“The Germans have a good pension, so they can afford to travel around the world in their old age.” – many share this stereotype and expect comfortable social security by default. However, let's figure out what the high German pension really consists of.
Pension size in Germany
The average pension in Germany, according to forecasts of the German Pension Insurance, in 2023 will be 1543 euros per month gross with at least 45 years of work experience.
In reality, not everyone has such experience. It is also worth remembering that pension payments in Germany are subject to deductions such as health insurance, elderly care insurance (Pflege) and income tax (more details in this article).
As a result, it turns out that the majority of pensioners receive the amount less than 1000 euros (38,2% of women and 14,7% of men), even taking into account pension indexation in 2022 and 2023.
For a comfortable life, especially if you rent a house, a regular state pension may not be enough. So, let's figure out how the Germans manage to live well?
What does a good pension in Germany consist of?
Germans, as a rule, build their pension from so-called “cubes” throughout their lives, making great efforts to do so. If we slightly change the saying, then the Germans live by the principle: “Rely on the state, but don’t make a mistake yourself” and use all the opportunities, and there are quite a lot of them.
Pension programs in Germany represent an important aspect of social protection for citizens. Germany has a long history of developing its pension system, which is one of the most extensive and stable in the world.
In Germany there is a three-tier pension insurance system:
1
Die Basisvorsorge
Basic insurance, state pension
- Gesetzliche Rentenversicherung - GRV
- Basisrente/Rürup-Rente
2
Die Betriebsrente
Corporate pension, employer-subsidized funded supplementary pension
- Die betriebliche Altersversorgung - bAV
- Riester-Rente
3
Private pension provision
Private pension plans
- Fondsgebundene Lebensversicherung
- Endowment policy
- Privaterenteversicherung
Let's take a closer look, using examples:
Level one – Basic insurance, state pension (Die Basisvorsorge)
State pension (Gesetzliche Rentenversicherung - GRV)
It is compulsory for most of the working population and is paid by the state. The size of the pension depends on wages and the number of years worked. The standard retirement age in Germany is 67 years. How much does an ordinary pensioner in Germany receive in Germany? “How to find out the size of your future pension”.
- pros
- Universality: A state pension is available to almost every working person in Germany, providing a basic pension benefit for the majority of the population.
- Reliability: The state pension is a stable and reliable source of income in old age, thanks to government regulation and control.
- Cons
- Limited benefits: Due to demographic changes and economic factors, the state pension may not be enough to provide you with a comfortable retirement.
- Dependence on the economy: The state pension system depends on the current economic situation and the number of people working, which may affect the level of payments in the future.
In addition to payments for the period after retirement (old-age pension), the state offers insured persons protection in case of illness and disability, and not only to the insured persons, but also to their dependents. What types of state pensions there are can be found in the article “Special pensions from the state.”
The state pension in Germany is financed through mandatory contributions paid by employees and their employers on income (18,6%). It is important to note that the retirement age is increasing, and therefore many citizens are considering additional insurance.
Basic private pension (Basisrente / Rürup-rente)
Basic private pension (To learn more) is intended for a wider range of people, including self-employed people, freelancers, entrepreneurs, as well as doctors and lawyers. Payment can only be made in the form of a lifetime monthly pension and is made after the insured person reaches 62 years of age. Rights to a basic pension cannot be capitalized, sold, transferred or pledged.
- pros
- You can independently determine the size of the deposit.
- Contributions reduce the tax base.
- The pension is for life and can be inherited.
- Cons
- The funds cannot be returned in any other way than through pension payments for the rest of your life.
Rürup-Rente designed to provide long-term retirement security, which may be attractive to those looking to secure a stable income in retirement.
Level two – Corporate pension, employer-subsidized funded supplementary pension (Die Betriebsrente) and Riester-Rente
Riester-Rente
Program Riester-Rente (To learn more) This is a voluntary additional pension insurance with state participation.
Riester-Rente is intended for a wide range of the population, including working people, as well as spouses and children, and including middle- and low-income employees.
- pros
- Government subsidies up to 950 euros per year, tax breaks.
- Tax incentives.
- A variety of payment options, including lifetime pensions, one-time payments and other options.
- Cons
- Not available to all segments of the population, it is a long-term product - early termination can lead to significant losses.
Riester-Rente is a form of private pension savings program that is supported by the state, which makes it a fairly safe form of pension savings. It provides stable and secure financial security in retirement.
Company pension (Die betriebliche Altersversorgung - bAV)
Many companies offer their employees additional pension programs, which, on the one hand, increase employee loyalty, and on the other hand, offer significant assistance in ensuring a safe and quiet life in retirement. Such a program includes contributions from both the employee and the employer. To participate in the program, an employee must work at the company for at least 3 years.
- pros
- Contributions paid are not subject to tax and social contributions.
- It involves an individual approach and flexibility in conditions; you can choose the amount of payment, as well as the beginning and nature of pension payments.
- Cons
- Available, as a rule, only to employees, which limits its applicability to the self-employed or people with non-standard forms of employment.
Employer participation can significantly increase future pension payments. The company pension in Germany is a useful tool for saving for retirement, but its effectiveness depends on individual circumstances and decisions made by the employee and employer.
Level three – Private pension programs (Private Altersvorsorge)
Private pension plan (Fondsgebundene Lebensversicherung)
Private pension plan (To learn more) - This is a guaranteed old-age pension that will be paid for life. Your monthly contributions are invested in investment funds. You can choose them yourself. Investors benefit from rising fund share prices on global markets.
- pros
- Investment opportunities - higher returns, flexibility.
- Exemption of a significant part of pension payments from income tax.
- Flexible system - you can suspend contributions or terminate the contract, partial withdrawal of funds is possible (having children, buying a house, etc.).
- May be inherited.
- Cons
- Investment risks.
- There is no guaranteed minimum return.
The Fondgebundene Lebensversicherung allows you to receive the accumulated capital as a pension or a large one-time payment, and it can also be inherited in the event of the death of the policyholder. This product is effective because it applies a compound interest rate that gives the best results for long-term investing.
How to get a high pension?
As pension plans continue to evolve in Germany, you should monitor changes in legislation and consider a variety of options to ensure financial security in retirement.
If you have recently arrived in Germany and have not yet taken care of this issue, then it is time to think about your future pension. Then you won’t have to be content with the little that the state offers.
If you have any questions or want to choose your own individual pension plan, we are always ready to help you.
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Video: What has changed in pensions in 2024 in Germany?
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