After many years at work, many pensioners are looking forward to a well-deserved retirement. However, financial worries can overshadow this golden period of life. A clear understanding of the German pension system, especially for expats, can help alleviate some of these money worries.
Historically, pensioners have benefited from a generous pension plan in Germany. However, due to an aging population and a pay-as-you-go system where the working population supports pensioners, many people now have to consider alternative retirement strategies beyond the German state pension. Despite these challenges, the German pension system continues to rank highly among the world’s pension systems and has been continuously improved.
Due to the aging population and rising pension costs, the German government has implemented several reforms since 2002 to ensure the long-term efficiency and affordability of the German pension system. These changes include gradually raising the statutory retirement age and reducing the maximum state pension payments. In this blog post, we will explore the intricacies of the German pension system and provide valuable insight and guidance for those seeking a secure and worry-free retirement.
Key Points
- The German state pension system is a mandatory insurance for employees.
- Contributions are shared between employees and employers.
- Eligibility for a pension requires a minimum of five years of contributions.
- The pension amount depends on the total contributions made during the working life.
The German pension system
The German pension system is designed to support pensioners financially and ensure they have a decent standard of living. This comprehensive system consists of various components, including the statutory pension, occupational pension and private pension insurance. It is important for expats and foreign nationals living in Germany to understand the intricacies of the German pension system so that they can use it effectively and benefit from it.
Pillar 1: The Statutory Pension Plan in Germany (Gesetzliche Rentenversicherung)
The three-pillar model forms the basis of the German pension system and offers pensioners a wide range of financial security. The first pillar is the statutory pension, a compulsory state program financed by contributions from employees, employers and the state. It comprises various benefits such as old-age pensions, disability pensions and survivors’ pensions.
The benefits of the pension insurance in Germany are paid on reaching retirement age and provide a basic pension of around 70 percent of net income. There is also a safety net for low-income pensioners.
Since 2005, all regional and local branches of German pension insurance have been united under the name Deutsche Rentenversicherung“.
Pillar 2: The company pensions (Betriebliche Altersvorsorge)
The second pillar of the German pension system focuses on company pension schemes, i.e. employer-financed pension plans designed to supplement the statutory pension. These company pension plans are offered by many German companies as part of the remuneration package for their employees. Although it is not compulsory for employers to offer a pension plan, government subsidies and tax breaks make them attractive to both employers and employees.
In Germany, there are five common types of company pension scheme: direct insurance, direct commitment, provident fund, pension fund and pension fund. Each type of pension scheme works differently, but all are designed to provide employees with an additional retirement income.
The contributions for company pension plans are generally between 3 and 15 percent of an employee’s gross monthly salary and are usually paid into the pension fund by the employer directly from the employee’s salary. As these contributions are paid before income tax, employees benefit from a tax advantage. Employers often increase these contributions and the level of contributions made by both parties depends on the pension scheme in question.
The amount of pension an employee can receive on retirement depends on the length of time contributions have been paid and the salary during the years of employment. It is important to know that occupational pension payments are taxable. In order to protect employees’ pensions, the German government has enacted laws that protect company pension contributions even in the event of the company’s insolvency.
Pillar 3: The private German pension plan (Private Altersvorsorge)
The third pillar of the German pension system comprises private pension insurance plans offered by banks and insurance companies. The German government offers premiums and tax incentives to encourage the population to pay into these plans. Private pension schemes, which have grown in popularity since their introduction in the early 2000s, include two main types: Riester pensions and Rürup pensions.
The Riester pension
The Riester pension was introduced in 2002 and serves as a supplement to the statutory pension. Employees who pay income tax in Germany, self-employed persons who pay into the statutory pension insurance scheme, recipients of unemployment benefit, conscripts, civil servants and people with permanent disabilities are eligible. Contributors must invest at least 4% of their annual income, with the state granting additional allowances and tax deductions.
The Rürup pension
Introduced in 2005, the Rürup pension is intended for people who do not pay into the statutory pension insurance scheme and are not entitled to a Riester pension, such as the self-employed, freelancers and high earners. Although the state does not grant any allowances, it does offer tax incentives for contributions up to a maximum amount of €26,528 per year in 2023. The benefits from the Rürup pension are guaranteed for life, but cannot be passed on or inherited after the death of the contributor.
