Early Retirement Pension: Securing Retirement with Children's Savings Accounts

Germany needs more shares in its pension system to secure pensions for the future. This requires a fundamental reform of the pension system. The federal government, however, is planning on a smaller scale. It is currently working on the introduction of an early retirement pension. For this to be successful, it needs sufficient volume, simple products and an unbureaucratic government framework.

"If done well, the early retirement pension planned by the federal government could be a way to start saving during childhood. To be successful, the early retirement pension should start at birth, allow additional payments from third parties such as parents or grandparents, and, above all, reach every child. Simple and inexpensive private products enable reliable long-term savings. Targeted retirement provision requires that the early start pension flows directly into a retirement savings account after the age of 18,‘ explains Henriette Peucker, Chief Executive and Member of the Board of Deutsches Aktieninstitut.

This is the result of the study ’Children's savings accounts in international comparison – What can we learn from other countries for the early retirement pension?", presented today by Vanguard and Deutsches Aktieninstitut. Although children's savings accounts have different objectives in other countries, the savings principle can be applied without restriction to retirement provision. The study compares children's savings accounts in France, the United Kingdom, Israel, Canada and the United States and identifies success factors and recommendations for action in Germany.

The coalition agreement between the CDU, CSU and SPD stipulates that every child attending an educational institution in Germany should receive state contributions of €10 per month into an individual, funded and privately organised account from the age of six to 18. The savings accumulated under this early start pension scheme will only be paid out and taxed upon retirement. 

"Children's savings accounts open up the possibility of saving for retirement. They are a gateway to financial education and can motivate young investors to continue making private contributions even after the state contributions have expired. If Germany introduces the early start pension now and learns from international approaches, children can benefit from the capital market at an early age and look forward to significantly better retirement provisions in the long term," emphasises Sebastian Külps, Managing Director of Vanguard Group Europe GmbH.

The recommendations of the study in detail:

1. Start as early as possible – from birth: The early start pension should begin at birth and not only at the age of 6. This is common practice in the countries we looked at, and for good reason. A longer investment period and higher investment volumes enable higher savings.

2. Include all sections of the population: For children whose legal guardians do not open a securities account, one should be set up automatically. This way, the early start pension benefits all children regardless of their social background. Experience from abroad shows that standardised solutions from private providers with a high proportion of equities are suitable for automatically opened securities accounts in order to enable attractive returns in the long term.

3. Enable additional payments from third parties: In order to fully exploit the potential of the early start pension for retirement provision, additional payments by legal guardians and other third parties such as relatives, friends or even foundations are necessary. The state contributions of €10 per month should also be increased in order to achieve a sufficient income in old age.

4. Offer attractive tax incentives: Attractive tax incentives, based on examples from abroad, are crucial to the success of the early retirement pension. We advocate tax exemption for investment income, similar to the French or British model. Tax deductibility of private additional payments also makes sense, as it provides incentives to supplement state contributions with additional payments from third parties.

5. Link to retirement savings accounts: On the child's 18th birthday, the children's savings account should automatically be converted into a retirement savings account. 
6. Observe the basic rules of successful stock investment: Broad diversification increases the chances of success and is particularly effective for small investment amounts via funds. For higher savings through third-party contributions, investment in stocks is also an option. For a high-yield investment, we recommend a minimum stock allocation of 60 per cent for the early retirement pension, as is already the case for fund savings in capital-forming benefits.

7. Digitise securities account management: The process of opening and managing securities accounts should be fully digitised. Securities accounts can be opened without forms by assigning the tax identification number that is automatically assigned at birth. It is also helpful to make the early start pension and other pension options a compulsory topic in schools as a starting point for promoting financial education.