How high is the monthly payment under a life annuity, and what is left of it after tax?
The question I hear most often about life annuities is not what one actually is. It is: why is the annuity so low? Usually the person sitting opposite me is in their early sixties, owns a house in eastern Dresden and has come home with an offer of a few hundred euros a month. The figure is disappointing. That does not make it dubious. It is the result of a calculation that the offer almost never sets out.
How the value of the house becomes a monthly payment
Three figures determine the payment. The market value of the property. The capitalised value of your right of residence, which is deducted from it. And the statistical remaining life expectancy across which the rest is spread. On top comes an interest rate, because the buyer pays today for something they can only use decades from now.
The value of the right of residence is the item owners underestimate. It equals the rent you will not have to pay for the rest of your life, discounted back to today. For an 80 square metre flat in Striesen that is a six-figure sum at 65, and still a good third of that at 85. The younger you are, the larger this deduction, and the less is left for the annuity.
The second lever appears in no brochure: the capitalisation rate. It sets the rate at which future payments are discounted back to today. And it works harder than most people assume. In my model calculation the payment for the 65-year-old rises from around 840 euros at two per cent to around 1,350 euros at five per cent, without anything about the property changing. Anyone who does not know the rate applied cannot judge an offer.
Why the age at signing lifts the payment only becomes clear from the figures. At 65 the remaining amount is spread over a good 21 years, at 85 over barely seven. At the same time the deduction for the right of residence shrinks. Both effects pull in the same direction.
Model calculation: flat in Dresden-Striesen, 80 square metres, market value 320,000 euros
Assumed local net cold rent of 9.00 euros per square metre, capitalisation rate 3.0 per cent, statistical remaining life expectancy for women according to the 2023/2025 life table of the Federal Statistical Office. My own calculation for illustration, not an offer.
| Age at signing | Statistical remaining term | Capital value of the right of residence | Remaining annuity base | Monthly annuity |
|---|---|---|---|---|
| 65 | 21,1 years | 133.600 € | 186.400 € | approx. 1.000 € |
| 75 | 13,2 years | 93.000 € | 227.000 € | approx. 1.760 € |
| 85 | 6,7 years | 51.700 € | 268.300 € | approx. 3.730 € |
The jump is bigger than the ratio of the years. Between 65 and 85 the payment grows to more than three times as much, although the same property sits behind it. For a man of the same age it comes out higher, because the life table assigns him around 18.0 rather than 21.1 years at 65: in the same calculation around 1,220 euros instead of 1,000 euros.
What the tax office takes from the annuity
It is not the whole annuity that is taxed, only its income share. The largest part of each payment is your own purchase price being paid back to you in instalments, and your own money is not taxed a second time. Only the interest element is taxable, and the law sets it at a flat rate.
How high it is depends solely on the age completed when the annuity begins. The table is set out in section 22 no. 1 sentence 3 letter a sub-letter bb of the German Income Tax Act. Here are the values for the age groups that occur in practice.
| Age when the annuity begins | Taxable income share |
|---|---|
| 65 to 66 years | 18 per cent |
| 67 years | 17 per cent |
| 68 years | 16 per cent |
| 69 to 70 years | 15 per cent |
| 71 years | 14 per cent |
| 72 to 73 years | 13 per cent |
| 74 years | 12 per cent |
| 75 years | 11 per cent |
| 76 to 77 years | 10 per cent |
| 78 to 79 years | 9 per cent |
| 80 years | 8 per cent |
| 81 to 82 years | 7 per cent |
| 83 to 84 years | 6 per cent |
| 85 to 87 years | 5 per cent |
Applied to the model calculation: anyone signing at 75 pays tax on 11 per cent of 21,120 euros of annual annuity, so around 2,320 euros. At 65 it is 18 per cent of 12,000 euros, around 2,160 euros. At 85 it is 5 per cent of 44,760 euros, around 2,240 euros. The three amounts sit close together, although the annuity itself multiplies. That is the point where many owner conversations turn: the higher annuity in old age costs almost nothing extra in tax.
The percentage is fixed when the annuity begins and then applies for the entire period it is drawn, even if you live to a hundred. Signing a year later, by contrast, can move you into a lower row of the table. Whether the income share produces any tax at all depends on your other income. Your tax adviser works that out, not I.
Life annuity or fixed-term annuity, and what happens on an early death
A pure life annuity ends with death. That is not a clause but its nature: under section 759 of the German Civil Code the annuity is, in case of doubt, payable for the lifetime of the recipient. If you die three months after the notary appointment, the buyer has the property for three payments. It is precisely this risk that they charge for through the discount.
The heirs are not left with nothing at all. A life annuity is payable in advance, for cash annuities three months at a time (section 760 of the German Civil Code). Whoever lived to see the start of such a period is entitled to the full amount for it. But that is no more than one quarter.
