Life Annuity or Payout Plan up to Age 85: Which Is Better?
Published on · Managing Director & Partner, Alsterspree Verlag GmbH
This article was written by an author with the support of AI.
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The Answer: Longevity Protection or Flexibility?
Whether a lifelong life annuity or a fixed-term payout plan up to age 85 is better within the Altersvorsorgedepot depends on your personal priorities: A life annuity is the right choice if you want to insure against the financial risk of living a very long life and seek guaranteed income until the end of your life. Deutsche Rentenversicherung explicitly emphasizes that many people underestimate their life expectancy and thus the value of lifelong payments, and that funds are no longer available once a payout plan expires. A payout plan up to age 85, on the other hand, is superior if return opportunities, the inheritability of remaining capital, and financial flexibility in retirement are your main priorities.[1] Both models can be combined at the beginning of the payout phase with a one-time partial capital withdrawal of up to 30 percent of the available capital.
What if your situation looks slightly different? If you have virtually no other lifelong income besides the statutory pension, face specific health considerations, or intentionally wish to pass on wealth, the answer shifts significantly. An overview of the payout options puts both alternatives in context, while independent advice can guide you through more complex estate or health circumstances.
Conditional Decision Based on Personal Preferences
With the reform of private retirement provision starting in 2027, the previous obligation for lifelong annuitisation that applied to traditional legacy Riester contracts is eliminated; pure payout plans will be permitted going forward, with payouts ending optionally no earlier than age 85. When the payout phase begins, savers between the ages of 65 and 70 can freely choose which payout model best fits their life situation. Both basic models are characterised by clearly defined legal parameters:
- Life annuity: Guarantees a monthly payout until the end of life. Remaining capital is pooled within the insurance collective to hedge against longevity risk.
- Payout plan up to at least age 85: The capital remains invested in the depot and is drawn down on a scheduled basis via monthly instalments until at least the completed age of 85. Any remaining unused balance falls to the heirs in the event of death.
- Combination with 30 percent lump-sum withdrawal: Regardless of the chosen variant, savers can withdraw up to 30 percent of the accumulated capital as a lump sum at the beginning.
Combining the 30 percent option
A partial capital withdrawal of up to 30 percent of the assets at the start of the payout phase makes it possible to make major purchases at the start of retirement or build a liquidity buffer. The remaining balance of at least 70 percent of retirement assets then forms the computational basis for the monthly life annuity or payout plan. It should be noted that the lump-sum payment is also subject to deferred taxation at the individual tax rate.
The options in numbers: sample calculation after taxes
To make monetary differences tangible, a mathematical comparison based on a standardised depot balance is worthwhile. Subsidised contributions during the accumulation phase as well as accrued returns are always subject to deferred taxation at the individual tax rate under § 22 Number 5 EStG upon payout. Because the personal tax rate in retirement is generally lower than during working life, a noticeable tax advantage is maintained.
Both options in direct comparison
Specific euro figures cannot yet be reliably compared today: annuity conversion factors, fees, and payout formulas of providers will only emerge with the new products that can be offered starting 1 January 2027. Structurally, however: a payout plan must run at least until the completed age of 85. In the standard case of a start at 65 that is around 20 years, after which the allocated capital is exhausted and the contract ends, whereas a life annuity provides payments until the end of life. Because the same capital amount in a payout plan is distributed over a limited time frame, the monthly instalment is generally higher than with a lifelong pension, but it also comes to an end. The following overview compares both models according to the criteria that inform your decision.[1]
| Criterion | Payout plan up to age 85 | Lifelong life annuity |
|---|---|---|
| Payout duration | Time-limited, ends no earlier than age 85 | Lifelong |
| Monthly instalment amount | Tends to be higher, as capital is distributed over a limited period | Tends to be lower, but without an end date |
| Capital after age 85 | Exhausted once the agreed plan expires (at the earliest at 85) | Payment continues unchanged |
| Longevity protection | Not included | Core of the product |
| Inheritability | Remaining un-withdrawn balance is transferable | Only with agreed pension guarantee period |
| Taxation | Deferred at individual tax rate | Deferred at individual tax rate |
| Partial lump-sum payout at start | Up to 30 percent possible | Up to 30 percent possible |
Note: qualitative comparison. Concrete pension amounts and value developments depend on future provider product conditions and your individual tax situation. No investment advice within the meaning of § 1 Abs. 1a Nr. 1a KWG.
Tax burden in the payout phase
Deferred taxation applies to both variants: contributions remain tax-free during the accumulation phase, while benefits in the payout phase are taxed at the individual tax rate pursuant to § 22 Number 5 EStG. A payout plan runs at least until the completed age of 85; someone starting at 65 therefore spreads their capital over around 20 years, after which it is exhausted. Because the same capital stock is distributed across this limited timeframe, monthly gross amounts and consequently tax withholdings are generally higher than with a lifelong annuity, though available monthly income terminates along with the payout plan.[1]
Inheritability and remaining capital: What is left after the phase?
A central difference between the two payout options lies in the fate of unconsumed assets in the event of premature death. The fixed-term payout plan ends upon the expiration of the agreed period, whereas the life annuity pays out until the end of life.[1] From this follows the practical difference: with a payout plan, in the event of death during the term, any remaining unpaid balance remains in the depot and can pass to heirs, whereas with a traditional life annuity, the capital is tied within the insurance collective to fund lifelong payments.
Asset Transfer with a Payout Plan
If the pension saver dies during the term of a payout plan, the remaining depot balance as of that date is generally inheritable. Clear tax frameworks apply in this case:
- Transfer to spouse: The remaining retirement pension assets can be transferred without penalty to an individual retirement pension contract of the surviving spouse. State subsidies and tax benefits remain fully intact.
