Pension in Germany [Retirement Age and German Pension System]

Demystifying Pensions in Germany: Exploring Retirement Age, German Pension System, Pension Calculator, Private Pension Funds, etc. Plan your future confidently with our comprehensive guide on pensions in Germany.

Key Takeaways

• The German pension system is based on three pillars.
• The first pillar covers basic pension benefits. It includes state pensions like statutory pension insurance, professional pension schemes, and the Rürup pension.
• The second pillar comprises subsidized pension provisions. It includes company pension schemes and Riester contracts. The second pillar primarily aims at employees.
• The third pillar refers to unsubsidized pension plans. It includes private pensions like life insurance or private pension insurance.
• The pension subsidies comprise government bonuses and contributions from the employer.
• Every employed person must take compulsory insurance. The first pillar covers compulsory insurance schemes.
• Usually, compulsory German pensions are insufficient to cover your retirement expenses. Hence, it’s recommended to supplement it with other pension schemes.
• Which retirement plan is right for you depends on
  • whether you are employed or self-employed,
  • whether you use state subsidies or want to save flexibly,
  • and how much time you have left until you retire.

This is how you do it

• Check how much the statutory pension insurance will pay you during retirement.
• Understand different pension schemes you can opt for to supplement your old-age pension.
• Refer to the four categories to find the pension plans that fit your needs and situation.
• Consider investing in real estate and stocks. The rental income, interests, and dividends are excellent ways to contribute to your retirement provision.
• You can also opt for an ETF savings plan to save flexibly till you reach retirement age.

Table of Contents

There are many options to secure pensions in old age. But which pension scheme fits your needs is the question many struggle to answer.

So, to help you make the best decision, we have created four categories based on your employment situation and the time to retirement.

We’ll also explore the key elements of retirement planning in Germany, including the pension system, retirement age, pension providers, and the role of the German government.

But before checking the categories, you must know the following.

• Your pension entitlements
• The three pillars German pension system

Compulsory statutory pension in Germany

Your current pension value

First, determine how much pension you will receive from your compulsory pension insurance after retirement. Then estimate your expenses after retirement.

Once you know your pension and expenses after retirement, you can determine if your pension is sufficient.

Usually, a compulsory pension in Germany is insufficient to cover your expenses after retirement.

There are three statutory pension systems in Germany based on your occupation.

• State pension fund or statutory pension insurance (Gesetzlichen Ren­ten­ver­si­che­rung in German) for employees
• Professional pension scheme (Berufsständischen Versorgungswerk in German) for licensed freelancers
• Statutory pension (Gesetzliche Pension in German) for civil servants
• No obligatory basic pension for self-employed

Let’s check them in detail.

Statutory Pension Insurance (Gesetzlichen Ren­ten­ver­si­che­rung (GRV) in German)

The state pension system covers most employees. In addition, it includes some self-employed professions.

The mandatory state pension includes the self-employed, who it considers need protection in old age. These are

• driving instructors,
• fitness trainers,
• self-employed teachers,
• midwives,
• or physiotherapists.

On Deutsche Rentenversicherung, you can find the complete list of all compulsorily insured individuals.

The situation of the German pension system doesn’t look good.

The majority of the German population is getting older. As a result, fewer employed people will finance more pensioners with their contributions in the future.

The outcome is a decreased pension entitlement, which we can already see.

An average earner with statutory pension insurance receives 1,280 € in pension before taxes. It is only 48.1% of the average income (before taxes).

And as per the pension reform 2004, the minimum pension level in 2030 should be 43%.

Thus, you must have other provisions to maintain your living standard in old age.

Professional pension schemes (Berufsständischen Versorgungswerk in German)

Professional pension insurance covers freelancers. It includes

• resident doctors,
• pharmacists,
• architects,
• lawyers,
• auditors, and many more.

Unlike statutory pension insurance, professional pension funds invest their members’ contributions in the capital market.

And on top of it, the insured person pays for their own pension.

Last but not least, the low-interest rates reduce the pension amount further. Hence, freelancers must expect less pension in the future.

Thus, freelancers should also look into additional pension options.

No obligatory basic pension insurance

Self-employed people not insured in the statutory pension insurance or the professional pension scheme must take care of their pension themselves.

Hence, they must look into the available pension options.

