You have been working in Germany for some time now. Maybe you considered settling.
Then it's time to learn about the German pension system. I mean you are paying hundreds of Euros into it every month. It would be nice to know where the money goes, right?
In short, it’s not. Your public pension contributions are being spent on today’s pensioners. We call it a generational contract - working people pay for the elderly. All you get in return is a promise that the state will return the favor when you’re old.
In this scenario, you’re the blue guy. You keep handing over your pension contributions to the elderly. Once you retire, younger people will do the same for you.
The flaw with this system is the reliance on the relationship between the people paying into the system and the ones receiving their pension. The demographic change in Germany has put a strain on the system; the public pension system defines itself as the first layer of a pension and strongly recommends saving in addition.
You can imagine the pension system as a pyramid with three layers. The bottom layer is the least flexible but offers the highest tax advantages.
The public is the foundation. It’s mandatory for employees. There is no opt out option. Freelancers and business owners are free to decide how to save for their retirement. As a general rule, it’s recommended to either opt for the public pension or a basic pension (Basis Rente / Rürup Rente).
The public pension is considered inflexible because:
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Company pensions and “Riester” pensions are part of layer two because they are also restrictive. Retiring early is also not an option here. The company pension offers a similar tax advantage to the public and basic pension. You don’t pay income tax on your contributions. The taxes are deducted when you collect your pension. The income tax rate depends on your overall income, which is likely to be a lot less during retirement, effectively giving you a tax cut.
The Riester pension is a separate product section. Generally speaking, it’s not the most attractive pension product for most. The costs are often high and the return low. The only real upside is that you can get a bonus if you pay at least 4% of your income into the insurance. The state also gives you a bonus for each child you have. That said, unless you have a small income and a lot of kids, the bonus payments are not enough to compensate for the high costs and low returns.
Flexible pension (Private Altersvorsorge) products don’t have all the restrictions that the other pension products have.
In short, a flexible pension can be like investing in an ETF savings plan plus the benefits of getting a lifelong monthly payout and tax benefits. A decent flexible pension product gives you a wide variety of low cost passive ETFs to invest in.
A flexible pension is the best option if you already have one of the more restrictive pension products because it gives you more liberty to manage your contribution how you see fit.
An ETF savings plan can, of course, be used to save for retirement. It’s not officially recognized and therefore also not subsidized with tax reductions. ETFs by themselves lack a critical feature for pension planning - the annuity, a lifelong monthly payment. ETFs are a great tool to build wealth. You have full flexibility and control over your money and it’s true that ETFs are the best option from a cost perspective. Generally speaking, I would recommend an ETF savings plan for wealth building before retirement. If you don’t use the fund before retirement, it’s also very handy during retirement. A flexible pension with ETFs can be used before retirement but is a disadvantage when it comes to cost.
You pay 9.3% and your employer does the same. Before you ask, no, you can’t opt out - the public pension is mandatory for all employees. Your contribution is taken out of your paycheck before you get your gross salary.
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The contribution to the system does have a ceiling. If you earn more than the ceiling, your contribution is capped (9.3% x the ceiling).
Example: You earn €8,000 per month gross and you live in West Germany. Then your monthly contribution is €7,300 x 9.3% = €678.90 per month.
You might have the impression that you’re already paying a lot into your pension. The reality is that people get older than they used to.
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On average, we work about 42 years of our lives, roughly 49% of our lives. That’s a lot but rising life expectancy means we also spend about half as long enjoying the longest vacation of our lives - retirement. It should be clear that saving 18.6% during our working time is not going to pay for that. If we don’t consider the interest, we would need to save 1/3 or one euro out of every three euros we earn to have a similar level of income during retirement.
Before we look at how you can calculate your pension, let’s talk about the retirement age. Do you know what the current retirement age in Germany is?
It used to be 65. For everyone that retires after 2030, it’s going to be 67 years. That’s the regular retirement age. Of course you can retire earlier or later than the regular retirement age but the earliest you can retire is 63 years; if you retire earlier than the regular retirement age, you will be penalized.
For every month you retire early, your pension is reduced by 0.3%.