A minimum term helps against this. It is agreed that the annuity runs for a fixed number of years even if the recipient dies earlier, and continues for life after that. This is the extended life annuity. The buyer charges for that promise, usually through a slightly lower payment. Anyone with children for whom a residual payment matters should ask about it.
A fixed-term annuity is something else. It runs for a set number of years, regardless of how long you live. If it also ends at the latest on death, tax law calls it a shortened life annuity and applies its own table in section 55 subsection 2 of the Income Tax Implementing Ordinance. The taxable income shares are higher there: 16 per cent for a 15-year term, 21 per cent for 20 years. Anyone who overlooks that calculates their net annuity too high.
When the buyer stops paying
An annuity is a promise stretching over decades. A promise like that is worth as much as the person giving it, unless it is attached to the land. That is what the land charge in kind under section 1105 of the German Civil Code is for: the recurring payments are owed out of the property, not only out of the buyer's pocket.
What that charge achieves is both overestimated and underestimated. It travels with the property: if the buyer sells on, the next owner pays. It does not replace an enforceable title, though. So that you do not have to sue first if payment is late, the deed should contain a submission to immediate enforcement. Without it, the emergency takes months.
The second building block is the priority notice securing retransfer under section 883 of the German Civil Code. It secures your claim to have the property transferred back if the buyer breaches their obligations. Its effect is sharper than the clumsy name suggests: dispositions made after it is entered are ineffective in so far as they would defeat the claim, and that applies to dispositions in enforcement proceedings or by an insolvency administrator as well.
That leaves inflation. In twenty years, 1,760 euros are no longer the same 1,760 euros. At two per cent price growth a year they then have the purchasing power of around 1,180 euros. An index-linking clause tying the payment to the consumer price index helps against that. It is expressly permitted: the German Price Clause Act prohibits such clauses in principle but exempts recurring payments for life if they are tied to a price index of the Federal Statistical Office (section 3 subsection 1 no. 1 letter a of the Price Clause Act). The charge itself may also be drafted so that the payments adjust automatically to changed circumstances (section 1105 subsection 1 sentence 2 of the German Civil Code).
What is left for the heirs
This is where most of the conflict I see in Dresden families comes from. After a life annuity the property is gone. What remains is the part of the payments that was not spent. If the seller dies early, little is left. If they live to a great age, the deal was good for them, and still nobody inherits the house.
My experience from owner conversations: the conflict does not break out at the notary but months earlier at the kitchen table, when the children learn that the family home is already being negotiated over. Anyone considering a life annuity should talk first. That is not legal advice but practical advice.
One point still belongs with the notary or a lawyer: if the property is transferred well below value, part of the transaction may amount to a gift. What that means for compulsory shares of an estate is decided on the individual case, not by a rule of thumb.
When a life annuity fits and when it does not
Between 70 and 75 it comes down to the individual case. Everything then hangs on how certain you are that you want to stay, and on how the rental value compares with the market value. Outside that range the picture is clearer.
It fits when
- Staying put is not negotiable. Moving is out of the question, whatever it would bring.
- You are over 75. Before that the payment is rarely worth talking about.
- You need money reliably every month rather than a large sum at once.
- There is nobody meant to inherit the property, or everyone involved backs the decision.
It does not fit when
- You are under 70. The deduction for the right of residence then costs you around 42 per cent of the market value.
- You need a large lump sum, for instance to pay out siblings.
- The property is meant to stay in the family.
- The buyer cannot show that they will stay solvent over decades.
What I want to see before any signature
Three figures and one rank. The market value applied, the capital value of the right of residence and the capitalisation rate, plus the rank of the right of residence and the charge in the draft land register entry. Anyone who does not give me those four items in writing gets no recommendation from me.
Which four routes exist at all, and why a partial sale usually costs more over ten years than a bank loan, is set out in the overview of property annuities and partial sales in Dresden.
Have the offer checked before you sign
I compare the annuity offered against the market value of your property and tell you which interest rate and which remaining term are built into it. Free and without obligation, even if you sign nothing afterwards.
You might also be interested in
Averting a forced auction: sell beforehand
Selling before a forced auction in Dresden: stop the proceedings, buy time under § 30a ZVG, and achieve 20-30 % more than at auction.
Community of heirs & property sale
Community of heirs and property sale in Saxony: unanimity, payout, avoiding a partition auction. Get advice now.
Distress sale in financial difficulty & personal insolvency
Selling a property facing foreclosure or personal insolvency in Dresden: avert the auction, secure market value, speed up the sale.
Reviews & credentials
Free valuation of your property
Receive a first well-founded estimate within 24 hours, based on current market data and our many years of experience.
