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Is the ALTE LEIPZIGER AL Pension Flex (AR15) worth it?

Fabian Beining - Senior Investment Consultant

Introduction to contract review.

Can I rely on the Alte Leipziger AL Rente Flex?

A customer came to us with this exact question and presented us with their specific contract offer for review.

If you are currently considering this question, this blog article will help guide you and provide a better understanding. Please note that individual parameters may result in your specific offer or contract assessment being different.

We do not intend to criticize the insurer or the policy being reviewed but rather aim to objectively and accurately examine the offer we have received in its individual composition.

If you would like a specific review of your offer or existing contract, please feel free to contact us without any obligation.

More information: How does a contract review work?

Before we examine the details of the Alte Leipziger AL Rente Flex offer, it is important to mention some fundamental points that distinguish a good retirement plan.

Ensure that your retirement plan has a high, realistically expected return for the future.

Consider that all costs will reduce your return and therefore should be kept as small as possible.

There are several factors that can reduce your return on investment. Depending on the type of investment, you need to consider additional negative factors that can affect your returns. It is important to be aware of these factors and factor them in from the beginning.

Use the legal possibilities of tax reduction for a high compounding effect.

Do not underestimate the negative effects of inflation – protect your capital.

If you specifically consider these listed points, there is a high likelihood that your invested capital will actually increase in the end.

Contract review master data.

Based on the offer we have received, the monthly contribution is 400 Euros without an initial investment. The assumed contribution duration is the entire contract term of 27 years. A dynamic contribution adjustment is not desired.

The age of the policyholder at the start of the contract is 40 years, and retirement is planned at 67 years old. With consistent contribution payments throughout the contract term, a total of 129,600 Euros will be invested. Additional payments during the contract term and changes in contributions are not considered.

To determine if a contract is truly worthwhile for you, it is necessary to first calculate the realistic average rate of return (before costs and taxes) for the future.

The development of individual securities such as stocks or funds is unpredictable. To provide a professional evaluation of an investment, it is important to delve deeper. This entails initially examining the sources of returns that the investment relies on, i.e., the asset classes in which a financial investment is made.

If we come across an investment with a hundred percent stock ownership, we will use the long-term expected return of the stock market, which is an average of nine percent per year.

There are numerous scientific research papers on these “market returns” in different asset classes, which we refer to. Relevant literature references can be found at the end of this article.

Starting from the market return, which is the long-term development expected for the future, the different types of costs (such as contract costs and fund costs of the respective fund used) and other factors that reduce the return are then subtracted in order to determine a realistically expected customer return.

The Alte Leipnitzer AL Rente Flex documentation shows that 100% of the contributions go into the Templeton Growth Fund. This fund is an equity fund with an equity share of almost 100%. Therefore, we assume a world stock market return of 9% per year – before costs and taxes (market return). From this, various return-reducing factors are deducted to determine a realistic average customer return.

If you want to learn more about the basics of a financial mathematics exam, you can find a link to a separate blog article on this topic below.

Costs are stated in the contract.

ALTE LEIPZIGER AL Pension Flex (AR15) costs

In the next step, it is necessary to research the various types of costs that significantly reduce your return. These include the costs of the insurer and the fund investment, which are directly deducted from the contract balance at different times. Although the other factors that reduce returns do not fall directly into the category of costs and are therefore not paid from the contract balance, they should also be taken into account as they have a direct impact on the return and thus on your invested capital.

Summary of costs: The costs of Alte Leipziger are 25,310.32 Euros, and the costs of the capital investment are 73,006.55 Euros.

This includes both the fund costs and other factors that reduce returns.

From the graphic, you can see the different cost categories of the insurer during the premium payment period. The following cost categories should be taken into account.

The provided contract offer from Alte Leipziger AL Rente Flex includes researched costs that are highlighted in red.

Alpha costs are the fees associated with the conclusion and distribution of the contract. These costs are typically deducted from the contract value over the course of five years (60 months). Depending on the type of intermediary (insurance broker, insurance agent, etc.), these costs can be paid out as commissions to the intermediary, up to 100 percent. The calculation involves multiplying the annual premium by the number of years of premium payment and adding any initial contribution (known as the valuation sum). In the case of particularly long contract durations, the calculation of the valuation sum is limited to a certain number of years, typically 30 to 50 years, depending on the insurance company.

Dynamic adjustments (such as automatic five percent per year) and contribution increases during the contract term increase the valuation sum. In such a case, when calculating the new valuation sum, it is assumed that the increased amount will be invested until the end of the contribution payment period. The additional annual amount resulting from the contribution increase is multiplied by the future contribution years. Each time at the time of the increase, new closing and distribution costs are calculated.