Example: your regular monthly pension would be €1,500 per month. Retiring at 67 would reduce your monthly pension by €270 to €1,230 per month.
Of course, you can also retire past the regular retirement age. In that case, you would get 0.5% additional pension for every month you delay the start of your pension.
Alternatively, you can receive your pension and keep working. The additional income increases your income tax rate and thereby the tax you pay for your pension but it’s worth considering.
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However, the reality is that, on average, people retire before the official retirement age.
This is worth considering when calculating your public pension. You might think now that you can just keep working after 67 and close the gap between your expenses and your public pension this way but, for the majority of people, that’s not what reality looks like. Some get too sick to work, some can’t find a job anymore, and some simply hate their jobs and are glad to get their working lives over with. Do me a favor and don’t plan with the best case scenario in mind.
Let’s calculate your pension.
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There are two factors that make up your pension:
If you multiply your total number of pension points by the pension value, you get your monthly pension.
The pension points are a method of distribution. You need to calculate your pension points for every year that you paid into the system separately if you want an accurate result. Your salary divided by the average German salary for that year gives you the number of pension points you earned that year. When you want to retire, you add up all the pension points you collected over the past years. This gives you your total number of pension points.
The pension value is determined by the political party in power. In theory, it should be calculated by dividing all public pension contributions from the same year divided by all outstanding pension points. The reality is that the contributions are already not sufficient to maintain the current level of pension. The pension is heavily subsidized with taxes.
Therefore, it seems likely that the pension value will decrease over time. This has already been going on for years - by not decreasing the pension value but by not increasing it enough to offset inflation. Inflation has historically been 1.87% per year. The pension value has only been increased by 1.1% per year, effectively lowering the pension over time.
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Points: Let’s say you earned €60.000 in 2022. The average German salary was €41,005 but let’s be less German and round it to €40,000. For your pension contribution, you would have received 1.5 points. If the earnings from this year are representative because you’re not expecting massive salary increases anymore, then you can simply multiply your pension points by the total number of years that you’ll be working. For example, if you started working at 30 and you expect to retire at 67, then simply multiply your points by 37 to get the total number of pension points.
Pension value: The pension value is decided once a year for the people that retire in that year. We can’t look into the future to know what this value is going to be. The best approximation is the current value.
Monthly pension: You multiply your total points by the current pension value to get your monthly pension. For example, 55.5 points x €37.60 = €2,086 per month.
You might be wondering if €2,086 is a realistic pension. Let me answer the question by giving you some facts. Only 50 people out of 20 million pensioners currently receive a monthly pension of above €3,000 per month. Only 0.6% of pensioners receive a pension of over €2,400 per month.
The calculation does not factor in years that we don’t work because we’re taking care of our children, are sick, on sabbatical, unemployed or self-employed. Most people have gaps in their employment history.
First, let’s look at your pension information and then we’ll see how much the tax man takes out of your pension.
When you’ve worked for more than 5 years and are over 27 years old, you should receive your first pension information by mail. After that, you’ll get it every year.
If you have not received your statement, you can request it online here: https://www.eservice-drv.de/SelfServiceWeb/. The document you’re looking for is the second option from the top - Rentenauskunft.
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The most important information is in the box on the right.
The first number tells you how much pension you’re entitled to in case you fall ill and can’t work anymore. Usually, it’s less than welfare. To protect your standard of living you should check out income protection insurance.
The second number tells you how much pension you’ve already earned, meaning, how much pension you would receive if you were to retire tomorrow.
The third number is an estimation of how much pension you will receive if you keep working until you’re 67. The estimation is based on income over the last five years. This means, if your last five years are not representative, for example, because you were only working part time or recently joined the workforce and only earned a pittance for an internship, your pension estimation will most likely be off by a landslide.
If that’s the case, then forget about the pension statement and use a pension calculator instead.
You can either input the second number from your pension statement or the output from the pension point calculator.
The calculator is in German but Google Translate works fine.
If you’ve calculated your public pension, please reach out to me so we can talk about your plan to close the gap. If your plan is to move to Poland or Spain when you retire, fine, but let’s check if that’s a solid plan.
