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Tag: Pension system

Self-Employed Pension in Germany for Expats

Posted on by Clara

Table of Contents

Pension planning is a crucial aspect of financial management for self-employed expats living in Germany. Unlike employees who benefit from employer contributions to their pension plans, self-employed individuals must take full responsibility for their retirement savings. For expats, the process can be even more complex due to differences in the pension systems across countries. In this article, we’re going to explain the essentials you need to know to make informed decisions and secure a financial future with your self-employed pension in Germany.

1. Eligibility For Self-Employed Pension In Germany

Participation in the public pension scheme is not mandatory for all self-employed individuals. For expats, the first step in pension planning is understanding whether they are eligible for this system and the benefits it offers. While many self-employed individuals in Germany can voluntarily opt into the public pension system, the rules can vary depending on the type of self-employment. Expats should carefully review these rules to determine if this option aligns with their retirement goals. Those who opt-in will need to contribute a percentage of their income to the pension system, with the potential to receive pension payments upon reaching retirement age through their self-employed pension in Germany.

 

2. Pension Options for Self-Employed Expats

There are different options for expats considering self-employed pension plans in Germany.

Voluntary Participation in the German Public Pension Scheme 

One option available to self-employed expats is voluntary participation in the German public pension scheme. This can be particularly advantageous for those who plan to stay in Germany long-term. The main benefit of this option is the security of receiving a guaranteed pension payout upon retirement. However, the downside is that contributions can be relatively high, and the system is not very flexible. You can find further information on German pension schemes on this link.
Coins, hand and notebook
Happy girl smiling with her computer

Private Pension Plans 

For expats who prefer more control over their retirement savings, private pension plans are a viable alternative. These plans, which include Riester and Rürup pensions, offer tax benefits and the potential for higher returns compared to the public pension system. Each type of plan has its own advantages and disadvantages, which expats should consider based on their financial situation and retirement goals when setting up a self-employed pension in Germany. On this link you will find more information on the different private pension plans we offer.

International Pension Plans 

Expats who anticipate moving to another country in the future may find international pension plans more suitable. These plans are designed to be portable, allowing the policyholder to continue contributing and receiving benefits regardless of their location. This flexibility makes international pension plans an attractive option for globally mobile individuals, which can complement a self-employed pension in Germany.

Self-Invested Pension Plans (SIPPs)

 Self-Invested Pension Plans (SIPPs) are a type of personal pension plan that offers individuals greater control over how their retirement funds are invested. SIPPs are popular among self-employed expats who prefer to manage their own investments or who want access to a wider range of investment options than those available through traditional pension plans. These can be a critical part of a self-employed pension strategy in Germany. SIPPs allow you to choose and manage a variety of investments within your pension plan, including stocks, bonds, mutual funds, and property. This flexibility can potentially lead to higher returns, but it also requires a certain level of financial knowledge and a willingness to actively manage the investments.

Woman with a computer using a calculator
Figures representing a family, a house and a car

Occupational Pensions

 While occupational pensions are typically associated with employees, self-employed individuals in Germany have the option to set up their own occupational pension schemes. This can be particularly beneficial for those who run a business with employees or who anticipate growing their business in the future.

Occupational pensions for the self-employed involve setting up a pension scheme that you and potentially your employees can contribute to. These schemes can provide significant tax advantages, as contributions may be tax-deductible. Additionally, occupational pensions can be an attractive benefit if you have employees, helping to attract and retain talent.

3. Finding Affordable Pension Plans

These are the key factors you should consider when choosing a provider for your self-employed pension in Germany:

  • Fees and charges: Analyze the fee structure, including management fees, administration fees, and any other charges that may apply. Lower fees can have a significant impact on your pension savings over time.
  • Flexibility: Consider the flexibility of the plan in terms of contribution amounts, withdrawal options, and the ability to switch investments within the plan. This is particularly important for expats who may need to adapt their self-employed pension in Germany to changing circumstances.
  • Customer service: Evaluate the quality of customer service provided by the pension provider. Reliable and accessible customer support can make managing your pension plan much easier, especially if you encounter issues or need assistance with your account.
  • Tax efficiency: Assess the tax benefits associated with each provider’s plans, as some may offer better tax advantages than others, particularly if you are contributing from abroad or planning to retire outside of Germany. You can also check out the German Federal Ministry of Finance’s official website, which includes information on tax regulations and financial planning.
Coins on a table

Utilizing Financial Advisors

Given the complexity of pension planning, especially for expats, consulting a financial advisor can be a wise decision. An experienced advisor can help you navigate the various pension options, optimize your tax situation, and ensure that your plan aligns with your long-term financial goals regarding your self-employed pension in Germany.
Not all financial advisors have experience working with expats, so it’s crucial to find one who understands the unique challenges you face, such as dealing with multiple currencies, tax jurisdictions and the possibility of future relocations. An advisor with this expertise can help you choose a pension plan that is both tax-efficient and flexible, ensuring it can adapt to your changing circumstances.

4. Common Mistakes to Avoid

Not Starting Early 

One of the biggest mistakes self-employed expats make is delaying their pension planning. The earlier you start, the more time your investments have to grow, and the more financially secure you will be in retirement. Waiting too long can limit your options and require larger contributions to meet your retirement goals for a self-employed pension in Germany.

Ignoring Currency Fluctuations 

For expats, currency fluctuations can have a significant impact on pension savings, especially if you plan to retire in a country with a different currency. It’s important to consider how exchange rates might affect your pension’s value and explore options to mitigate this risk and protect your self-employed pension in Germany, such as holding pension assets in multiple currencies.

Overlooking Tax Implications 

Tax considerations are a crucial part of pension planning, but they can be complex for expats due to different tax laws in Germany and their home countries. Overlooking tax implications can lead to unexpected liabilities or missed opportunities for tax relief. It’s advisable to seek professional advice to ensure your pension plan is tax-efficient.

Not Considering Future Mobility 

For many expats, the possibility of moving to another country in the future is a reality. Failing to consider future mobility can significantly impact your pension planning. If you plan to relocate, you’ll need to ensure that your pension plan is portable and that it aligns with the pension regulations of your potential future country of residence. International pension plans or SIPPs, which offer greater flexibility, might be better suited for those who anticipate moving between countries.

In conclusion, by understanding your options and taking proactive steps to secure your financial future, you can enjoy the benefits of living in Germany while ensuring a comfortable and well-funded retirement. Remember, the sooner you start, the better positioned you will be to achieve your retirement goals with your self-employed pension in Germany. If you require any further guidance or assistance, please don’t hesitate to reach out to us. We now have a live chat feature available on every page! If you have any questions, just click to start a conversation, and our team will be happy to assist you shortly.

What our clients say about our services

GOWRI S.
GOWRI S.
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I have had an incredible experience with Dabar Reimer. She is very well experienced and was able to provide solutions for multiple scenarios. I am very thank full to her and highly recommend having a discussion with Dabar before choosing your next insurance policy.
Grant F.
Grant F.
Proven Expert Review
They have been so patient and thorough with helping during every step. I couldn’t imagine doing this on my own!
Chew Teck S.
Chew Teck S.
Proven Expert Review
My agent, Anja Lampert is super friendly and helpful throughout the entire process. Excellent service provided.
Anonymously
Anonymously
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The support I have received from Dabar was outstanding. She was always available to answer all my questions, and helped me out through the whole process. Thank you so much!
Nikos
Nikos
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I have appointed with Alex as the to-go person for all matters. Honestly he is providing the best service someone can get in Germany, solving problems literally in minutes! Highly recommend MW Expat Solution!
Anonymously
Anonymously
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It was a brilliant experience with MW expat. Right from filling up my details online, receiving a prompt call to book an appointment for detailed discussions of my needs to finally having a zoom call to talk to an advisor face to face was quick efficient, and re-assuring. I had the privilege to talk to Adriana Gonzalez, who was nothing short of brilliant. She was extremely composed, utterly professional, and very helpful.
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German Pension Payout: What You Can Expect to Receive

Posted on by Clara

Table of Contents

Germany’s pension system is widely recognized for its robustness and reliability, providing financial stability to retirees. However, planning for retirement in a new country can be overwhelming, especially when it comes to understanding the local pension system and what your German pension payout might be.

If you’re an expat in Germany, figuring out how much you’ll receive from the German pension payout can feel like a puzzle. In this article, we will delve into different aspects of the German pension system, helping you understand contributions and potential payouts so that you can confidently plan for your future.

1. Understanding the German pension Payout system

The German pension system, known as the Deutsche Rentenversicherung, is primarily funded through mandatory contributions from employees and employers. It operates on a pay-as-you-go basis, where current workers fund the pensions of current retirees. As you may already know, the main types of pensions within the pension system are the public or state pension (Gesetzliche Rentenversicherung, GRV), company pensions (Betriebliche Altersvorsorge, bAV), and private pensions (Private Altersvorsorge). Understanding these components is crucial to estimating your future German pension payout. You can read further information on pension plans in Germany on this link. 

People using a computer to understand factors influencing pension payouts

2. Factors influencing pension payouts

In Germany, pensions are commonly disbursed monthly to individuals who have reached the appropriate retirement age. The administration of these payments falls under the purview of the Deutsche Rentenversicherung, the country’s pension insurance agency. Pensions are typically transferred directly into the recipient’s bank account, forming the foundation of your German pension payout.

The following factors determine the amount of pension one receives within the German pension system:

1. Earnings. The higher your earnings, the higher your contributions, and consequently, the higher your pension payout.

2. Contribution years. The number of years you have contributed to the pension system significantly affects your final German pension payout.

3. Pension points. Throughout your career, you accumulate pension points based on your income relative to the national average income. These points are crucial in calculating your pension.

4. Retirement age. The standard retirement age in Germany is gradually increasing from 65 to 67. Luckily, the German pension system requires everyone to chip in with a mandatory pension contribution. This contribution, known as the Gesetzliche Rentenversicherung, amounts to 18.6% of your gross income every month (as of June 2024). Early retirement is possible but results in reduced benefits.

3. Calculating the German state pension

The calculation of the state pension in Germany is based on a formula that includes the number of pension points accumulated, the pension factor (which depends on the type of pension) and the current pension value. Here’s a simplified breakdown:

  • Pension points. Each year, you earn points based on your income compared to the average income, which directly impacts your German pension payout.
  • Pension factor. Generally, it is 1.0 for a standard old-age pension.
  • Current pension value. This is the monthly pension amount for one pension point. As of 2024, the value is approximately €36.02 in Western Germany and €35.52 in Eastern Germany.

Example calculation: If you have accumulated 45 pension points and retire with a standard pension:

  • 45 points x €36.02 (West) = €1,620.90 per month.

Moreover, pensions in Germany are subject to income tax. The taxable portion depends on the year of retirement, with a gradual increase in the taxable percentage. For those retiring in 2024, approximately 84% of the pension is taxable.

We highly recommend you to check out the Bundesregierung website (official Federal Government website) to request or receive your annual pension information and stay informed about your personal situation.

Old couple riding a bike

4. The Impact of Demographic Changes on the Pension System

Germany, like many other countries, is facing significant demographic changes that will impact its pension system and by extension, your German pension payout. The population is aging, with a growing number of retirees and a shrinking workforce to support them. This shift raises concerns about the sustainability of the pay-as-you-go system in the long term.

 

  • Aging population. As the population ages, there will be more retirees relying on pensions, while the number of working-age individuals contributing to the system decreases. This demographic shift could lead to increased financial pressure on the pension system.
  • Longevity. People are living longer, which means they will be drawing pensions for a more extended period, potentially reducing the amount of future German pension payouts.
  • Policy responses. To address these challenges, Germany has implemented reforms such as gradually increasing the retirement age and encouraging private pension savings. These measures aim to ensure the long-term sustainability of the pension system despite demographic pressures.

5. Recent Pension Increase: July 2024

On July 1, 2024, German pensions increased by 4.57%, marking the third consecutive year of significant pension growth. This increase, driven by rising wages and strong labor market conditions, will be applied uniformly across all federal states, eliminating the historical disparity between Eastern and Western Germany. The adjustment, which exceeds the projected inflation rate of 2.8% for 2024, reflects the favorable wage agreements that have contributed to this positive development.

Federal Employment Minister Hubertus Heil highlighted the importance of this increase, noting that it symbolizes a key milestone in the equalization of pension rates across the country. Previously, pension rates in former East Germany were lower due to different calculation methods, but legislative changes initiated in 2017 have gradually leveled these rates. The 2024 adjustment brings the pension rates fully in line across all regions, a year earlier than originally planned.

This upcoming increase will benefit approximately 21 million pensioners in Germany, providing additional financial security by enhancing the German pension payout in a time of rising living costs.

Pensions increase

6. Special Considerations For Expats

For expats, there are a few important things to remember when it comes to pensions:

  1. Bilateral agreements. Germany has agreements with many countries to avoid double contributions and to ensure that periods of contribution in different countries can be added together within the pension system.
  2. Residency. Generally, you must reside in Germany to claim the full pension. However, expats from EU/EEA countries and some other nations can receive their German pension payout abroad. For more detailed information on how these agreements apply specifically to Germany, you can visit the European Commission’s official website here.
  3. Voluntary contributions. Expats who have not completed enough contribution years may opt to make voluntary contributions to enhance their pension entitlement.

With this information in mind, you can better understand how the German pension system works and what to expect in terms of your pension payout. By familiarizing yourself with the key factors that influence pension payouts, such as earnings, contribution years and pension points, you will be able to navigate the complexities of the system. 

If you need personal guidance, feel free to reach out to us. Our pension experts will assist you in helping you make informed decisions and secure a bright future, ensuring your German pension payout meets your retirement needs. Arrange a free consultation now! We also have a live chat feature available on every page. If you have any questions, just click to start a conversation, and our team will be happy to assist you shortly.” 

What our clients say about our services

GOWRI S.
GOWRI S.
Proven Expert Review
I have had an incredible experience with Dabar Reimer. She is very well experienced and was able to provide solutions for multiple scenarios. I am very thank full to her and highly recommend having a discussion with Dabar before choosing your next insurance policy.
Grant F.
Grant F.
Proven Expert Review
They have been so patient and thorough with helping during every step. I couldn’t imagine doing this on my own!
Chew Teck S.
Chew Teck S.
Proven Expert Review
My agent, Anja Lampert is super friendly and helpful throughout the entire process. Excellent service provided.
Anonymously
Anonymously
Proven Expert Review
The support I have received from Dabar was outstanding. She was always available to answer all my questions, and helped me out through the whole process. Thank you so much!
Nikos
Nikos
Proven Expert Review
I have appointed with Alex as the to-go person for all matters. Honestly he is providing the best service someone can get in Germany, solving problems literally in minutes! Highly recommend MW Expat Solution!
Anonymously
Anonymously
Proven Expert Review
It was a brilliant experience with MW expat. Right from filling up my details online, receiving a prompt call to book an appointment for detailed discussions of my needs to finally having a zoom call to talk to an advisor face to face was quick efficient, and re-assuring. I had the privilege to talk to Adriana Gonzalez, who was nothing short of brilliant. She was extremely composed, utterly professional, and very helpful.
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Secure your future abroad with tailored insurance & pension plans

Get expert advice on the best solutions for expats – personalized to fit your unique needs. Start planning today!

The German Pension System: The Ultimate Guideline

Posted on by MW Expat

As an expat coming to Germany, we understand that the German pension system can be hard to understand. If you come to work in the country and are employed, you will contribute to the pension system, just like every other citizen. Does this sound too confusing? Read this article to better understand how the pension system works in Germany for expats!

What is the German pension age?

The German pension system is experiencing some major changes in terms of retirement age. Nowadays, the official retirement age for women is 65 years and 67 years for men. Over a transition period from 2012 to 2029, this will gradually climb up to official retirement age. In addition, an early retirement is possible in Germany if you have worked for at least 35 years. However, for every year that you retire earlier than planned, 3.6% of your pension will be deducted. At the moment, 4 employees finance 1 retiree in Germany.

First step: taxation

First of all, you should be aware that all pensions are taxable in Germany. What does this mean? This means that you must declare all pension payments you get to the tax office, whether it is in Germany or in a foreign country. These payments may include a state pension, occupational pension scheme, Riester pension or private pension insurance.

In some cases, your pension could be subject to double taxation, which occurs when both Germany and your place of residency tax your pension income. As a result, you must determine whether the two nations have a double tax agreement in place.

In addition, as soon as you’ve paid into your pension for more than five years, you will receive an annual pension information letter with your pension balance and further information.

What is a mandatory state pension?

In Germany, the mandatory state pension (statutory pension) is known as the Gesetzliche Rentenversicherung (GRV). Employees contribute to the German state pension through payments to the German social security, where a proportion of the wage is paid. Instead of being saved or invested, these compulsory contributions are reallocated to pay for existing pensioners. The system is subsidized through the German state.

For expats who decide to leave Germany, two scenarios may occur. On the one hand, it might be possible to get a return on your half of the pension contributions to the state. If you have paid into the German pension scheme for less than five years, you can get half of your saved retirement back (only half of it, since 50% is paid by the employee and 50% by the employer; you can only get the amount paid by the employee back). You can receive this right away, but you have to submit a request for it.

On the other hand, if you have contributed to the German pension system for more than five years, you have to wait until you reach retirement age before you receive your German pension abroad. In this case, you will get the full retirement amount you saved for the time that you were contributing into the system.

However, the statutory pension insurance is not enough and it is usually advised to supplement it with a private pension fund. Contact us for a free consultation today to find out more information about this.

What is a Riester pension?

The Riester pension is one of the most complex parts of the German pension system. The Riester pension is a state-subsidised private pension plan. This is how it works: as an individual, you contribute to a private pension contract, bank savings plan or fund during your active working life. This way, you get state allowances, tax advantages and a monthly pension for the rest of your life.

What happens if you are still contributing with your Riester pension and you decide to leave Germany? Since these financial benefits are directly linked to your residency in the country, you are no longer eligible for additional subsidies and allowances from the German government. If you move to another EU country, you will not be required to repay anything and will be able to claim the benefits of the plan when you retire.

However, for non-EU citizens, the German government would expect you to repay any state contributions made to your Riester account by the time you retire. Taking this into account, the Riester pension system is only convenient for people who plan to stay in Europe for their whole lives.

What is a basis pension (Rürup) and BAV?

The basis pension, sometimes known as the Rürup pension, is named after its “creator”, Prof. Rürup. The Rürup pension was established to allow self-employed people and freelancers to save for retirement in the same way that employees do.

Moreover, a company pension scheme (bAV = betriebliche Altersvorsorge in German) is the creation of a supplementary pension through the employer from contributions of the employer, the employee, or both combined.

For expats who leave Germany, we have good news: both pensions can be transferred abroad.

What is a private pension insurance?

The private pension insurance (Private Rentenversicherung) is made up of individual pension investment plans set up by banks and insurance companies to raise your overall German pension entitlement when you reach the retirement age. There are good news for expats who leave the country: you can get your private pension in every foreign country around the world without any complications or deductions.

 

We hope that this article helped you better understand the way the German pension system functions and how you can take advantage of it as an expat. If you wish to learn more information concerning your personal options, contact us here!