Annuities and Longevity Risk: Sofortrente, Deferred Annuities and the Rentenfaktor
Understand longevity risk and mortality credits, read a Rentenfaktor and a payout rate, apply the German Ertragsanteil tax and compare an annuity with self-withdrawal on a like-for-like basis.
What you will learn
- What longevity risk is and why pooling it (mortality credits) cannot be copied by a portfolio.
- How a Sofortrente is priced: Rentenfaktor, payout rate, guarantee and surplus share.
- The German Ertragsanteil taxation of private annuities (general orientation, as of 2026).
- A structured comparison of annuity versus self-withdrawal.
Explanation
Longevity risk is the risk of living longer than your money. A withdrawal plan must assume a horizon to age 95 or 100, which forces a low rate on everyone, including those who will not live that long. An annuity (Leibrente) pools the risk: each member receives a lifelong income financed partly by the capital of members who die earlier. That transfer is the mortality credit; it grows with age and is the one return source a portfolio cannot produce.
Products in the German market
- Sofortrente (immediate annuity): you pay a single premium and the monthly pension starts at once, for life. Options such as a guarantee period (Rentengarantiezeit) or a refund of unused capital (Kapitalrückgewähr) protect heirs but lower the pension.
- Aufgeschobene Rente (deferred annuity): premium now, payments later. A long deferral to a late age, sometimes called longevity insurance, buys a large late-life income cheaply because many buyers never reach the start date. It is rarely offered as a pure product in Germany; check what is available.
- Most contracts pay a guaranteed pension plus a non-guaranteed surplus share (Überschussbeteiligung).
Rentenfaktor and payout rate
The Rentenfaktor states the monthly pension per €10,000 of capital: a factor of 40 means €100,000 buys €400 a month. The payout rate is yearly pension divided by premium: €4,800 / €100,000 = 4.8 percent. This is not a return: part of each payment is your own capital coming back. Distinguish the guaranteed factor (fixed in the contract) from the current factor; only the guaranteed one is binding, and some contracts allow it to be reduced under a trustee clause. Factors depend on age, unisex mortality tables and interest rates, so compare offers for your age in the current year.
Taxation: the Ertragsanteil (general orientation)
A private Sofortrente bought with taxed savings is taxed on a fixed Ertragsanteil, a deemed income share set by the age at which payments begin: 18 percent at 65 or 66, 17 percent at 67, 22 percent at 60 or 61. Only that share is added to taxable income at your personal rate. This differs from the statutory pension (Besteuerungsanteil, 84 percent for 2026 starters) and from a Rürup/Basisrente, which is taxed like the statutory pension. Health insurance contributions may also be due on the annuity; check with a Steuerberater and your Krankenkasse.
Worked example
Hypothetical example: Rolf, 67, considers a €100,000 Sofortrente with a guaranteed Rentenfaktor of 40 (a round illustrative figure; real offers depend on year and insurer). The alternative is to keep the €100,000 invested and withdraw 4 percent real. Fees, surplus shares and health insurance are ignored.
Step 1: annuity income. €100,000 / €10,000 × €40 = €400 a month = €4,800 a year, level in nominal euros.
Step 2: payout rate and simple break-even. 4.8 percent. Rolf has his premium back after €100,000 / €4,800 = 20.8 years, around age 88, ignoring interest. At 3 percent nominal, a €4,800 yearly withdrawal would last about 34 years, to age 101, so the annuity "wins" financially only for very long lives.
Step 3: inflation. After 20 years at 2 percent inflation the €4,800 buys only €4,800 / 1.02^20 = €3,230 of today's goods. The self-withdrawal of €4,000 is planned to rise with prices.
Step 4: tax. Ertragsanteil at 67 is 17 percent: €4,800 × 0.17 = €816 taxable. At a 30 percent personal rate that is about €245 a year, so the net annuity is about €4,555. The self-withdrawal is taxed on the gain share of each sale (lesson 7), which is often also small at first.
Step 5: the comparison.
| Criterion | Sofortrente | Self-withdrawal (4 percent) |
|---|---|---|
| Year-1 income | €4,800 nominal | €4,000 real |
| Lasts | For life, guaranteed | Depends on returns and sequence |
| Inflation | Eroded unless indexed option bought | Planned to keep pace |
| Flexibility / heirs | None after purchase (unless options bought) | Full; remaining capital is inheritable |
| Insurer risk | Depends on the insurer; Protektor is the German guarantee scheme for life insurers | Market risk instead |
A common compromise is partial annuitisation: cover only the part of the floor (lesson 9) that the statutory pension does not, and keep the rest invested.
Common mistake
Practice activity
Hypothetical: Ute, 65, is offered a Sofortrente with a guaranteed Rentenfaktor of 35 for a €150,000 premium. Calculate (a) the yearly pension, (b) the payout rate, (c) the simple break-even in years and (d) the taxable Ertragsanteil amount per year.
Show solution
(a) €150,000 / €10,000 × €35 × 12 = €6,300 a year.
(b) €6,300 / €150,000 = 4.2 percent.
(c) €150,000 / €6,300 = 23.8 years, around age 89.
(d) Ertragsanteil at 65 is 18 percent: €6,300 × 0.18 = €1,134 taxable per year at her personal rate.
Limitations: ignores surplus shares, health insurance, inflation and alternative returns on the €150,000; the Ertragsanteil table can change, so check current law.
Key takeaways
- Annuities pool longevity risk; mortality credits are the one return a portfolio cannot copy.
- Rentenfaktor × capital / €10,000 gives the monthly pension; the payout rate is not a return.
- Private Sofortrenten are taxed on a small Ertragsanteil by starting age (general orientation; check current rules).
- Compare on inflation, tax, flexibility and break-even age; partial annuitisation of the floor is a common middle way.
Next step
Lesson 11 turns to the portfolio itself: how the equity share should move during decumulation and where property income fits.
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