Pension in Germany: The 2024 Guide to Retirement

Retirement should be a time of relaxation and enjoyment after years of hard work. Yet concerns about the efficacy of the German pension system can cloud this golden period. The statutory pension in Germany aims to provide financial security to retirees. But understanding its details and your options is crucial, especially if you are worried about old age poverty.

How old do you have to be to retire in Germany?

You must be 67 to retire in Germany if born after 1964.

However, if you were born before 1964, you could retire earlier:

Why is Germany’s retirement age increasing?

The retirement age is increasing because Germany’s population is aging. Hence, more people receive pensions for longer.

Increasing the retirement age allows people to contribute to pensions for longer. Plus, it also ensures that they receive pensions later on.

These changes reduced the financial burden on the statutory pension system. Some say we may see an even greater increase in retirement age in the future.

How does early retirement work in Germany?

You could retire early, starting when you turn 63. That would mean you’d receive a reduced statutory pension.

You can expect your pension to decrease by ≈0.3% for each month of early retirement. This is a rough estimate from our calculations. Use the official state pension calculator to see how much your future pension will be.

Early retirement is appealing for those who wish to enjoy their golden years before the rest of the herd.

Still, prepare your retirement funds well in advance. You should account for smaller social security checks and extended retirement years.

How does the statutory German pension system work?

It operates on a principle of solidarity. Contributions from workers fund the statutory pensions of retirees.

Employees and employers contribute a percentage of the former’s salary to the pension fund. Government subsidies also supplement this amount.

In 2024, the contribution rate is 18.6% of gross wages. Employees and employers each contribute 9.3% of the employee’s gross salary.

When it’s your turn to retire, you get monthly payments based on your contribution history.

Why You Can’t Ignore Retirement Planning Anymore

There are 3 reasons why retirement planning is more critical than ever:

1. Future pension benefits are uncertain.
2. Career changes happen unexpectedly.
3. Retirement should be a time of comfort, not financial stress.

Future pension benefits are uncertain.

The sustainability of this pension provision system is under pressure. Germany’s population is aging, and its birth rates are decreasing.

If the imbalance between contributors and beneficiaries grows, younger generations will have to supplement their pension provision with alternative sources of income—for example, personal savings or investment plans.

Also, pension funds rely on their investments’ returns for cash. If they remain too low for too long, they’ll be forced to pause payments or ask the government for a bailout.

Career changes happen unexpectedly.

But what if this scenario doesn’t play out? Still, retirees need financial security if life events reduce their lifetime contributions. Yes, even things you can’t control could reduce your benefits.

Here are some examples:

• Lifetime wages are lower than average.
• Choosing to work part-time.
• Taking a career break.
• Health issues affecting your ability to work.

Retirement should be a time of comfort, not financial stress.

But what if you’re confident in the sustainability of the system? And you know for a fact that you’ll maximize your statutory pension?

Well, you could have to downgrade your lifestyle.

Your pension will be smaller than your current salary unless you supplement it with additional retirement planning.

Pension Insurance Options in Germany

By now, you should be convinced that you must plan your retirement.

The German pension system is often compared to a pyramid. There are three levels, and as you go up the pyramid, you increase your financial security. The first level is the basic state pension, which provides a basic level of income in retirement. The second level is occupational pensions, which are provided by employers. The third level is private pensions, individual savings and investment plans.

So, what options are best for you? Let’s find out.

What is Basis pension insurance?

The Basic Pension, also known as the “Rürup Rentenversicherung,” after its creator, Bert Rürup, is a pension scheme introduced in Germany in 2005.

The Basis pension is designed to provide long-term financial and social security.

It’s best for the self-employed, freelancers, and high-income earners who aim to stay in Germany their entire career.

How Does It Work?

1. Tax Advantages: Contributions made to the Basis pension are tax-deductible.
   For example, if you contribute 10’000 € in a year, the government will tax you as if you earned 10’000€ less than you currently do.
   Yes, that’s right. You can reduce your taxable income by the amount you contribute! However, note that this only applies to taxable income in Germany.
2. Lifetime Income: Upon retirement, you’ll receive monthly pension payments in annuity (forever). This is on top of the statutory pension.
3. Flexibility: You can choose how much to contribute and how aggressively you want to invest. You can also increase, decrease, or pause your contributions anytime.
4. Protection: The basic pension offers total protection against attachment by creditors.
   In English? It means you’re shielded from seizures in many circumstances, like bankruptcy.

What’s the catch?

• Eligibility: You must live and pay taxes in Germany. Otherwise, it’s available for everyone.
• Income Limitations: There are no income limitations. But, the tax benefits make it more attractive for higher-income earners in the top tax bracket.
• Long-Term Commitment: You can’t withdraw money or cancel this basic pension policy. You can only pause your contributions (even forever, if you wish) instead of canceling.

Is the Basis pension a good choice for me?

The Basis pension is excellent for self-employed and high-income earners in Germany long term. Its tax advantages and focus on lifetime income make it perfect for increasing retirement income.

However, private pension insurance is the better alternative if you seek flexibility or pursue a career outside of Germany.

What is Riester pension insurance?

The Riester Pension adds to the social security money you get from the state pension by encouraging you to save on your own, thanks to help from the state.

Former labor minister Walter Riester introduced it in 2002, but it’s lost its luster and has found many critics.

How It Works

You contribute 4% of your annual gross income and get a yearly bonus from the government of 175€. If you have children, the government will add 300€ for each child you have.

If you contribute less than 4%, you’ll get some of the government’s contribution but not the full amount.

You also receive limited tax benefits from the money you pay into it. When people retire, they receive a regular payment for life from their Riester plan.

