After dedicating years to their careers, many pensioners eagerly anticipate a well-deserved retirement. However, concerns about financial stability can cast a shadow over this golden period of life. Gaining a clear understanding of the German state pension scheme, particularly for expats, can help alleviate some of these monetary anxieties.
Historically, German retirees have benefited from a generous statutory pension. However, due to an aging population and a pay-as-you-go system in which the working population supports retirees, many individuals now need to explore alternative retirement strategies beyond the German state pension. Despite these challenges, Germany’s pension scheme consistently ranks highly among global pension schemes and has continuously improved as the government works to reform and streamline the procedure.
In response to an aging population and a mounting pension bill, the German federal government has implemented several reforms since 2002 to ensure the long-term efficiency and affordability of the pension scheme. These changes include gradually increasing the statutory retirement age and reducing the maximum state pension payments. This blog post will delve into the intricacies of the German state pension system, offering valuable insights and guidance for those seeking a secure and worry-free retirement in Germany.
The German pension scheme
The German retirement scheme is designed to provide financial support to retirees, ensuring a comfortable standard of living. This comprehensive system comprises various components, including the state pension, occupational pension, and private pension schemes. For expats and foreign nationals residing in Germany, it is crucial to understand the German pension scheme’s nuances to effectively navigate and benefit from it.
Pillar 1: The German Statutory Pension Insurance Scheme (Gesetzliche Rentenversicherung)
The three-pillar model forms the foundation of the German retirement system, offering diverse sources of financial security for retirees. The first pillar is the state pension, a mandatory government-run program funded through contributions from employees, employers, and the government. It covers various benefits, such as old-age pensions, disability pensions, and survivor’s benefits.
The statutory pension insurance benefit (RV) is provided to individuals upon retirement age, offering basic payments of approximately 70 percent of their working net income. A safety net is also in place for low-income pensioners.
Since 2005, all regional and local branches of the German pension insurance system have unified under the “Deutsche Rentenversicherung” title.
Pillar 2: The company pensions (Betriebliche Altersvorsorge)
The second pillar of the German pension scheme focuses on company pensions, which serve as employer-sponsored retirement plans to supplement the state pension. Many German companies offer these occupational pension plans as part of their employees’ compensation packages. While employers don’t need to provide a pension scheme, government subsidies and tax breaks make them an attractive option for employers and employees.
In Germany, there are five common types of company pension schemes: Direct insurance, Direct grant, Support fund, Pension company, and Pension fund. Each type of pension scheme operates differently, but all are designed to provide additional retirement income for employees.
Company pension contributions typically range from 3 to 15 percent of an employee’s monthly gross salary and are usually paid by the employer directly into the pension fund from the employee’s salary. Since these contributions are made before income tax, employees benefit from a tax advantage. Employers often “top up” these contributions, with the specific amount contributed by both parties depending on the type of pension scheme in place.
The amount of pension an employee can withdraw upon retirement depends on the time they have contributed to the plan and their salary throughout their working years. It is important to note that company pension payments are taxable.
To protect employees’ retirement savings, the German Federal Government has enacted laws to safeguard contributions to company pension schemes, even in the event of company insolvency.
Pillar 3: The private German pensions (Private Altersvorsorge)
The third pillar of the German pension scheme involves private pension plans, facilitated by banks and insurance companies. The federal government offers bonuses and tax incentives to encourage the population to contribute to these plans. Private pensions, which have gained popularity since their inception in the early 2000s, mainly comprise Riester Pension and Rürup Pension.
The Riester Pension
The Riester Pension, introduced in 2002, serves as a supplement to the state pension. Eligibility extends to workers paying German income tax, self-employed individuals contributing to the state pension, those receiving unemployment benefits, military conscripts, civil servants, and individuals with permanent disabilities. Contributors must invest at least 4% of their annual income, with the government adding bonuses and tax deductions.
The Rürup Pension
The Rürup Pension, introduced in 2005, is designed for individuals who don’t contribute to state pensions and aren’t eligible for Riester Pensions, such as self-employed workers, freelancers, and high-income earners. While the government doesn’t provide bonuses, they offer tax incentives for contributions up to 26,528 euros per year in 2023. Benefits from Rürup Pensions are guaranteed for life but cannot be passed on or inherited upon the contributor’s death.
How is the german state pension funded?
The German state pensionscheme, also known as statutory pension insurance or RV, relies on mandatory contributions from employees and employers to ensure the system remains financially stable and capable of providing pensions to retirees.
Participation in the RV is compulsory for anyone employed in Germany, including many self-employed workers. Each team member’s contribution is assessed based on their annual earnings, with everyone required to contribute 18.6 percent of their net salary. This percentage is split evenly between the employer and the employee, with each party contributing 9.3 percent up to a maximum contribution cap known as the Beitragsbemessungsgrenze.
As of 2023, the monthly contribution ceiling is set at 7,300 euros in the old (western) federal states and 7,100 euros in the eastern states. This disparity is due to the historically lower wages in the former GDR. The federal government has pledged to equalize these contributions by 2024, creating a more uniform nationwide pension system.