Statutory pension (Gesetzliche Pension in German)

It is the classic pension scheme for everyone working in the public sector. These could be

• civil servants,
• judges,
• soldiers,
• or pastors.

Usually, the federal or state governments pay higher old-age pension than you get from the statutory pension.

Nevertheless, taking private pension plans is advisable to boost your income in old age.

The three-pillar German pension system

Pension insurance experts in Germany speak of the three-pillar pension system. The experts grouped the pension plans into three pillars based on the tax incentives one gets.

The first pillar of the German pension system

This pillar includes pension solutions covering basic pensions.

Following pension schemes comes under the first pillar of the German pension system.

• Statutory pension insurance (Gesetzlichen Ren­ten­ver­si­che­rung in German) – covering all employees and some self-employed people.
• Professional pension schemes (Berufsständischen Versorgungswerk in German) – covering certain licensed professions like doctors, pharmacists, lawyers, architects, etc.
• Rürup pensions – favorable for high-earning self-employed people. But anyone can take them out.

All the above pension plans have tax incentives in common.

Pension contributions to these plans count as special expenses. And you can fully deduct the contributions to the statutory and professional pension schemes from your tax.

In the case of the Rürup pension plan, you can deduct 96% of the contributions from taxes in 2023.

But the tax deduction percentage increases by 2% annually. Thus, by 2025, contributions to the rürup pension plan will also be 100% tax deductible.

Hence, reducing your tax burden in the present. But you’ll pay taxes later when you start receiving the pension.

However, the tax burden during the pension age is usually low. The reason is simple, your income after retirement is less than what you earn today.

The second pillar of the German pension system

The second pillar includes subsidized pension plans.

• Riester pension plan
• Company pension schemes (Betriebliche Altersvorsorge (bAV) in German)

They are particularly suitable for employees.

Riester pension plan

• A Riester pension plan is often a private pension plan (funds-linked) or fund savings plan.
• In the Riester pension plan, you benefit from the state’s allowances and tax deductions on your contributions.

Company pension schemes (Betriebliche Altersvorsorge (bAV) in German)

As the insurance company deducts the contribution directly from your gross salary, you do not pay any taxes or social security contributions on your company pension plans.

But, the company pension schemes are worthwhile if the employer contributes to the pension plan contributions.

From 2019, every employer must co-contribute at least 15% of the employee’s contributions. But some employers co-contribute even more.

Hence, check your employer’s co-contribution percentage before making a decision.

With company pension plans, you also pay the full health and nursing care insurance contributions in old age. Thus, it’s vital that your employer contributes to your pension plan.

Though one of the pension benefits is tax savings, you pay taxes later in the retirement age.

But your taxes are usually low as your retirement income is low.

You can learn more about it in our guide on company pension schemes.

The third pillar of the German pension system

The third pillar includes all private pension plans without special funding from the state or tax savings.

It includes private life insurance (private Le­bens­ver­si­che­rung­en in German) or pension insurance.

In private pensions, you pay the contributions from your net salary instead of gross. Thus, you have already paid the income tax on your contributions.

But to make private plans worthwhile, you do not pay taxes on dividends or interest during the savings phase.

On top of it, the tax on your pension income during retirement is less than your personal tax. The tax rate depends on your age when you draw the pension.

For example, you pay only 18% tax on your pension if you retire at 65. You can find what tax you will pay at what retirement age in Section 22 of the Income Tax Act.

If you want the saved capital paid out all at once, you only pay the personal income tax rate on half of the sum.

Other options to secure pension in retirement age

ETF Savings plan or Stock Investment

Many stock brokers in Germany offer ETF savings plans. In these plans, you pay a fixed amount that the broker will invest in a low-cost ETF of your choice.

ETF is an exchange-traded fund that is composed of a set of securities. Typically, ETFs follow a broad market index like S&P500 or MSCI World, etc.

The ETF savings plan offers you a lot of flexibility.

• Contribution amount: You decide the amount you want to invest every month. You can even change the amount anytime you wish.
• Investing period: You can let the savings plan run until you retire, pause it for a while, or stop it after a few years. You are in the driver’s seat instead of the state or an insurance company.

Check with your existing broker if they offer an ETF savings plan. Otherwise, you can also open a free account with one of the brokers in a few minutes.

Keep in mind the following things while choosing an ETF.

• You invest over the long term.
• The fund should contain stocks from different countries, sectors, and currencies.

