Your German Pension Options
We go to work each day for many reasons: interesting projects, good colleagues, and for that money that keeps appearing in our accounts each month. But we also choose to think of the future, and one day we will stop working – and that’s when retirement funding will become very important. Even if that’s a long way in the future, start thinking now!
This discussion on the German pension system focuses on the unique expat reality. Although expats pay into the German pension system, they may not plan to retire in Germany. Let’s explore 3 main topics:
- How is the statutory German pension structured?
- What are other pension options?
- What happens if you don’t retire in Germany?
There are three main pillars to the German pension system:
Gesetzliche Rentenversicherung (GRV) – Mandatory state retirement insurance. This is the fund which you and your employer must pay into each month. The amount you pay is statutory, 18.6% of the gross salary in 2019, the employer paying half of this. This will raise to 20% in 2025.
Betriebliche Altersversorgung (bAV) – These are private voluntary pension schemes which are available with the employer’s involvement, which allow employees to bolster their German pension contributions for retirement. The employer may match the amount you pay in part or in full as part of the benefits program.
Private pensions – these are individual pension investment plans set up through insurance providers and banks to increase your total German pension entitlement when you reach pension age.
Let’s look at: the statutory German pension system
How much does it cost?
The amount you must contribute towards your state German pension (via social security contributions) is calculated on your annual salary (including any bonuses), which your employer automatically deducts and pays along with the same amount paid by the employer to make a 50:50 contribution from both parties. The maximum contribution in 2018 was 19.5% of gross salary (9.3% by employee and 9.3% by employer). This will rise to 20% by 2025. The current contribution assessment ceiling is €5,800 per month in eastern Germany and €6,500 per month in western Germany. Those earning low incomes (less than €450 a month) are exempt from paying pension contributions.
You will see these deductions each month in your payslip.
How long do I have to pay into it?
Eligibility: To be eligible to receive a pension in Germany, you must pay into the pension for at least 60 months (5 years).
Pension age: The retirement age is 65 years old, but is projected to raise to 67 at some point. If you retire early, you are penalized by 3.6% per year before you reach the statutory retirement age.
How stable is it?
The German pension system ranks 13th in the world. However, there is some discussion around the future of the pension system. Experts project that as life expectancy rises and people have fewer children, there will not be sufficient funds in the statutory system to cover the whole pension of all retired persons. This article goes into more detail on some of the suggested reforms.
In short, it may be wise to supplement the statutory system with additional pension schemes.
BaV – an additional pension scheme
What is the BaV?
First of all – if you say “bee ay vee” – Germans won’t understand you. You must say “Bee ah FOW” – as the V is pronounce FOW in German.
It stands for Betriebliche Altersversorgung, or “Occupational Pension Scheme”. True to its name, this kind of pension is offered by your employer. Contributions by the employer may vary. You can contribute to the scheme from your pre-tax earnings. About 18 million Germans had one of these plans in 2015.
Private pension schemes
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.
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.
What if I don’t plan to retire in Germany?
Great news! You can still benefit from the German pension system.
If you work for less than 60 months in Germany:
24 months after you have left the country, you can file for a return of your statutory pension contributions. It will take about 6 months to process, but you will get your contributions sent back to you at an account you specify. To be clear: although both you and your employer were contributing, you will NOT get the employer’s contributions. Just the amount from your side.
If you work longer than 60 months:
If you worked and paid contributions in Germany for more than 60 months, you will receive a German pension after reaching the official German pensionable age. In addition to the periods of contributory employment, many other periods are considered, including:
- Child-rearing (until three years of age)
- Child raising period (up until 10 years of age)
- Schooling and university after the age of 17
- Training periods
- Times of illness and unemployment
- Times caring for relatives
For some of the times mentioned, mandatory contributions from government agencies will be paid to you in Germany, resulting in pension claims. The other periods have a positive effect on the calculation of the pension.
For example, if you raise two children in the first three years of their life in Germany while you were living in Germany (at least 60 months), you are entitled to a German pension without having had to work in Germany.
Your entitlements from your BaV may vary by plan but you should be able to either get the plans paid out or receive the entitlements at retirement age.
Depending on where you’re from, your pension in Germany may transfer to your home country’s system, or be paid out, or be paid out in addition to or deducted from your home country’s pension.
If you’re from Australia, Bosnia-Herzegovina, Canada, Chile, Israel, Japan, Macedonia, Montenegro, Morocco, Serbia, South Korea, Turkey, Tunisia, or the USA, there is a direct agreement between your country and Germany. If you are from another country, check with your social security system.