Upon enrolling in the statutory pension scheme, individuals are issued a unique social security ID in German “Sozialversicherungsausweis.” This number is crucial for tracking an individual’s pension contributions throughout their working life. Employees must provide their employer with this number to ensure that all pension contributions are accurately recorded and allocated when starting a new job.
Summary: The German state pension scheme is primarily funded through compulsory contributions from employees and employers. This funding model ensures that the system can provide pensions to retirees while adapting to demographic changes and maintaining long-term financial stability.
Who is eligible for the German state pension?
The German state pension scheme is designed to be accessible and inclusive, ensuring that many individuals can benefit from it. Individuals employed by a German company for at least five years qualify for pension benefits. Those with less than five years of employment may still be eligible to receive a reimbursement of their social security contributions.
If your are interested in this topic, I recommend you our blog post about how to apply for pension refund Germany
Even if you haven’t made any contributions to the state pension fund, you might still be eligible for a German state pension under certain circumstances. Notable inclusions in the eligibility criteria are:
- Individuals with disabilities may be eligible for a pension if they have been employed in a disability-specific position for a minimum of one year.
- Members of spiritual societies, such as deaconesses.
- Self-employed/ freelancers, including artists, coastal fishermen and midwives.
- Parents raising a child.
- Some volunteering caregivers.
- Periods of sustained unemployment or illness.
- Time spent caring for relatives.
- Time spent working in other EU countries.
- Education and training.
Expats legally working in Germany and contributing to social security are also eligible for German pension benefits, provided they have worked there for at least five years. If you don’t fulfill this criterion but have accrued pension benefits in another EU nation, you can request a pension from the authorities of the most recent country where you were employed.
Summary: You must have worked for at least five years in Germany to receive a German state pension. The amount of RV you receive depends on the contributions you have built up during your working life in Germany. Through its accessibility and inclusiveness, a wide range of individuals 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 scheme (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 want 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
Compulsory Pension Health Insurance
Typically, once you begin claiming your German pension, you must start paying for compulsory pensioners’ health insurance. The government may provide additional support, which will be directly subtracted from your pension disbursements. The amount you pay depends on your pension benefit payments, ensuring that your health insurance costs are proportional to your retirement income.
How to calculate german state pension?
The calculation of the old age pension in Germany German is based on a formula that incorporates various factors such as pension points, access factor, current pension value, and pension type factor. Here’s a breakdown of each component:
- Pension Points: For every year you work as an employee and contribute to the public pension insurance, you receive pension points. The number of points you collect depends on your gross income. One pension point is given for the average income, which is €38,901 in 2022. If you earn more or less, your points adjust accordingly. The maximum number of points you can collect annually is limited to 2.17 in 2022.
- Access Factor: This factor refers to the age you retire in relation to the standard retirement age (67 for those born after 1966). An access factor of 1 is assigned if you retire at 67. For each month you retire earlier, the factor decreases by 0.003 points, and for each 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 overall economic situation. In 2022, the pension value is €36.02 for Western Germany and €35.52 for Eastern Germany.
- Pension Type Factor: This factor accounts for the specific form of the pension. For a regular old-age pension, the factor is 1, while for partial or full disability, it is 0.5 or 1. Other pension types include small and large widow(er)’s pensions (factors of 0.25 and 0.5) and half-orphan’s and full orphan’s pensions (factors of 0.1 and 0.2)
With this information, you can calculate your monthly pension using the formula:
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?
Once you attain the German legal retirement age, you can collect your state and private pension benefits while residing abroad.
However, claiming an old age pension in Germany company pension from abroad may not be possible, so it’s advisable to check with your employer. The pension amount you receive will depend on your contribution duration.
Typically, your old-age pension benefits will be paid into a German bank account, from which you can transfer the funds to your foreign bank account. Deutsche Rentenversicherung covers the transfer cost. If your bank is in one of the SEPA countries, you can have the German pension directly deposited into your account.
Relocating to another country could affect the sum of your pension. The tax paid on your pension is contingent on the agreement between Germany and your country of residence. If you plan to move away from Germany, it’s recommended that you contact Deutsche Rentenversicherung to determine how this may affect your future pension benefits.
Expats often lose track of their pension rights when relocating between countries. Since pension funds may not actively pursue you, staying informed about your German pension administration and maintaining accurate records is crucial.
When will I reach retirement age in Germany?
Due to demographic developments, Germany has raised the age threshold for the basic old-age pension. For individuals born between January 1, 1947, and December 31, 1958, the previous basic age threshold of 65 years has been incrementally increased, and for those born between 1959 and 1963, it has been raised by two months per year. The basic age threshold for anyone born after January 1, 1964, is 67.
To receive the basic old-age pension, individuals must meet the general qualifying period of five years, which includes contribution periods and supplementary periods. Alongside the basic old-age pension, individuals can earn additional wages without affecting their retirement.