Although ETF saving plans and investing in stocks offer you control and flexibility, but you don’t enjoy special tax advantages.

For example, you invest using your already taxed income. On top of it, you pay capital gains tax on the interests, dividends, and profits you make.

Real estate

Investing in Real Estate is also a good way to secure your older self.

You can save on rent if you live in your own house. Hence, it reduces the burden of expenses in old age.

Or you can rent the property to earn a rental income. Again, the rental income can be a good source of earnings on top of your compulsory pension.

Lastly, don’t forget the rise in your property’s value over time.

Assess pension options based on your situation

Now you know the different pension options available in Germany. But which option fits you depends on your life and financial situation.

Here are some questions that can help you with the decision-making process.

1. What pension plans can you choose? Not all pension schemes are available for all professional groups.
2. Which form of provisions (state allowances and tax advantages) makes sense for you?
3. What is your risk appetite? Are you okay with the low returns but a secure pension? Or are you willing to take certain risks for higher returns, e.g., investing in the stock market?

Let’s check different scenarios and determine which pension option makes the most sense.

Category 1: Employed and more than 15 years before retirement

Question 1: Are you planning to buy a property soon?

If yes, you should save money to buy the property. You have the following options to do this while collecting interest.

• No risk options
  • Tagesgeld account: You can earn interest on your money parked with the bank for a period of time.
  • Festgeld account: It’s an extension of “Tagesgeld” that offers better interests with low flexibility.
  • Riester home savings contract (Riester-Bausparvertrag in German): You can use the Riester subsidy to finance a property you will use yourself.
• Return-oriented options with some risks
  • Riester fund savings plan (Riester-Fondssparplan in German): The insurance company invests part of your contributions in the stocks. Hence, there is always the risk. But the company guarantees to repay all the money you paid over time.

You can compare the offers from different banks on Check24*.

Question 2: How much tax you pay?

Different pension plans make sense based on how much tax you pay.

High taxpayers – Marginal tax rate (Grenzsteuersatz) 42% or more

High taxpayers should consider the following pension contracts

• Rürup contract in addition to Riester – especially if you aim for a higher supplementary pension. In a Rürup contract, you cannot withdraw money at the beginning of the retirement phase. On top of it, you can’t cancel the Rürup contract.
• Fund-linked Rürup pension insurance (fondsgebundenen Rürup-Rentenversicherung): In this plan, you can achieve higher returns than the classic variant. Only choose the fund variant if you feel comfortable with the idea that there is no guarantee for your deposits.
• ETF savings plan

Low taxpayers

Low taxpayers should consider the following pension schemes.

• Company pension plan(Betriebliche Altersvorsorge (bAV))
• Riester fund savings plan (Riester-Fondssparplan) – In Riester, the more children you have, the better.
• ETF Savings plan

Category 2: Employed and less than 15 years to retirement

Do you fulfill the below criteria?

• You are employed,
• you have more than five but less than 15 years until retirement,
• you have a property that you are paying off,
• and you have some money left over in the month that you can use.

In this situation, you should ask yourself two questions

• How flexible do you want to be with your savings?
• Are you willing to give up government funding for the flexibility?

Complete flexibility and no government subsidies

• ETF savings plan
• As the retirement age approaches, gradually move your savings into fixed-term deposits.

Receive government funding with no to very less flexibility.

• Riester fund savings plan – You can invest up to 2,100 € a year in it. You can withdraw 30% of what you have saved when you retire.
• Rürup contract – If you want to contribute more than 2,100 € a year to your pension.
• Company pension scheme – You pay the contribution amount from your gross income. Hence, you avoid paying social security and taxes on the contribution amount.
• Statutory pension insurance – You can voluntarily make additional contributions to the statutory pension insurance if you want to retire early.

Category 3: Self-employed

Before you consider saving for a pension, you must ensure sufficient reserves to survive a few months of dry spells in the company.

Thus, the first task is securing the business operation’s liquidity. You can save money in a Tagesgeld account that pays good interest.

You can compare the offers from different banks here*.

Once the company is financially secure, we can talk about pensions. You have the following options.

• Voluntarily insure in the statutory pension insurance system
• Rürup contract
• ETF savings plan – You can easily open an account with a broker (like Scalable Capital*) and start investing in ETFs or create a savings plan (Sparplan in German)

Statutory pension insurance system

Once you enroll in the state pension system, the same rules apply to you as to employees. It means

• You pay an amount every month, depending on your income.
• You are protected against disability.
• You must contribute to the state pension fund for at least five years to be eligible for a pension in old age.