During the contract period, any additional payments also incur new closing and distribution costs – typically similar to a one-time premium.

If you reduce or completely stop contributing before the repayment period, the outstanding closing and distribution costs will not be charged to you. However, any costs that have already been calculated will not be refunded to you. After the repayment period expires, no further reduction will occur, as the closing and distribution costs have already been fully calculated.

In our contract offer for Alte Leipziger AL Rente Flex, we have determined an evaluation amount of 129,600.00 euros and alpha costs of 2.5 percent.

The annual contribution of 400 Euro for 12 months for a period of 27 years amounts to a total of 4,800 Euro.

The calculation is 129,600.00 Euro multiplied by 2.5 percent.

The total cost of 3,240.00 Euros will be spread over 60 months.

Additional alpha costs of 2 percent will be incurred starting from the 6th year.

The annual contribution of 400 Euros over a period of 22 years amounts to a total of 4,800 Euros.

The amount is 105,600.00 Euro multiplied by 2 percent.

The total cost of 2,112.00 Euros for Alpha is spread out over 22 years.

(Not considering future changes or additional payments)

The amount of Beta costs depends on the contributions and is deducted from the contract balance immediately after each contribution payment. This type of cost belongs to the administrative costs of an insurance contract. Many insurers differentiate between regular contributions, initial investments, and additional payments made during the contract period. Some insurers use a scale to calculate these costs, which often leads to a reduction of Beta costs over the contract period.

Early contribution reduction or contribution exemption leads to an adjustment of beta costs from the time of reduction. The disadvantage for you in this case is that if you are charged relatively high beta costs in the first few years due to the tier calculation and you as a customer only partially or not at all benefit from the later reduction.

Some insurers involve their customers in the surplus participation, which reduces the beta-costs.

Attention: The surpluses are determined annually and are not guaranteed. Therefore, they could also be completely eliminated next year for the entire remaining term of the contract.

In our contract offer of Alte Leipziger AL Rente Flex, we have calculated beta costs of 6.33 percent for each monthly contribution of 400 euros.

The calculation is: 400 Euro multiplied by 6.33 percent equals 25.32 Euro multiplied by 12 months multiplied by 27 years of contribution duration.

The total cost over the entire contract period is 8,203.68 Euros.

Gamma-Kosten are a percentage cost rate that is typically calculated based on the total contract value at any given time. These costs make up the largest portion of expenses for most long-term contracts and are considered part of the administrative costs of an insurance policy. Normally, these costs are calculated annually and deducted directly from the contract value. However, some providers may calculate and display Gamma-Kosten on a monthly basis, so it’s important to verify the billing frequency being used.

Over the years, ongoing contributions, dynamic adjustments, additional payments, and interest form a continually increasing basis for calculations. The fixed percentage cost rate often leads to a significantly rising cost size, which is calculated from the contract balance. Some insurers apply different percentage gamma cost rates for different types of contributions (such as ongoing contributions or additional payments, etc.).

In our contract offer for Alte Leipziger AL Rente Flex, we have calculated annual gamma costs of 0.48 percent on the total contract balance.

It is not possible to accurately quantify the Gamma costs before the contract is finalized due to the unpredictable nature of the contract development. However, assuming a consistent contract development, an estimated cost amount for the entire contract term can be determined. In the financial mathematical report on the Alte Leipziger AL Rente Flex, we will see the total amount of insurer costs. By subtracting the specifically calculable other types of insurer costs, our calculations reveal a remaining amount for the Gamma costs.

The total Gamma costs over the entire contract term, assuming a consistently constant surplus participation, amount to 11,754.64 Euros.

Kappa costs are also known as administrative costs or unit costs. These costs are deducted directly from the contract balance. However, not all insurers calculate this type of cost. If they are applicable, they represent a fixed annual amount, regardless of any individual contract details.

In our contract offer for Alte Leipziger AL Rente Flex, we were unable to determine the kappa costs.

This is an excerpt from the essential investor information of the Templeton Growth Fund.

The costs of the capital investment, specifically the fund, can be found in the excerpt from the “Essential Investor Information”. The following types of costs should be distinguished.

The sentence is already in a neutral tone of voice.

These costs are charged for each deposit or withdrawal and often serve as compensation for bank or investment advisors. They may be deducted directly from the investment amount or paid separately. The calculation method can be misleading, as it leads to different costs. Under certain conditions, these costs are occasionally discounted or completely waived. However, often the ongoing costs of the fund are higher, which has a significantly more negative impact on longer-term performance than the cost advantage gained through the discount on the front-end load. In most insurance-based retirement contracts, these types of costs are completely waived and therefore should not be considered.