How are pension plans financed in Germany?
The German pension system, also known as statutory pension insurance, is based on compulsory contributions from employees and employers in the country to ensure the financial stability of the system and secure pensions for pensioners.
Participation in the pension scheme is mandatory for every employee in Germany, including a large number of self-employed people. Each employee’s contribution is calculated on the basis of their annual income, with everyone having to contribute 18.6 percent of their net salary. This percentage is split equally between the employer and the employee, with each party contributing 9.3% up to a maximum contribution limit.
From 2023, the monthly income threshold will be EUR 7,300 in the old (western) federal states and EUR 7,100 in the new federal states. These differences are due to the historically lower wages in the former GDR. The federal government has pledged to equalize these contributions by 2024 and thus create a more uniform pension system throughout the country.
When registering for the state pension insurance in Germany, insured persons receive a unique social security number, the “social security card”. This number is crucial for tracking an employee’s pension contributions during his or her employment. Employees must provide this number to their employer when they start work so that all pension contributions can be correctly recorded and allocated.
“The German pension system is mainly financed by compulsory contributions from employees and employers. This funding model ensures that the system can provide pensions for retirees while adapting to demographic change and maintaining its long-term financial stability.”
–Oliver Frankfurth
Who is entitled to a German pension?
The German state pension system is designed to be accessible to all and to benefit a wide range of people. People who have been employed by a German company for at least five years are entitled to pension benefits. Those who have been employed for less than five years may still be entitled to a refund of social security contributions.
If you are interested in this topic, I recommend our blog post: How to get a German Pension Refund
Even if you have not paid any contributions into the statutory pension insurance scheme, you may be entitled to a German statutory pension under certain circumstances. The eligibility requirements include the following:
- People with disabilities may be entitled to a pension if they have been employed in a disability-specific position for at least one year.
- Members of spiritual societies, such as deaconesses.
- Self-employed/freelancers, including artists, coastal fishermen and midwives.
- Parents bringing up a child.
- Some voluntary carers.
- Periods of prolonged unemployment or illness.
- Time spent caring for relatives.
- Time spent working in other EU countries.
- Education and training.
To be entitled to a pension, you need a total of 5 years of insurance periods. In addition to employment, this also includes periods spent raising children, studying and much more.”
–Oliver Frankfurth
Expats who work legally in Germany and pay into the social security system are also entitled to German pension benefits, provided they have worked there for at least five years. If you do not meet this criterion but have acquired pension rights in another EU country, you can apply for a pension from the authorities in the country where you were last employed.
In summary: To receive a German statutory pension, you must have worked in Germany for at least five years. The amount of pension you receive depends on the contributions you have accumulated during your working life in Germany. Due to its accessibility and inclusivity, a wide range of people can benefit from the German old-age pension.
How much German state pension will I receive?
The state pension you receive depends on your contributions throughout your working life. A year’s contributions at the average earnings of all contributors (43,142 euros in 2023) earn one “pension point” (Entgeltpunkt). Contributions based on a lower or higher income earn proportionately fewer or more pension points. When you retire, your pension points are totaled to calculate your pension benefits. Retiring early or late will cause your monthly pension payments to decrease or increase, respectively.
The minimum pension in Germany: Basic Pension (Grundrente)
Following years of negotiations, the federal government’s basic pension plan (Grundrente) was implemented in January 2021. This scheme ensures that everyone who has paid into the German pension scheme for a significant amount of time receives adequate pension benefits.
In essence, anyone who has contributed to the system for at least 33 years (including both working years and time taken out to raise children or provide unpaid care) will receive a supplement on top of their regular pension to guarantee a basic subsistence. The basic pension is calculated and paid out automatically, so there is no need to apply. If you would like to know more about this topic, you can find detailed information on the page of the German pension insurance about the basic pension: https://www.deutsche-rentenversicherung.de/DRV/DE/Rente/Allgemeine-Informationen/allgemeine-informationen-rente-node.html
Pensioner health insurance
As soon as you receive your German pension, you usually have to pay into the statutory health insurance scheme for pensioners. The government may provide additional support, which is deducted directly from your pension payments. The amount you pay will depend on the pension payments you receive, so your health insurance costs will be in proportion to your pension income.