NOTE: You can only apply for compulsory state pension insurance if you have become self-employed within the past five years.

Rürup pension plan

Consider taking a Classic Rürup pension plan if

• you don’t trust the legal system
• or have been self-employed for more than five years.

The benefits of this pension plan are

• As of 2023, 96% of the contributions are tax deductible. By 2025, 100% of the contributions will be tax deductible.
• No risk, as you will receive a guaranteed pension.

Note: It’s disadvantageous to take a Rürup pension plan if you are part of statutory health insurance. You’ll end up paying 14% of your pension in health insurance.

Learn more about it in our guide on Rürup pension schemes in Germany.

Category 4: Five years or less to retirement

Question 1: Is there a regular amount left over in the month you want to invest?

• Riester fund savings plan: For employees with a regular amount left to invest.
• Company pension plan: For employees with a regular amount left to invest.
• Rürup pension insurance: For self-employed with a high tax rate.
• German state pension fund: Beneficial for both employed and self-employed. The savings may be paid out all at once as the total contribution is too small for a pension.

Question 2: Do you have a larger amount available that you want to use?

• Instant annuity (Sofortrente in German): You can transfer all the money to an insurer at the beginning of retirement. In return, the insurer will pay you a lifelong pension. The advantage of this plan is you will get a pension till you are alive. You should get several offers before you choose one.
• Voluntary contributions to statutory pension insurance (GRV): You have less than five years to retire. Consider making voluntary contributions, as it can help you fulfill the minimum waiting period of five years. Hence, securing your entitlement to a statutory pension.
• Invest in a diversified, inexpensive index fund (ETF): To limit the risk of loss, the money should remain invested for at least 10 to 15 years.
• Fixed deposit stairs: You can park the money in multiple fixed deposits (Festgeldkonto) that runs for one, two, or three years. Hence, due at different times.
• Buy a rental property: If you have a lot of money left over, you can consider buying a rented property as an investment. The rental income could be a supplementary pension.

F&Qs on a pension in Germany

What is the retirement age in Germany?

• The statutory retirement age in Germany is 67 if you are born after 1967.
• You can also retire early at 65 without any pension deduction.
• The earliest retirement age with a pension deduction is 63 years. Assuming you contributed to the pension fund for at least 35 years.

You can use the retirement age calculator by Deutsche Rentenversicherung to calculate your exact retirement age.

How much reduction in pension entitlement in case of early retirement?

0.3% per month or 3.6% per year reduction in your pension entitlement. So, if you retire at 63, your pension will be reduced by 14.4%.

How much is the state pension in Germany?

You can find this information in the “Ihre Renteninformation” letter from DRV.

You can also use the pension entitlement calculator by Deutsche Rentenversicherung (DRV) to calculate your exact pension.

However, an average earner with statutory pension insurance receives 1,280 € in pension before taxes. It is only 48.1% of the average income (before taxes).

The pension entitlement will reduce further to 43% by 2030. Thus, you must have other provisions to maintain your living standard in old age.

How long do you need to work in Germany to be eligible for a pension entitlement?

You must have contributed at least five years to the state pension fund to qualify for a pension. If you didn’t, you must voluntarily contribute an extra sum to the pension fund to compensate for the missed period.

Will I get a pension if I leave Germany?

• If you move to another country temporarily, nothing will change for you. The state pension fund will transfer your pension to an account of your choice.
• If you move permanently to a country in the European Union, Iceland, Liechtenstein, Norway, or Switzerland, you will also receive the full pension.
• There may be restrictions on your pension if you move permanently to a country outside the European Union or a country with which Germany has no social security agreement.
• Seek advice from a German pension insurance advice center in case you move permanently to a country outside the EU or with which Germany has no social security agreement.
• To ensure your pension is credited to your new account on time, inform Deutsche Post AG’s pension service of your move in good time.

References

• https://www.finanztip.de/altersvorsorge/
• https://beamten-infoportal.de/ratgeber/pensionsanspruche-von-beamten
• https://www.deutsche-rentenversicherung.de/DRV/DE/Rente/Allgemeine-Informationen/allgemeine-informationen-rente-node.html