The ongoing costs are deducted directly from the fund balance by the asset management company. The amount of the ongoing costs can be adjusted without your consent. You are not actively informed about this, but can only research on your own initiative at the end of a financial year to find out how high the percentage costs were on your fund balance in the last year. Just like the gamma costs, the calculation basis also increases over the duration of the contract term. The ongoing premium payment, dynamic adjustments, additional payments, and interest therefore form an increasingly higher calculation basis over the years. The percentage cost rate often results in a significant increase in cost size, which is calculated from the fund balance.

According to the essential investor information of the Templeton Growth Fund, which is included in our contract offer of the Alte Leipziger AL Rente Flex, we find annual ongoing costs of 0.98 percent, calculated on the total fund balance. Due to the unpredictable fund development, it is not possible to accurately quantify the ongoing fund costs for the future. In our financial mathematical examination, we have therefore assumed a consistent fund development and no possible changes to the ongoing fund costs.

These factors are not directly fees that will be charged to you as a customer. However, they must be considered because they have a direct impact on your returns and therefore your capital. The amount of these factors is influenced by the investment strategy, so we classify them as part of the costs of capital investment for better understanding. Like the ongoing costs mentioned above, these influencing factors are to be considered annually as a percentage and cannot be precisely calculated for the future. Hundreds of scientific studies prove that there are a number of factors that reduce returns.

In our research on our contract offer of Alte Leipziger AL Rente Flex and the selected investment strategy, we have taken into account the following factors that may reduce the return.

Opportunity costs, resulting from potentially unfavorable investment decisions compared to a scientific, evidence-based investment strategy, are estimated to cause an average annual reduction in returns of 0.50 percent.

The estimated transaction costs are an average of 1.00 percent per year, resulting in reduced returns.

The chosen investment strategy is estimated to result in an average annual reduction in returns of 0.46 percent due to cash lock-in.

For a detailed explanation of these and other negative influencing factors, we have written a separate extensive blog article. You can find the link to it at the end of this article.

In der Literaturangaben finden Sie eine Studie, die die Unterschiede zwischen konventionellem Asset Management und evidenzbasiertem Investieren verdeutlicht.

The result of our examination of the Alte Leipziger AL Rente Flex.

We have created an evaluation with our financial mathematical software, which presents all factors in Euros comprehensively on the results page throughout the entire contract duration.

The costs and other factors that decrease returns of a financial product directly affect the return on your invested money. These are often difficult or partially not visible in the extensive offering and contract documents.

Is the ALTE LEIPZIGER AL Pension Flex (AR15) worth it?

The total amount of contributions made over 27 contract years is calculated by multiplying 400 Euros by 12 months and then by 27 years.

The total costs of the capital investment include fund expenses and other factors that decrease returns.

The total costs of Alten Leipziger during the contract period will be directly deducted from the contract.

This is the representation of the total burden in euros over the 27 years of the contract duration.

Estimated gross final capital payout after 27 years.

Projected net capital payout after 27 years.

Estimated gross pension after 27 years of contribution.

(The results page from the financial mathematical report)

The total deposit over the contract period is 129,600.00 euros. The cost items taken from the contract documents of Alten Leipziger amount to a total of 25,310.32 euros. The total costs of the capital investment, plus other negative influencing factors, amount to 73,006.55 euros.

The final capital is 231,562.54 Euros. Taxes are due on this final amount in the event of full payout at the end of the contract. Based on our tax requirements, this results in a one-time tax burden of 12,266.38 Euros, resulting in a net capital of 219,296.16 Euros.

You can also choose to receive a lifelong pension from the Alte Leipziger AL Rente Flex. The monthly pension amount is based on the contract balance at the start of the pension, multiplied by the guaranteed pension factor, at a minimum. Many insurers have repeatedly reduced the higher pension factors that result from surplus. Therefore, we calculate with the guaranteed pension factor, which is 23.08 euros per 10,000 euros contract balance at the planned retirement age.

The monthly gross pension is 534.44 euros, calculated using the guaranteed annuity factor of 23.08 euros per 10,000 euros.

Our conclusion on the Alte Leipziger AL Rente Flex (AR15) is as follows.

At first glance, the result of receiving a lifelong gross pension of over 534.44 euros from a monthly investment of 400 euros seems quite decent. Similarly, the comparison of 129,600.00 euros paid in versus a net capital payout of 219,296.16 euros may also appear to be a good result at first glance.

However, the following factors must be taken into consideration.

If you choose to receive a monthly pension of 534.44 Euros (before taxes) instead of a lump sum payment of 231,562.54 Euros (before taxes), you would need to receive the pension for 433 months, which is just over 36 years. You would have to live to at least 103 years old in order to actually benefit from the pension option.