How much is the German state pension
The calculation of the old-age pension in Germany is based on a formula that includes various factors such as pension points, access factor, current pension value and pension type factor. Here is a breakdown of the individual components:
- Pension points: For every year you work as an employee and pay into the statutory pension scheme, you receive pension points. The number of points you collect depends on your gross income. One pension point is awarded for the average income, which is €38,901 in 2022. If you earn more or less, your points will be adjusted accordingly. The maximum number of points you can collect each year is limited to 2.17 in 2022.
- Access factor: This factor relates to the age at which you retire in relation to the normal retirement age (67 for anyone born after 1966). You will be assigned an access factor of 1 if you retire at 67. For every month you retire earlier, the factor decreases by 0.003 points, and for every month you retire later, it increases by 0.005 points.
- Pension value: The pension value corresponds to one pension point and is adjusted annually according to the general economic situation. In 2022, the pension value will be €36.02 for West Germany and €35.52 for East Germany.
- Pension type factor: This factor takes into account the specific type of pension. The factor is 1 for a standard old-age pension and 0.5 or 1 for a pension due to partial or full reduction in earning capacity. Other types of pension are the small and large widow’s/widower’s pension (factors 0.25 and 0.5) and the half and full orphan’s pension (factors 0.1 and 0.2).
With this information, you can calculate your monthly pension using the formula:
Monthly pension = Pension points × Access factor × Current pension value × Pension type factor
Though this formula may seem complex, understanding each component can help you estimate your expected state pension in Germany.
Can I receive my German pension abroad?
As soon as you reach the mandatory retirement age in Germany, you can also draw your state and private pension benefits abroad.
“Before you leave Germany, have a current record of your insurance periods sent to you to check them (e.g. during employment). Gaps or errors should definitely be corrected, as this can affect your future pension.
–Oliver Frankfurth
However, it may not be possible to apply for a German occupational pension from abroad, so you should check with your employer. The amount of pension you receive depends on your contribution period.
As a rule, your old-age pension will be transferred to a German bank account, from which you can transfer the money to your foreign bank account. Deutsche Rentenversicherung will cover the costs of the transfer. If your bank is located in one of the SEPA countries, you can have the German pension transferred directly to your account.
If you move to another country, this may affect the amount of your pension: The taxation of your pension depends on the agreement between Germany and your country of residence. If you are planning to move away from Germany, you should contact Deutsche Rentenversicherung to clarify how this may affect your future pension benefits.
Expats often lose track of their pension entitlements when they move from one country to another. As the pension funds may not actively track you, it is important that you stay informed about your German pension administration and keep accurate records.
When will I reach retirement age in Germany?
Due to demographic developments, Germany has raised the age limit for the basic old-age pension. For people born between January 1, 1947 and December 31, 1958, the previous standard retirement age of 65 was gradually raised, and for those born between 1959 and 1963, it was increased by two months per year. For all those born after January 1, 1964, the standard retirement age is 67.
In order to receive the basic old-age pension, you must fulfill the general waiting period of five years, which includes contribution periods and additional periods. In addition to the basic old-age pension, individuals can earn additional wages without this affecting their pension.
The early old-age pension can be applied for at the age of 63 if you can prove 35 years of qualifying pension contributions. However, the pension is reduced by 0.3 % for each month before reaching the statutory retirement age. People with severe disabilities can receive an old-age pension if they meet certain criteria, with the full retirement age being gradually raised for people born in 1952 and later.
Individuals can receive their old-age pension without deductions if they are at least 63 years old and have completed a qualifying period of 45 years . The starting age of this pension will be gradually raised to 65 for those born before December 31, 1952.
Special provisions apply to miners: For insured persons born after December 31, 1952, the starting age for their pension will be gradually increased. For people born after January 1, 1964, the age limit is 62.
Old-age pensioners can apply for a partial pension or postpone the start of their pension. However, it is recommended to consult with the pension provider before taking up employment or work as an early pensioner.
Summary: The German retirement age has been gradually raised due to demographic change. The standard retirement age is now 67 for anyone born after January 1, 1964. There are various regulations for early retirees, people with disabilities and certain professions such as miners, where the age limits are adjusted accordingly.
