Germany’s pension system consistently ranks highly among pension systems worldwide. This ranking is also steadily improving as Germany's government works to reform and streamline its pension system.
Faced with an ageing population and an increasingly unwieldy pension bill, since 2002 the German federal government has enacted multiple reforms to the pension system in order to ensure its long-term efficiency and affordability. This includes gradually increasing the statutory retirement age and reducing maximum state pension payments.
The German pension system
The German pension system combines a pay-as-you-go system, in which the working population pays for pensioners’ benefits, with supplementary pension plans. In these supplementary schemes, individuals (either independently or through an occupational scheme) contribute to pension plans to “top up” what they receive from the state pension. These different models therefore make up the three pillars of the German pension system.
Pillar 1: The statutory pension insurance system (gesetzliche Rentenversicherung)
The statutory pension insurance benefit (RV) is paid out to individuals from the age of 65 and provides basic payments of around 70% of your working net income. There is also a means-tested safety net for low-income pensioners.
Since 2005, all regional and local branches of the German public pension insurance system have been brought under the unified title Deutsche Rentenversicherung.
Contributions to public retirement insurance
Participation in RV is mandatory for anyone working in Germany (and many self-employed workers as well), with each employee assessed based on annual earnings. Everyone must contribute 18.7% (employer and employee each bear a 9.35% contribution) of their net salary up to a maximum contribution ceiling (Beitragsbemessungsgrenze).
As of 2020, this monthly contribution ceiling is 6.900 euros in West Germany and 6.450 euros in East Germany. This disparity is in part due to historically lower wages in the former GDR; the federal government has pledged to even out contributions by 2024.
Once you are enrolled in the statutory pension scheme, you will receive a unique social security ID (Sozialversicherungsausweis). Whenever you start a new job, you will need to provide your employer with this number, so that they can keep track of all your pension contributions to date.
Who is eligible for the state pension?
In order to be eligible to receive a German state pension, you need to have been working for a minimum of five years in Germany. The amount of RV you receive depends on the amount of contributions you have built up during your working life in Germany. As well as time spent working, alternative situations are also considered contributory periods, such as:
- Time taken out to raise a child
- Education and training
- Periods of illness or sustained unemployment
- Time spent caring for relatives
In these instances, pension contributions will be taken from any government benefits you are entitled to. These periods of time can therefore count towards the minimum five-year requirement.
How much state pension will I receive?
A year’s contributions at the average earnings of all contributors (37.873 euros in 2018) earns one “pension point” (Entgeltpunkt). Contributions based on a lower or higher income earn proportionately less or more pension points. When you retire, your pension points are summed up to calculate your pension benefits. If you choose to retire early or late, this will make your monthly pension payments go down or up.
Compulsory Pension Health Insurance (Krankenversicherung der Rentner)
Usually, once you start to claim your German pension you must start paying for compulsory pensioners’ health insurance. This may be supplemented by the government and it will be deducted directly from your pension payments. How much you pay depends on the amount of pension benefit payments you receive.
Pillar 2: Company pensions (betriebliche Altersvorsorge)
The second component of the German pension system is collective pension schemes, to which workers contribute through their employers. Designed as a supplement to the state pension plan, company pensions are becoming increasingly popular in Germany, with around 60% of the population participating in one.
It is not compulsory for employers to offer a pension scheme, but government subsidies and tax breaks make them an attractive option. These schemes are either managed by companies themselves, or pension associations operating on behalf of multiple companies.
The different types of company pension schemes
There are five common types of company pensions in Germany:
Direct insurance (Direktversicherung)
The employer arranges a life insurance and pension policy for the worker. The pension is then paid by the life insurance company.
Direct grant (Direktzusage)
The employer pledges to provide future pension benefit payments for the employee.
Support fund (Unterstützungskasse)
Some companies (usually the larger ones) have their own pension schemes that pay benefits out to employees upon retirement.
Pension company (Pensionskasse)
The employer arranges contributions to a pension scheme operated by an association specialising in company pensions. The association then pays the employee’s pension.
Pension fund (Pensionsfonds)
The company founds its own pension scheme. The main difference is that these schemes, unlike other company schemes, often invest large amounts of the contributions in stocks and shares.
Company pension contributions
Contributions (typically 3-15% of your monthly gross salary) are usually paid by your employer directly into the pension fund from your salary. As it is paid before income tax, you receive a tax advantage. Your employer will also usually “top up” your contributions. The amount you and your employer contribute depends on the type of pension scheme they operate.
Company pension benefits
The amount of pension you can withdraw when you retire depends on how long you have been contributing and what your salary was. Company pension payments are taxable. The German Federal Government has ensured through laws that all contributions to company pension schemes are protected, even in the case of company insolvency.
Pillar 3: Private German pensions (private Altersvorsorge)
The third component of the German pension system is private pension plans set up through banks and insurance companies. The federal government provides incentives such as bonuses and tax incentives to encourage the German population to contribute. If you are considering starting a private German pension, it would also be worth consulting with a financial consultant to make the most of the incentives on offer.
After a slow beginning since their inception in the early 2000s, these private plans are steadily gaining popularity. Broadly, there are two types of private pension plans in Germany:
Riester Pension (Riester-Rente)
Introduced in 2002, the Riester pension plan is designed as a “top up” to the state pension, to mitigate any loss of income caused by pension reforms. The state promotes the Riester plan through bonuses and tax benefits.
Who is eligible for the Riester pension?
As a general rule, anyone who contributes to the state pension insurance scheme is entitled to set up an additional pension provision through the Riester plan. This includes:
- Workers paying German income tax
- Self-employed workers who are contributing to the state pension plan
- Anyone receiving unemployment benefits
- Military conscripts
- Civil servants
- Anyone with a permanent disability
Riester pension contributions
To exact maximum benefits from the Riester pension plan, contributors should contribute a minimum of 4% of their yearly income (up to a maximum of 2.100 euros). If you do this, each year the government adds a 175 euro bonus, plus 300 euros for each child born after 2008 (or 185 euros for children born before 2008).
