Germany is the fourth largest economy in the world and the largest in Europe. The country is an industrial powerhouse. It consistently competes in trade surplus with China. Germany’s massive industrial economy attracts millions of foreign workers. The country absorbs migrants and refugees, adding to its rich cultural heritage. One of the questions facing gainfully employed migrants in Germany is investing the surplus income. Here are some thoughts.
Starting an ‘instant access’ savings account (Tagesgeldkonto) with a German bank is a good option for expats with low risk appetites. Such an account also offers maximum flexibility. This makes it ideal for migrants who are in Germany temporarily, including students. The size and regularity of savings does not matter. By law one can have a balance of up to EUR 100,000 per person and per account. Depositors can earn some interest on their savings. The interest rate for a Tagesgeldkonto depends on the currency market. It varies between 0.05% and 1% annually according to the bank and size of savings. Many German banks offer a Tagesgeldkonto. All you need for starting an account as a foreigner is your passport and visa. It is easy to deposit money into your account in any currency. You can also withdraw your money anytime conveniently from ATMs in Euros. Some banks allow account holders to simultaneously hold multiple currencies such as EUR, USD, and GBP.
A fixed deposit account (Festgeldkonto) mandates a minimum investment size and a minimum deposit period. Account holders cannot withdraw their money before the fixed deposit period without penalties. Fixed deposits offer higher interest rates. Unlike a Tagesgeldkonto, the rate of interest on a Festgeldkonto does not vary. It is fixed at the time of opening the account. The deposit term can vary from 1 to 120 months. Currently Alpha and BlueOrange banks offer interest rates hovering near 0.95% per year for fixed deposit accounts starting from EUR 1,000.
Investing in real estate in Germany is a worthwhile venture for those who can. German banks offer mortgages for as low as 1%. Expats are allowed to purchase properties in Germany for both self-occupation and investment. According to the German Federal Statistics Office ‘Desatatis’ residential properties continue to appreciate in value in 2020. This is true of both urban and rural areas. A growing economy, rising incomes, and increasing housing demand are some of the factors pushing the prices up. Investing in a property today can be very profitable in the future.
One of the considerations for property investors is tax. Buyers must pay a real estate tax in Germany, which depends on the property value. The basic tax rate is 0.35% multiplied by a municipal factor. The municipal factor depends on the property’s location. The final tax rate usually comes out to 1.5%-2.6%. Selling your property before the end of 10 years attracts a compulsory capital gains tax of 25%. However, selling property after 10 years is exempt from capital gains tax.
In Germany all workers including expats must contribute to public retirement insurance. Contributions to the German state pension are proportional to the annual salary. Public retirement insurance is made via social security contributions. In 2018 the contribution amounted to 19.5% of annual gross salary. Employers contribute 9.75% while workers contribute the remaining 9.75%. This amount is set to increase to 20% by 2025. Workers who earn less than EUR 450 monthly are exempt from paying this contribution, and are still entitled to pension payments. Self-employed expats are not obligated to pay state insurance contributions. However, those who decide to join the scheme can do so voluntarily.
State pension in Germany is paid according to the number of years worked, age, and average income. According to the OECD the pension rate in Germany is 51%. This is lower than the OECD average (63%) and EU average (71%). According to the Federal Ministry of Health and Social Security Germany plans to reduce the pension rate to 48%. The retirement age in Germany is 65. The age limit is gradually being increased due to the country’s aging population.
Stock markets are the perfect investment avenue for those with thorough knowledge and higher risk appetites. Other than directly buying stocks, individuals can also choose to invest via managed funds. These can be a good way to diversify your stock portfolio and save on transaction time/costs. Investment funds are overseen by fund managers who decide which stocks to buy/sell and when. Managed fund investments come with administration fees that can be as high as 3%.
A different way to invest in stocks is via exchange traded funds (ETFs). These are not managed actively. Rather, they follow particular stock market indices in an exact model. Indexes are portfolios that include shares of several companies. Indices help investors readily assess stock market performance. Examples of ETF funds in Germany are DAX ETF and MSCI World ETF. Investors in ETF funds do not own stocks. For example investors in the DAX ETF fund do not own the stocks of companies that DAX invests in. Instead investors own units of the DAX ETF, which is like owning shares in the ETF. ETF funds are long term investments, and are sometimes used as retirement plans. The administration fees in ETF funds are generally low. The total expense ratio (TER) for ETFs is usually less than 1%.
A significant percentage of expats in Germany prefer to send money home to invest in their countries of origin. This is motivated by differences in bank interest rates, property prices, family obligations, business opportunities, and many other factors. In 2017 migrants in Germany sent more than EUR 20 billion in remittances. Sending money from Germany to a non-Euro country mandates currency conversion charges. In addition there are transfer fees which depend on the more of sending. One of the most convenient, reliable and cost effective solutions for sending remittances is the Ria Money Transfer App. With the convenience of sending money as easily as sending an email, this app is ideal for those who send remittances regularly.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.