Here’s the answer:
1. About 11% for social insurance. This includes 3.4% for care insurance and 7.3% for health insurance. The actual numbers depend on things like the health insurer and number of kids.
2. Taxes. The public pension contribution was not taxed. Therefore, you have to pay income taxes on the payout. The tax is deducted before you receive it; how much tax you pay depends on how much income you receive. To figure out what your tax rate is, we look at the chart.
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On the x-axis, we have your taxable income in thousands. The dashed line is your average tax rate. If your monthly pension is €1,666 or €20,000 per year, we start at 20 on the x-axis, go up to the dashed line and then to the left. The y-axis tells us that, for €20,000, the average tax rate is 10%.
If your pension is €20,000 gross per year, you’ll pay around €2,000 in taxes and €2,200 for social insurance. Your net pension would be €15,800 per year. **This is €1,316 per month.**
If you’re thinking “Shit, that’s not a lot!”, let me put that into perspective for you.
The average pension for people that retired at 67 in 2022 was €921.60 for women and €1177.28 for men. That’s gross - before tax and social insurance!
You’ve calculated your expected public pension and are wondering how much you need to save additionally. A rule of thumb is that you should put aside about 15 - 20% of your net income. Of course, the actual number varies a lot. It depends on your age, your expectations, and how you plan to invest the money.
Expectations: When do you want to retire? Please remember that the average person retires at least a couple of years before the official pension age. What standard of living do you want? Do you expect to need more or less money than you do now? If you plan to spend your retirement traveling then you might need a little more. If you plan to live like you do now then 80% of your current expenses is probably a good target because you won’t need to save for your retirement anymore and things like commuting to work are also obsolete.
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To get a feeling for how big your gap is, compare your current monthly expenses with your net pension.
With that information,
drop me your contact information so I can give you a call.
We can discuss your situation and clarify your expectations. When you know what you want, we’ll discuss solutions.
Your pension won’t sort itself out so do it now!
Living in the European Union If your usual country of residence is in the European Union, you will usually receive your full pension as you would if you lived in Germany, accrued from all contribution and contribution-free periods. This also applies to pension entitlements from periods that were accrued outside the territory of today’s Federal Republic of Germany, but are included in the German pension, such as Reich territory contribution periods or contribution and employment periods according to the Foreign Pensions Law.The same applies if your usual country of residence is Iceland, Liechtenstein, Norway or Switzerland. However, to be entitled, you must be a citizen of these countries or a citizen of the European Union or a surviving dependent (widow/widower) of someone from these countries.
Bank Transfer Abroad If you normally live outside Germany, your pension can be paid into your bank account from a German bank. Deutsche Rentenversicherung pays the transfer costs. In exceptional cases, it is possible for you to nominate a person of trust who has a bank account in Germany to receive the payment, as long as they forward the money to you.
It is also possible to have your pension paid into your own bank account if the bank is one of the SEPA countries of the European Union, Iceland, Liechtenstein or Norway. Deutsche Rentenversicherung also pays the transfer costs in these cases.
Of course it is also possible for you to have the money transferred to your own bank account in a country other than those mentioned. In these cases, Deutsche Rentenversicherung, in cooperation with the pensions service of Deutsche Post AG, uses the standardised, most economical payment methods and converts the pension into the currency of the respective country. Just like in Germany or in the other countries mentioned above, Deutsche Rentenversicherung pays the transfer costs to the first bank authorised by you. It is not possible to pay any bank charges, currency conversion fees or exchange rate losses that occur during the transfer. These must be paid by the beneficiary.
In order to pay the pension, Deutsche Rentenversicherung requires the international bank code (BIC) and international account number (IBAN) of the beneficiary. In addition, payment declarations are also included, with which the bank also confirms the account details. For Italy and Canada/USA, there are special payment declarations.