Early pensions can be applied for at 63 if individuals can prove 35 years of qualifying pension contributions. However, the amount paid is reduced by 0.3% each month before the statutory retirement age. People with severe disabilities can receive an old-age pension if they meet specific criteria, with the full pension age gradually increasing for those born in 1952 and later.
Individuals can maintain their old-age pension without deductions if they are at least 63 and have fulfilled 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.
Miners have special provisions, with the entry age for their pension gradually increasing for insured persons born after December 31, 1952. For people born after January 1, 1964, the age limit is 62 years.
Old-age pensioners can apply for partial retirement or postpone the beginning of their retirement. However, consulting with the pension provider before starting any employment or occupation as an early pension beneficiary is recommended.
Summary: The German pension age has been gradually raised due to demographic changes, with the standard age threshold now set at 67 for those born after January 1, 1964. Various provisions exist for early pensions, individuals with disabilities, and specific occupations like miners, with age thresholds adjusted accordingly.
Pension in germany for foreigners
Expats and foreign nationals working in Germany can benefit from the German pension scheme. However, they must meet specific criteria and understand the process of claiming their pensions. Foreign nationals working in Germany are generally required to contribute to the state pension system. To be eligible for a German state pension, individuals must have contributed to the state pension scheme for a minimum of five years (also known as the “qualifying period”) and reach the statutory retirement age, which is gradually increasing from 65 to 67 years, depending on the individual’s birth year.
If you do not meet these requirements, you may be eligible for a refund of your Social Security contributions before reaching retirement age. In this case, you can receive a lump sum (9.3% of your gross income) paid out to you early. You can learn more about this topic on this page: https://deregistration.de/services/pension-refund-germany/.
Foreign nationals who have contributed to the German pension scheme but move to another country may still be eligible to claim their pension from abroad. This process may vary depending on the country of residence and any existing reciprocal agreements between Germany and the foreign country. These agreements help coordinate pension benefits and ensure individuals retain their pension entitlements when moving across borders.
Can I receive pension in two different countries?
It is possible to receive pension benefits from two different countries, primarily if you have worked and contributed to pension schemes in both countries. This is a common situation for expats and individuals who have worked in multiple countries during their careers. Here’s what you need to know about receiving pension benefits from two different countries:
Totalization Agreements: Many countries have established bilateral social security agreements, known as totalization agreements, to coordinate pension benefits for individuals who have worked in both countries. These agreements help prevent double taxation and ensure workers benefit from both countries. It is essential to check if the countries you have worked in have such agreements.
Claiming Pensions: To claim pension benefits from two different countries, you need to apply for your pension benefits in each country separately. Ensure you follow each country’s application process and provide the necessary documentation to prove your work history and contributions.
Payment of Pensions: Generally, each country will pay the portion of the pension you are entitled to receive based on your contributions and work history in that country. You may obtain these payments directly into a bank account in each country, or you may have the option to receive payments in one country, depending on the countries involved and the agreements in place.
Taxation of Pensions: The taxation of pension benefits received from two different countries depends on the tax laws and treaties between the countries involved. Understanding how your pension benefits will be taxed in each country is crucial, and if any tax relief measures apply is vital.
Keeping Track of Your Pensions: As you move between countries, keeping track of your pension rights and contributions is essential. This includes maintaining records of your employment history, pension contributions, and any correspondence related to your pension benefits.
In summary, it is possible to receive pension benefits from two countries if you have worked and contributed to pension schemes in both. Understanding the agreements in place, the claiming process, payment options, and taxation will help ensure you receive your rightful pension benefits from both countries.
How do i claim my German state pension?
To claim your German state pension, follow these steps:
- Determine your eligibility: Ensure that you have met the qualifying period, which usually requires five years of contributions to the German pension scheme. Contributions periods and supplementary periods are added to fulfill this requirement.
- Gather necessary documents: Collect all relevant documents, including your social security number, proof of identity, employment history, and any additional information regarding your contributions to the German pension scheme.
- Contact Deutsche Rentenversicherung: Reach out to Deutsche Rentenversicherung, the German pension authority, to inquire about the necessary steps and forms for claiming your pension. You can find their contact information on their website and the application forms and other important information here: Application forms
- Fill out the application forms: Complete the required application forms provided by Deutsche Rentenversicherung. These forms will ask for your personal details, employment history, and bank account information for pension payments.
- Submit the application: Send the completed application forms along with the necessary supporting documents to the appropriate office of Deutsche Rentenversicherung. Keep copies of all documents for your records.
- Await a decision: Once your application is submitted, Deutsche Rentenversicherung will review it and determine your pension eligibility and amount. This process can take several weeks or months, so it’s essential to plan accordingly and be patient.
- Start receiving your pension: Upon approval, your pension payments will begin at the designated start date. Payments are typically made monthly and deposited directly into your bank account.
Remember that it’s crucial to claim your pension in a timely manner, as the process can take some time. It’s advisable to start preparing and gathering information about six months before you reach the German statutory retirement age. If you have any questions or concerns, don’t hesitate to contact Deutsche Rentenversicherung for assistance.