- Inheritance by other heirs: If the balance passes to children or third parties, a penalty-incurring settlement takes place. The subsidies and tax benefits received during the accumulation phase are retained, and the remaining net amount is paid out to the heirs.
- Remaining capital at age 85: If the payout plan runs as scheduled until age 85, the capital is mathematically fully consumed. Any surplus balance is paid out with the final installment. After that, no further payments are made.
The Guarantee Question with Life Annuities
In a pure life annuity, the benefit is structured as a monthly pension payment until the end of life; it ceases upon death and is not inheritable as such. To protect family members, savers can optionally agree on a pension guarantee period. If the pension recipient dies within this period, the surviving dependants continue to receive the pension until the guarantee period expires. However, including this guarantee reduces the monthly pension amount.
Suitability Test: Which Payout Option Suits You?
Choosing the optimal payout option requires a structured assessment of your overall retirement finances. Deutsche Rentenversicherung advises not rushing into new contracts and seeking neutral advice when in doubt.[1] Based on the following core criteria, you can assess which model better meets your requirements.
Decision Criteria for Retirement
- Life expectancy and family history: If, based on your health or family predisposition, you expect to reach a very advanced age of over 90, a life annuity offers valuable longevity security.
- Amount of other lifelong income: If you already have a solid base pension through the statutory pension insurance or an occupational pension scheme, this covers your basic living expenses. The retirement depot can then be used more profitably via a payout plan to support a higher standard of living up to age 85.
- Importance of inheritance: If you wish to ensure that unconsumed wealth benefits children or partners in the event of death, the payout plan holds a clear advantage.
- Need for liquidity and preserving purchasing power: Those who wish to travel more or make investments during the first 15 to 20 years of retirement will benefit from the higher monthly payouts of a payout plan.
In practice, savers with solid basic provision through statutory pension entitlements more frequently choose a payout plan to benefit from the return potential of the stock markets in retirement, whereas individuals with a lower statutory pension prefer the unlimited security of a life annuity.
Outlook 2027: Legal Framework and Future Products
The legal framework for the flexible payout phase has been adopted: the Bundesrat approved the Retirement Pension Reform Act (Altersvorsorge-Reformgesetz) on May 8, 2026, with implementation taking effect on January 1, 2027. The law firmly establishes the core pillars: freedom of choice between a lifelong annuity and a payout plan, a minimum duration until age 85 for payout plans, and the admissibility of retirement depots without contribution guarantees.[2][1]
What Is Bindingly Established and What Is Still to Follow
Despite clear statutory requirements, specific product offerings, fee schedules, and pension conversion factors from providers are currently still emerging. Providers of pension contracts can only offer the new products starting January 1, 2027; how payout plans from neobrokers, fund management companies, and insurers will be designed in detail will become apparent only upon market launch.
- Legally established: Free choice between a life annuity and a withdrawal plan up to age 85, partial lump-sum withdrawal of up to 30 percent, and the flexibility to switch at the start of the payout phase.
- Still open: Exact cost structures for administering withdrawal plans at neobrokers and the guaranteed annuity conversion factors of future pension insurance policies.
- Important rule: Do not draw hasty conclusions from the often rigid terms of legacy Riester contracts. The new product generations offer significantly leaner cost structures.
The Next Step: Subsidy Calculator and Independent Advice
Whether a lifelong life annuity or a withdrawal plan up to age 85 serves you better ultimately remains a personal trade-off between longevity protection, estate planning, and your desired financial flexibility in retirement. No generic comparison table can anticipate this decision for your individual circumstances.
For sound preparation, a two-step approach is recommended: First, use the Altersvorsorgedepot subsidy calculator to establish the depot balance both payout forms will later be drawn from. For more complex asset allocations, inheritance questions, or specific healthcare planning needs, independent advisory matchmaking provides the right pathway to qualified experts who can guide you through optimizing your payout phase.
- Step 1: Use the Altersvorsorgedepot subsidy calculator to work out the capital you are likely to have available at the start of retirement.
- Step 2: Compare these amounts against your fixed monthly basic expenses in retirement.
- Step 3: If needed, utilize independent advisory matchmaking for customized retirement and estate planning.
Häufig gestellte Fragen
- What happens to the remaining capital after age 85 under a withdrawal plan?
- Once the agreed withdrawal plan concludes upon completing age 85, the allocated capital is fully depleted as scheduled. No further payouts will be made from it. Individuals who live longer must rely on other sources of income from that point onward, such as the statutory pension, unless an extended payout plan was arranged.
- Can I withdraw 30 percent and still receive an annuity?
- Yes. At the beginning of the payout phase, you can withdraw up to 30 percent of the total accumulated capital from the Altersvorsorgedepot as a one-off lump sum. The remaining balance is then used for the lifelong life annuity or the temporary withdrawal plan. Both pathways can be combined with this partial lump-sum withdrawal.
- Which is inheritable: a life annuity or a withdrawal plan?
- With a withdrawal plan, any remaining undistributed capital can be transferred to your heirs in the event of death. In contrast, with a lifelong life annuity, payments generally cease upon death unless a specific guaranteed annuity period was agreed upon. The withdrawal plan offers clear structural advantages here.
- What is the earliest age I can begin receiving payouts?
- The earliest regular start for the payout phase from the Altersvorsorgedepot is upon reaching age 65. An earlier start is only permitted without forfeiture of subsidies if you are already drawing a statutory old-age pension prior to that date.
- How are payouts taxed in retirement?
- All payouts (both monthly installments from a life annuity or withdrawal plan and partial lump-sum withdrawals) are subject to deferred taxation (nachgelagerte Besteuerung). The distributed amounts must be taxed at your personal income tax rate during the payout phase.
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