Contributions are also classified as special expenses for tax purposes, making them tax deductible in the annual income tax return (up to 2.100 euros per year). If you start contributing before the age of 25, you also receive a special one-off bonus of 200 euros.
Riester pension benefits
You can begin withdrawing your pension payments (subject to income tax) at age 60. All contributions to the plan are fully protected by the law from legal claims and are guaranteed to you upon retirement. If you choose, you can also take a lump sum payout.
Rürup Pension (Rürup-Rente)
The Rürup pension plan was introduced in 2005 for anyone who does not contribute to state pensions and is not eligible for a Riester pension, usually freelancers and business-owners. Developed by economist Bernd Rürup, the plan (also known as Basis-Rente) is intended to provide self-starters with at least basic provision in old age. The state supports the scheme through tax benefits.
Who is eligible for the Rürup pension?
In theory, anyone can contribute to a Rürup plan. However, it was designed especially with the following groups in mind:
- Self-employed workers
- High-income earners
Contributions to Rürup pension
Generally, individuals decide how much they wish to contribute to the plan. Although the government does not pay out bonuses, they promote the Rürup plan through tax incentives. Contributions to the scheme (up to a maximum of 23.712 euros per year in 2018) qualify as special expenses for tax purposes. Currently, 86% of contributions are tax deductible; this is rising by 2% up to 100% in 2025. However, once you start collecting benefit payments (at age 62 at the earliest), they are up to 100% taxable.
Rürup pension benefits
Contributors are guaranteed a life-long pension; the benefit payments cannot be reduced even if you are, for example, collecting unemployment benefits. The money invested in Rürup schemes is also legally protected from legal claims or attachments. However, it cannot be passed on or inherited in the case of your death.
Private pension insurance providers in Germany
The following companies offer private pension plans in Germany:
- Cosmos Direkt
Retirement age in Germany
Like many other countries, Germany has been gradually pushing back the statutory retirement age in an attempt to improve the pension system’s long-term sustainability.
Currently, the retirement age in Germany is 65 years and seven months. Recent legislation ruled that by 2023 the retirement age will go up to 66. Thereafter, the retirement age will increase by two months each year, until 2029, when it will reach 67.
Exceptions are made for anyone who has made pension contributions for 45 years, making it possible to retire at the age of 63.
Early retirement in Germany
It is possible to retire early in Germany, as long as you have made contributions for at least 35 years. If you choose to take early retirement, the number of months you have left until you reach retirement age are deducted from your pension entitlement. This is what is known as the age factor (Zugangsfaktor) and results in around a 3,6% reduction in your pension entitlement for each missing year.
If you wish, you can also choose to retire later; the positive impact on your age factor and ongoing contributions has the potential to substantially increase your pension benefits.
German pensions & Living abroad
It is possible to receive German pension benefits if you move abroad. The amount you receive depends on how long you contributed for, what your salary was, and at what age you retire. If you only worked for a short time in Germany, you may also be entitled to a refund.
Pension contribution refunds
If you move abroad, you can have your pension payments refunded if you have contributed for less than five years. Usually, you must have been abroad for more than 24 months since you last made pension contributions in Germany before a refund can be issued. If you have contributed to your state pension for more than five years and move abroad, it is not possible to claim a refund. Instead, you will have to wait until statutory retirement age, when you can start claiming your German pension.
Can I contribute to my German pension from abroad?
If you move abroad, you will no longer contribute to the statutory pension through income tax and will therefore stop accruing pension points. It is not usually possible to continue contributing to company or private pension plans from abroad either.
If you have been contributing to a German pension plan, either state, company, or private, it is important to inform your pension provider of your relocation as soon as possible. They will be able to advise you on which actions to take to prevent you from unnecessarily missing out on future entitlements.
Can I receive my German pension abroad?
Once you reach the German statutory retirement age, you can start claiming your state and private pensions from abroad. It may also be possible to claim a company pension from abroad, but you should check with your employer. As with any pension, the amount you receive will be determined by how long you contributed for.
Your pension benefits will usually be paid into a German bank account for you to transfer to your foreign bank account. The cost of the transfer is covered by Deutsche Rentenversicherung. You can also have the German pension paid into your bank account if your bank is in one of the SEPA countries.
In certain cases, moving abroad may affect the amount of pension paid out to you. The amount of tax you pay on your pension depends on the arrangement Germany has with your country of residence. If you are moving away from Germany, it is best to contact the Deutsche Rentenversicherung as soon as possible to find out how this might affect future pension benefits.
It is common for expats to lose track of the pension rights they have accumulated when they move from country to country. Pension funds cannot be relied upon to be active in chasing you up, so it is important to stay on top of your German pension administration.
How much do I have in my pension fund?
To find out what pension benefits you have accumulated in your various pension schemes, you can contact your scheme provider or check the annual statement they send to you. You can also check your salary slip to see what contributions you have made.
German pensions in a nutshell
If you have worked in Germany for more than five years, you will receive a state pension (Pillar 1) proportional to the value of the contributions you made. Theoretically, you can receive this pension anywhere in the world, but your location may impact the payments you receive. If you leave Germany before you have made five years’ worth of contributions, you are entitled to a refund.
You may also receive pension benefits from company pension funds (Pillar 2) and private pension plans (Pillar 3), depending on whether you have contributed to one or both of these. The amount you receive depends on how much you have contributed and for how long. It is usually possible to receive a private pension from abroad, but receiving or contributing to a company pension abroad depends on your individual employer.