What happens to your German pension if you move abroad?
Plenty of expats come to work in Germany for a limited time only. But since pension insurance is mandatory, most contribute to at least one German pension while they’re here. When they move abroad, what happens to those contributions? Retirement investment app Horizon65 explains what you need to know
Anyone who works in Germany will sooner rather than later be confronted with the complex and not always easy to understand system of old-age provisions and pension insurance. And while its three tiers - state pensions, subsidised pensions and private pensions - are complicated enough when you’re in Germany, they become even more so if you ever decide to leave the federal republic and draw your pension elsewhere.
If you’re planning to spend your retirement outside the federal republic, you will have undoubtedly already discovered that the topic of what happens to your pension is rarely discussed. In this article, we look at some of the common problems, hurdles and peculiarities that expats who move abroad face when it comes to German pensions.
Check the taxation
First things first: you should know that all pensions are taxable in Germany. Regardless of whether it’s a state pension, occupational pension scheme, Riester pension or private pension insurance, all pension benefits you might receive - in Germany or abroad - have to be reported to the tax office.
In a worst-case scenario, this could mean that you find your pension subject to double taxation - which is when both Germany and your country of residence demand taxes on your pension income.
For this reason, it is strongly recommended that you find out if there is a tax treaty between the two countries. These treaties regulate which country has the right to tax income and how it is administered. You can check the Federal Ministry of Finance’s website for more information on tax treaties.
It’s also worth bearing in mind that, if you plan to stay abroad permanently (longer than six months), you will be subject to unlimited tax liability. This means that you don’t get a basic allowance and have your income taxed from the first euro. You also do not get to take advantage of any of the allowances or deductions afforded to German residents, meaning your tax burden may be higher.
What happens to your state pension?
The special thing about the state pension scheme is that it is mandatory in Germany. While all other types of pension accruals are the result of a conscious investment decision, the state pension is a compulsory contribution. For the vast majority of employees, therefore, it is unavoidable.
If you do later decide to leave Germany, one of two things will happen to your contributions to the state pension scheme.
For a very limited group, it is possible to have your pension contributions refunded. This includes you if you have paid into the pension scheme for less than five years but have not yet completed the so-called qualifying period and are not entitled to a pension. This option is normally only open to non-EU citizens.
If you have paid in for more than five years, then you have no choice but to wait until retirement age and start drawing your German pension abroad. The good news is that it’s not a problem to have your pension transferred to a foreign bank account - accrued pension entitlements are independent of your place of residence and remain so for life. Wherever you live, you can continue to receive the money and use it to fund your retirement.
What about Riester pensions?
The Riester pension is a very interesting product, which is suitable for many different people in many different circumstances. Unfortunately, this versatility comes at a price: a very high level of complexity. This is also a disadvantage when it comes to moving abroad.
Anyone who is still in the contribution phase with their Riester pension and then leaves Germany is no longer entitled to receive further subsidies and allowances from the German state, as these financial benefits are tied to your residency in Germany.
What happens to your contributions and the financial benefits you have received from the government depends on your destination after Germany. Anyone who moves to another EU country or to the extended European Economic Area will not be asked to pay anything back and can cash out the scheme when they retire.
Things are different if you move outside of the EU. In this situation, the German government would ask you to pay back any state top-ups you received into your Riester account - at the latest, by the time you retire. This means that the Riester scheme loses one of the main things that makes it profitable. It’s therefore only suitable for people who want to spend their whole lives in Europe. Anyone planning their retirement elsewhere should distance themselves from this system.
Basic pension (Rürup) and bAV
Pensions from company pension schemes (bAV) and the basic pension (Rürup) are handled in a very similar way to state pension benefits.
Contributions that have already been made are practically impossible to get back in both cases. Instead, you will (when you reach retirement age) acquire a pension entitlement that remains independent of your place of residence.
Since both variants work with tax advantages when paying in and not via allowances, the payment of pension benefits is also less complicated: it is possible to have both pensions transferred abroad.
Private pension insurance
Probably the simplest and clearest form of pension is the so-called private pension insurance (Private Rentenversicherung). Since this simply involves a contract between the saver and a financial institution, government requirements are reduced to a minimum.
Caution is only required with the exact terms of the contract, as these can differ significantly depending on the provider. However, your private pension can eventually be paid out almost anywhere in the world without any problems or deductions.
Horizon65 helps you find a private pension plan that is tailored to your needs and goals, even if you move abroad. Specially for IamExpat readers, they are offering a free consultation to help you discover what’s possible.