Retirement Phase: Design Options for an Individual Pension Plan and Greater Flexibility

Example Scenario: Payout Options in the Retirement Phase

We illustrate the different variants and their implications for policyholders using a practical example: Marie, 65 years old (born in 1961), has taken out an annuity insurance policy with Wünschdirwas Lebensversicherung AG. She now faces the decision of how her accumulated capital of €10,000 should be paid out.

The calculation is based on a guaranteed interest rate of 1 percent. For the lifetime annuity payment, we use the aggregate mortality table DAV 2004R. Costs are not taken into account. The possible payout options are shown in the figure below.

Lump-Sum Payout and Time-Limited Annuity

In capital-forming pension insurance policies, the accumulated capital can be paid out in full as a one-off lump sum at the beginning of the retirement phase. By making this decision, insured persons forgo the security of a lifelong, predictable pension and assume all associated financial risks themselves.

Example Scenario: Capital Depletion With Individual Investment Decisions

Marie decides to take her €10,000 as a lump-sum payout. She assumes an annual return of 1 percent on her investments. Each year, she withdraws €761.40. After 14 years – at the age of 79 – her capital is fully depleted. In the figure below, this option is shown by the blue line.

Traditional Annuity Payout

The traditional annuity payout is based on a fixed amount that remains constant throughout the entire retirement phase. It provides reliable and easily predictable income, making it particularly suitable for individuals who value stability. However, this option does not take inflation or rising living costs into account and therefore offers no protection against loss of purchasing power.

Example Scenario: Fixed Annuity With Limited Purchasing Power

Wünschdirwas Lebensversicherung AG offers Marie a traditional annuity payment of €648.14 per year, or €54 per month. This amount is guaranteed for life. In the figure, this option is represented by the constant purple line.

For comparison: if Marie were to manage her capital herself without any investment return and withdraw the same annual amount of €648.14, her capital would be fully depleted after approximately 15 years – at the age of 80.

Dynamic Annuity Payout

In a dynamic annuity payout, the pension increases annually by a predetermined percentage. This helps at least partially adjust the standard of living over time to rising costs.

Example Scenario: Increasing Annuity Payments Over Time

Marie chooses a dynamic annuity with an annual increase of 1 percent. Compared to the traditional option, the initial payout is lower, but it rises steadily over time.

The first annual pension payment is approximately €590; in the second year it increases to about €595.88. After ten years, the pension reaches €651.71, thereby exceeding the traditional annuity. In the figure, this trajectory is shown by the red line.

Inflation-Linked Annuity Payout

The inflation-linked annuity is a special form of dynamic pension: here, the pension level is directly tied to a price index, so that payments increase in line with the cost of living. This option provides targeted protection against loss of purchasing power and can be particularly advantageous in periods of higher inflation.

The inflation-linked annuity is therefore a specific type of dynamic pension in which the adjustment mechanism is explicitly linked to a consumer price index. As a result, pension payments rise in step with price increases, offering effective protection against the erosion of real value. This can be especially beneficial during periods of elevated inflation.

Example Scenario: Maintaining Purchasing Power Through Inflation Adjustment

In Europe, a long-term inflation rate of around 2 percent is typically targeted, which is also assumed in this option. For Marie, this results in an initial annual pension payment of €535. This is about €55 lower than the dynamic variant at the outset. However, after ten years the pension increases to approximately €652, reaching a similar level. Due to its stronger compounding effect, it grows significantly faster in later years. In the figure, this is represented by the green line.

Two-Phase Annuity Payout

The two-phase annuity payout takes individual retirement needs into account more strongly than traditional or purely dynamic options. It divides the retirement phase into two distinct periods: one with a higher annuity and a second with a lower one.

Example Scenario: Higher Pension in Early Years, Lower Payments Later On

Marie plans to travel extensively in the early years of her retirement and therefore prefers higher payouts during this period. Specifically, she chooses an annual pension of €700 for the first 15 years. In return, she accepts lower payments thereafter.

Wünschdirwas Lebensversicherung AG offers her a two-phase option accordingly: for the first 15 years, Marie receives €700 per year as requested; afterwards, the pension is reduced to €430 per year. In the figure, this trajectory is shown by the orange line.

More Choice Requires Guidance

All of the payout options presented have their own merits. For policyholders, however, the key question is which variant best fits their personal life situation and individual needs. In practice, these decisions are often constrained by the range of products available on the market.

The reform of tax-advantaged private pension schemes adopted at the end of March 2026 aims to address this issue by introducing greater flexibility in the payout phase: in the future, policyholders will be able to choose not only a lifelong annuity but also time-limited pension payments.

As the range of options expands, so does the need for well-founded consulting and suitable evaluation frameworks in the interest of consumer protection. We support the development of such concepts – feel free to get in touch!