effective Cost Ratio)

To make financial products comparable, the EU mandates in the PRIIPs Regulation that costs must be disclosed. The key metric for this is the Reduction in Yield (RIY) or Effective Cost Ratio (Effektivkostenquote).


The idea is simple: It is supposed to show by what percentage your return is reduced by the contract's costs.


The Look into the Law: Well-Intentioned, Poorly Calculated

The problem lies deep in the "engine room" of the regulation (Delegated Regulation (EU) 2017/653). There, the legislator has defined how calculations must be performed. And precisely these rigid rules often lead to distorted results for the saver.


An example from Annex VI of the Regulation: "The summary cost indicator (...) is the reduction of the yield due to total costs, calculated according to a standardized method."


What sounds harmless has pitfalls:

  1. The Scenario Trap: The regulation forces providers to calculate scenarios that are often based on the market development of recent years. If the stock market has performed well recently, the scenarios in the brochure look extremely rosy. The customer often gets a "rear-view mirror" view rather than a realistic forecast.

  2. Average vs. Reality: The calculation methods allow for estimating or smoothing certain costs (e.g., transaction costs within funds). Real cost spikes are often "ironed out" in the ratio.


Why is it so opaque? Since the introduction of the Insurance Supervision Act (VAG) in 1901, the principle of commercial caution (kaufmännische Vorsicht) applies. Insurers often have to calculate costs higher than realistically necessary to ensure their stability. These internal safety surcharges often do not flow back to the customer but remain with the company. The PRIIPs Regulation fails to make these internal calculations completely transparent.




Part 2 The Tax Boomerang (The Phase After 67)

The even bigger mistake, however, happens not at the signing, but during the planning of the payout phase. Many concepts advertise "saving taxes today" (e.g., Basic Pension/Rürup or Company Pension/bAV).


The Truth: Saving Taxes Often Just Means Shifting Taxes

What many forget: The state gives you nothing; it only grants you a deferral.

  • Today: You can deduct contributions from your taxes. That sounds good.

  • Later: In return, you often have to tax the pension at 100% in old age.


The Risk: If you have a high personal tax rate in old age (because you have provided well for yourself or receive rental income) or live in a country with unfavorable taxation, you may pay back more later than you saved today. Without a clean calculation of "deferred taxation" (nachgelagerte Besteuerung), the return calculation is incomplete.




The Solution: Transparency through Mathematical Analysis

We cannot change the laws (PRIIPs). But at Karmartha, we have the tools to contextualize them for you. Our approach aims to find providers who are fair to the customer despite the system.


For this purpose, we use—wherever sensible and necessary—specialized analysis software for a financial-mathematical expert opinion.


What We Can Do (Capability):

  • Simulation instead of Lump Sums: Our tools allow us to simulate contracts not just with smoothed average values, but with realistic scenarios over the entire term. This often unmasks hidden cost-eaters.

  • The Gross-Net Comparison: We have the ability to mathematically check: Is a commission-based policy or a fee-based tariff worthwhile? We do not rely on blanket statements ("Net tariffs are always better") but can calculate it individually if needed.

  • Tax Validation: As brokers, we are not allowed to provide tax advice. Therefore, for complex topics (e.g., payout phase, expatriation, corporate structures), we work with a network of tax advisors. Together, we can make statements that are sound not only mathematically but also under tax law.


Important: Competence Beats Software An expert opinion or simulation is always only as good as the expert operating it. Software is patient. If an advisor is unable to read the insurance terms and conditions and recognize tax pitfalls, the result is worthless.


At Karmartha, understanding global biographies and complex terms and conditions is a craft, not a chore. We use our analysis tools where they offer you real added value – not as a show, but as a decision aid.



Sources & Further Links






Legal Notice regarding this Article


No Tax Advice: Tax aspects are presented in this article in a general manner only to raise awareness of risks (e.g., deferred taxation). Binding tax structuring or advice is provided exclusively through our cooperating tax advisors or your own tax representative.


Note on PRIIPs / Key Information Documents (KIDs): The criticism of the calculation methods under the PRIIPs Regulation reflects the professional discussion within financial science. The legally prescribed Key Information Documents are nevertheless mandatory. Our individual analyses supplement this mandatory information but cannot override legal frameworks or the internal calculations of the insurers. The scope of our analysis depends on the individual advisory mandate.


 
 
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