Old life insurance policies - Taxation of pension payments?
If a taxpayer took out a life insurance policy prior to 1.1.2005, then when it matures, they can look forward to a tax-free payout of the surplus funds if certain requirements are met. In this context, such a policy is then referred to as a so-called old life insurance policy. By contrast, in the case of a pension insurance policy with a lump-sum option that was taken out prior to 1.1.2005, if the policyholder chooses to receive monthly pension payments, then this would normally result in tax being levied. It can be worthwhile appealing against this practice and requesting a suspension of proceedings.
Older taxpayers, in particular, frequently still have old life insurance policies or old pension insurance policies with lump-sum options. If, upon maturity of the insurance policy, the holder opts to cash out all at once - namely, to receive the capital that was paid in including the surplus funds as a lump-sum - then from a tax perspective there is no risk - provided that the criteria for tax exemption have been fulfilled. Whereas, if a holder of an old pension insurance policy with a lump-sum option chooses to receive monthly pension payments, then the local tax office would normally subject such pension payments to tax based on the income portion. Its amount will be determined by the age at which the taxpayer started drawing the pension.
There are however a number of arguments against this taxation. So, the Federal Fiscal Court (Bundesfinanzhof, BFH), in its ruling of 1.7.2021 (case reference: VIII R 4/18), already clarified that pension payments from an old pension insurance policy with a lump-sum option, taken out prior to 1.1.2005, are generally not subject to tax. Nevertheless, the German government retroactively repealed this ruling via the 2024 Annual Tax Act. For all tax cases that are still open it was specified in law that pension payments from old pension insurance policies with a lump-sum option have to be taxed on the basis of the income portion.
The first cases on the question of the constitutionality of this retroactive legislative amendment are currently pending before the tax courts (Nuremberg tax court, case reference: 6 K 1408/24; Münster tax court, case reference: 6 K 57/24 E). The following approach would be advisable for the taxpayers concerned.
- Appeals should be lodged against tax assessment notices in which pension payments from old pension insurance policies with a lump-sum option are taxed on the basis of the income portion.
- Concurrently, an application should be made for a suspension of appeal proceedings with reference to the pending test case.