In the case of usual residence outside Germany, the pensions service of Deutsche Post AG checks annually, mid-year, if the beneficiary is still alive. He/she receives a written Life Certificate, which must be confirmed and returned immediately. All authorities and pension funds as well as financial institutions of the country of residence and, if necessary, the German diplomatic missions carry out checks.Some countries such as Belgium, Finland, Israel, Italy, Luxembourg, the Netherlands, Austria, Poland, Sweden, Switzerland and Spain, register the death of the beneficiary so that in these cases, a written Life Certificate is not required.
Please note that even a pension which has already been approved can, in some cases, be reduced or even cancelled, if you transfer your usual place of residence to another country. Usually your pension will not change, but there are exceptions (Receiving a German Pension in Another Country).
You are therefore legally obliged to register a change of address. By doing this, you can find out the amount of pension you are entitled to receive in another country and avoid having to pay any money back at a later date.
If possible you should inform the pension service of Deutsche Post AG at least two months before you move, so that your pension can be transferred without interruption. This is because even if the amount of pension does not change, the transfer takes time owing to technical reasons.
Of course you can also find out from us about your pension eligibility in another country before you decide to move. You are welcome to make an appointment for a personal consultation at one of our information and advice centres.
Naturally Deutsche Rentenversicherung can also send you written information about your German pension eligibilities in a specific country. It’s enough to inform your pension insurance fund with a short message. Give your current nationality and the country as well as whether you plan to live there permanently or temporarily. Please make it clear in your request that you are only requesting information about a – possible – move, in order to avoid confusion. If you do then decide to move, please let us know in good time.
Naturally it is going to be important to you how you receive health and long-term care insurance in another country. This will depend on how you were insured up to now, which country you are moving to and whether you are moving temporarily or permanently, and if you also receive a pension from the country you are staying in. There are special regulations valid for the countries of the European Union and the countries Iceland, Liechtenstein, Norway and Switzerland.
Under certain circumstances Deutsche Rentenversicherung can also grant you a supplement towards your health insurance contributions in another country.
If you have questions regarding your continued health and long-term care insurance abroad please get in touch with your health insurance company.
Of course you can also find out from us about your pension eligibility in another country before you decide to move. You are welcome to make an appointment for a personal consultation at one of our information and advice centres.
Naturally Deutsche Rentenversicherung can also send you written information about your German pension eligibilities in a specific country. It’s enough to inform your pension insurance fund with a short message. Give your current nationality and the country as well as whether you plan to live there permanently or temporarily. Please make it clear in your request that you are only requesting information about a – possible – move, in order to avoid confusion. If you do then decide to move, please let us know in good time.
Deutsche Rentenversicherung operates as a liaison office for insured persons who have also accrued periods of insurance abroad and/or who live abroad.
We are your contact partner if you
- live outside the Federal Republic of Germany as a foreign national,
- live in the Federal Republic of Germany as a foreign national and have accrued foreign periods of insurance,
- live abroad,are a German citizen and have accrued foreign periods of insurance.
We
- process your application for a pension from Deutsche Rentenversicherung.
- process your application for contribution refunds from Deutsche Rentenversicherung.
- forward your application for a foreign pension to the relevant foreign insurance agency, if you are resident in the Federal Republic of Germany.
- pay your German pension to you abroad, if you are resident abroad.
- send you information about your pension account.
Queries and applications referring to agreement law and European law are processed by different insurance agencies. If you have lived or worked in one or several member states or agreement countries, you will be looked after by either
- Deutsche Rentenversicherung Bund
- Deutsche Rentenversicherung Knappschaft-Bahn-See or
- a regional pension fund of Deutsche Rentenversicherung.
The German insurance agency you paid your most recent German contributions to is fundamentally always responsible for you.
If you paid your most recent German contribution to the Deutsche Rentenversicherung Bund (formerly, Bundesversicherungsanstalt für Angestellte – BfA –), then that is your contact partner.
If at any point in time you paid at least one German contribution to Deutsche Rentenversicherung Knappschaft-Bahn-See (formerly Bundesknappschaft, Bahnversicherungsanstalt und Seekasse), then that is your correct contact partner.If you paid your most recent German contribution to a regional pension fund (formerly a Landesversicherungsanstalt – LVA –), then the regional pension fund that is responsible for the relevant member state or agreement country is responsible for you:
