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The German pension system - the ultimate Guideline

The German Pension System: The Ultimate Guideline

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!

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