Problems with the Riester Pension

1. Too Complicated: Many rules and paperwork discourage many from signing up.
   Even once you’ve signed up, the plan is so complicated that it’s hard to understand how to use it best.
2. High Costs, Low Returns: Riester plans have high management fees. Over time, these fees reduce the amount of money you earn from investments, making the plan less beneficial than alternatives.
3. Questionable Effectiveness: If you commit to a Riester pension, its benefits are negligible. They do not make a big enough difference in improving retirement security. Considering all the efforts you’ll go through, it’s one of the least effective schemes for your future savings.

Is the Riester Pension a good choice for me?

In 2024, the Riester pension has many disadvantages, making it attractive only for low-income earners with at least 2-3 children.

What is Company Pension insurance?

Company pension insurance (bAV) is when employees and employers team up to help save for retirement. There are five main types of company pensions in Germany:

1. Direct Insurance
2. Pensionskasse
3. Pension Fund
4. Support Fund
5. Direct Commitment.

Direct insurance is the most common option, so let’s explore it in more detail.

How does direct insurance work?

There are two forms of direct insurance:

• Employer-financed company pension insurance: your employer covers all contributions for your future pension. This ensures you receive an extra, lifelong income funded by your employer.
• Company pension through salary conversion: If your employer does not offer the above, you can use your salary. Your contributions are subtracted from your gross pay, so you won’t have to remember to do it. On top of that, your employer must match at least 15% of the sum you invest.

What’s in it for employees?

1. Tax Benefits: Money put into company pensions lowers the amount of tax a person pays.
2. Flexibility: Occupational pension plans let employees contribute extra money to increase retirement funds.
3. Financial Security: Thanks to tax benefits and employer contributions, it’s one of the best ways to ensure you’ll live decently once you retire.

Is direct insurance a good choice for me?

In almost all cases, German occupational pensions are good for employees and employers.

They provide extra money for retirement and encourage loyalty from employees.

As retirement planning becomes more important, occupational pensions are a big part of Germany’s commitment to its workers.

Whether you’re an employee looking for job security or an employer wanting to offer good benefits, understanding and investing in company pensions is a decision for a better future.

What is private pension insurance?

Private pension insurance is a voluntary savings plan designed to build up assets for retirement. These plans offer tax benefits and flexibility in payouts.

Here’s what you need to know:

• Voluntary Savings: Participation is optional and allows you to save money for retirement.
• Tax Benefits: Contributions come with tax advantages, helping you save more.
• Flexible Payouts: You can choose between a lifelong pension or a one-time payment.

Private pension insurance is a versatile option. It’s perfect for enhancing retirement savings beyond mandatory pension schemes.

How does it work?

The private pension is like a personal savings account for retirement. You contribute money to it regularly, and over time, it grows. When you retire, you receive payments from this account. It could cover your living expenses, go on holiday, or anything you’d like.

Benefits of the private pension:

1. Tax benefits: you can choose whether you want a lifelong monthly payout, a payout next to the statutory pension, or a one-off capital payout. In general, this has substantial tax benefits when you retire. This is one of the main reasons private pensions are so efficient at preparing you for the future.
2. Flexibility: You have control over how much you contribute and how you invest your money. You can also withdraw some funds at any time for unexpected events.
3. Supplementary Income: The private pension supplements your other sources of income and helps ensure a comfortable standard of living in retirement.

What happens with my private pension if I leave Germany?

You don’t have to live in Germany to take part in your pension insurance. You only need a European bank account, and receive tax benefits worldwide.

Is a Private Pension right for me?

We recommend everyone consider private pension insurance. Well, anyone who wants flexibility and a decent standard of living in retirement is the right fit.

Conclusion

Planning for retirement in Germany involves understanding and utilizing various pension options.

While the statutory pension system is essential, supplementing it with private pensions, company schemes, or ETF saving plans enhances your financial security.

With its tax benefits and flexibility, the German private pension is a valuable tool for building additional retirement income.

Whether you’re at the beginning of your career or approaching retirement, integrating these options into your strategy will help ensure a stable and comfortable retirement.

Pension Insurance FAQ

ETFs (Exchange-Traded Funds) are a modern approach to retirement planning. They track the performance of specific indices and offer diversification and potentially higher returns than savings accounts.

ETFs are commonly used in pension plans, but you can invest in them independently.

An ETF saving plan involves making regular contributions to a portfolio of ETFs through a brokerage account. These contributions are invested in a mix of stocks and bonds, potentially growing over time to provide income in retirement.

In almost all pension products, you can choose the monthly contribution entirely. The more you contribute, the more money gets invested and the higher the payout.

We recommend contributing a total of around 10% of your income after taxes to all retirement saving plans you undertake.

This depends on the pension product you have because they work very differently.

• If you have a Basis pension and no more taxable income in Germany: you can still participate without tax benefits.
• If you have Riester Pension insurance and leave Germany: you won’t receive the bonuses the government pays, which makes the Riester pension interesting in the first place.
• If you have Private pension insurance: you don’t have to live in Germany to take part in your pension insurance. You only need a European bank account. You even receive tax benefits worldwide.

It’s possible to get your pension back. For other pension products, it depends on what you subscribe to because they work very differently.

• If you have a Basis pension: Contributions to the Basis Pension are intended to be long-term; you can’t withdraw money or cancel the policy. You can only pause your contributions for an unlimited time instead of the cancellation, and you will receive a lifelong pension when you retire.
• If you have a Riester Rente: Getting a refund is possible but not recommended. You will lose all the government bonuses you have collected over the years. And, if you have benefited from the Riester pension for tax benefits, you will have to pay them back.
• If you have a Private Pension: Yes. You can withdraw money from it. Like in every other investment product, you only have to pay taxes on the stock market returns if you withdraw money from it before you retire.