Pension in Germany for foreigners
Expats and foreign nationals working in Germany can benefit from the German pension system. However, they must meet certain criteria and understand the procedures for applying for their pension. Foreign nationals working in Germany generally have to pay into the state pension system. To be eligible for a German state pension, you must have paid into the state pension system for at least five years (also known as the “waiting period”) and reach the statutory retirement age, which gradually increases from 65 to 67 depending on your year of birth.
If you do not meet these requirements, you may be entitled to a refund of your social security contributions before you reach retirement age. In this case, you can have the contributions you have paid (9.3% of your gross income) paid out early. You can find out more about this topic on this page: German Pension Refund.
Foreign nationals who have paid into the German pension system but move to another country may still be able to apply for their pension abroad. This procedure may vary depending on the country of residence and existing reciprocity agreements between Germany and the foreign country. These agreements help to coordinate pension benefits and ensure that individuals do not lose their pension rights when they move across the border.
Can I receive a pension from two different countries?
It is possible to receive pension benefits from two different countries, especially if you have worked and paid into the pension schemes in both countries. This is a common situation for expats and people who have worked in several countries during their working life. Here’s what you need to know about receiving pension benefits from two different countries:
Social security agreements: Many countries have bilateral social security agreements to coordinate pension benefits for people who have worked in both countries. These agreements help to avoid double taxation and ensure that employees receive benefits from both countries. It is important to check whether the countries in which you have worked have concluded such agreements.
Applying for pensions: To apply for pension benefits from two different countries, you must apply for your pension benefits in each country separately. Make sure you follow each country’s specific application procedures and provide the necessary documentation to prove your work history and contributions.
Payment of pensions: Generally, each country will pay out the portion of the pension you are entitled to based on your contributions and work experience in that country. Depending on the country and agreement, you can receive these payments directly into a bank account in each country or you have the option of receiving the payments in one country.
Taxation of pensions: The taxation of pension benefits you receive from two different countries depends on the tax laws and agreements between the countries involved. It is important that you know how your pension benefits are taxed in each country and whether there are any tax reliefs.
Keep track of your pensions: When you move from one country to another, it’s important to keep track of your pension entitlements and contributions. This includes keeping records of your employment history, your pension contributions and any correspondence regarding your pension benefits.
In summary, it is possible to receive pension benefits from two different countries if you have worked and paid into the pension systems in both countries. If you understand the applicable agreements, application process, payment options and taxation, you can be sure that you will receive your rightful pension benefits from both countries.
How do I claim my German state pension in 7 steps
To apply for your German state pension, follow these steps:
- Determine your eligibility: make sure you have fulfilled the qualifying period, which usually requires five years of contributions in the German pension system. To fulfill this requirement, contribution and supplementary periods are added.
- Gather the necessary documents: Gather all relevant documentation, including your social security number, proof of identity, employment history and any additional information about your contributions to the German pension system.
- Contact the GermanPension Insurance: Contact the German Pension Insurance to find out about the necessary steps and forms to apply for your pension. You can find the contact details on their website, the application forms and other important information here: Application forms
- Fill out the application forms: Complete the necessary application forms provided by Deutsche Rentenversicherung. These forms ask for your personal details, your employment history and your account details for pension payments.
- Send in the application: Send the completed application forms together with the required supporting documents to the relevant office of the German Pension Insurance. Keep copies of all documents for your records.
- Wait for a decision: As soon as your application has been submitted, German Pension Insurance will review it and decide on your pension entitlement and amount. This process can take several weeks or months, so it is important to plan accordingly and be patient.
- Start receiving your pension: Once approved, your pension payments will begin on the specified start date. Payments are usually made monthly and are transferred directly to your bank account.
Remember that it is important to apply for your pension on time, as the process can take some time. It is advisable to start preparing and gathering information about six months before you reach the statutory retirement age. If you have any questions or concerns, do not hesitate to contact Deutsche Rentenversicherung.
Remember that it is important to apply for your pension in good time, as the process can take some time. It is advisable to start preparing and gathering information about six months before you reach the statutory retirement age. If you have any questions or concerns, do not hesitate to contact Deutsche Rentenversicherung.
